Snapshot Notes - September 7, 2006

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THURSDAY, SEPTEMBER 7, 2006

PostCloseSummary

09/07/06 5:00 PM EST

This morning I wrote about the fact that previously when the S&P 500 hit a three-month high, then gapped down two days in a row, that second day tended to close in negative territory. Today followed those precedents by not being able to stage a positive close, and its return was close to those precedents as well.

The mid-day rally was enough to relieve the somewhat severe oversold condition that our shortest-term guides had entered, something I thought would free us up to see at least a test of this morning's lows - the first reaction counter to a price extreme is usually a pretty safe fade. We didn't have to wait too long, since as soon as the gap was closed in the S&P, selling pressure came on again and took us to challenge those lows.

From here, I'm looking for another short-term oversold reading. If we would happen to get that in the next day or two, particularly if the S&P was able to hold above 1290ish and the NDX above 1550ish, I would be interested in trying a short-term long trade.

Have a great night and we'll see you tomorrow!

ApproachingTheBell

09/07/06 3:25 PM EST

After the last note, we got another concerted push higher that closed the opening gap in the S&P, but that's where the rally stalled before taking us back near the lows of the day.

When we get a severe push in one direction or the other that creates an extreme overbought or oversold condition, fading the first reaction in the opposite direction is usually a pretty safe bet. The move off the lows this morning was enough to move most of our shortest-term indicators out of their oversold conditions - or at least well off their extremes - and that frees things up for another test to the downside.

If our short-term measures hit oversold extremes again (especially the intraday cumulative TICKs) in the next day or two, and particularly if the S&P stays above 1290ish and the NDX above 1550ish, then I'd be interesting in taking a shot on the long side.

LunchtimeLull

09/07/06 12:25 PM EST

We've seen a pretty good bounce-back over the past hour, particularly in tech, and it has already pulled many of our more sensitive guides out of their oversold conditions.

Our STEM.MR model for the NDX had reached an extreme in both relative and absolute terms, something that has consistently preceded rallies of 20 points or more in the NDX, and we've already seen that in a short period of time. I don't think the initial bounce out of the selling pressure we've seen is going to carry to new highs, though, and I expect to see at least a test of this morning's lows.

MidMorningOutlook

09/07/06 10:25 AM EST

Good Thursday morning...For this morning's edition of "fun with statistics", let's take a look at what happens anytime the S&P 500 (using SPY as a proxy) closes at a three-month high, then has a negative gap down open for the next two mornings.

Buying at the open on that second gap down (equivalent to buying today's open) and holding for the rest of the day would have resulted in only a 30% win rate (there were 25 instances), with an average trade of -0.4%, suggesting that it would be a low-probability trade to expect an up close off of today's gap down. This is using data from 1995 - present.

While this winnows down the sample size too much, I thought it was interesting that if the second gap happened on a Thursday and one bought at the close (instead of the open) and held through Monday's close, then it would have resulted in 3 winners out of 4 trades for an average of +1.1%. While it may seem silly to include the day of the week, there is some solid evidence that there is a day-of-week bias, particularly in regard to price extremes.

With today's selling pressure, all the gains from last week have been given back, reinforcing what we went over this weekend and on Tuesday. A few of our short-term guides have hit oversold extremes, especially on the Nasdaq, but so far it has not lead to any kind of a bounce whatsoever. Yesterday afternoon I suggested that this is an important thing to watch, and if we don't get an upside reversal sometime today, then I think we have our answer about the market's character - meaning it would make more sense going forward to fade rally attempts.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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