Snapshot Notes - September 12, 2006

http://www.sentimentrader.com/subscriber/subscriber_home.php

TUESDAY, SEPTEMBER 12, 2006

PostCloseSummary

09/12/06 5:00 PM EST

In the Post Close Summary yesterday, I noted that if the 1580 level held on the NDX this morning, then there should be enough buying interest to challenge the 1600 area. That proved to be the case, but I certainly underestimated the willingness of buyers to chase prices. I understand that there are some mechanics related to option expiration this week that may have exacerbated today's move, but regardless it was impressive.

Despite the big green today, trying to buy after a big rally the Tuesday of an option expiration week has usually been a losing proposition. Since its inception, if you had bought the Nasdaq 100 trust, QQQQ, after it rallied at least 1% the Tuesday before an expiry and held through the following Monday, you would have had less than 40% winning trades, a negative bias that has remained consistent over the years. The precise timing of the failure has been tricky, though. Often (especially recently), we've seen some follow-through strength the next day before prices moderated over the next few days.

I noted earlier that I consider the overall technical picture of the NDX to be negative, the only one of the major indices to have that distinction. As such, that's where I want to focus on short sales when we hit short-term overbought conditions, and that's what we have now. Our short-term guides have cycled into fully overbought status, and the odds are against a further sustained move when that's the case.

So we have a decent setup for a short trade, now we just need the trigger for entry. I mentioned earlier that I was waiting to see either the initial signs of a failure into the close (unlikely given the day's persistent strength), or a gap up opening tomorrow. We didn't get the failure, and obviously I'm not sure about the gap up open tomorrow. If we don't get a large gap up, but rather prices hold steady or rise a bit further, I will become increasingly interested in taking a short position as the day goes along, playing the probabilities that we'll see a pullback over the coming days.

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

ApproachingTheBell

09/12/06 3:25 PM EST

The major stock indices have gone parabolic over the past two hours, showing more strength than I thought they would, as the NDX didn't even pause at the September high before powering higher.

Our intraday guides are now fully overbought, and I am stalking a smallish short position in the Nasdaq. The fact that buyers have had enough interest to shove the index over last week's high with nary a pause is cause for concern on the short side, but instead of avoiding it altogether I will be reducing my planned position size.

I will be using the 1630ish area on the NDX as a mental stop, and would exit with a loss if we sustain trade above that area. The way I view it, the technical picture in the S&P and DJIA is positive, neutral in the Russell 2000, and negative in the NDX, so that's where I'm concentrating in terms of short positions.

I've been waiting for a confluence of our short-term guides to hit overbought before trying to short this move, and that's what we have hit in the past 1/2 hour. Virtually all the intraday guides that I watch are now stretched, especially the reliable cumulative TICKs and price oscillators. Given the overall negative technical picture in the NDX, and the stretched condition of these guides, it makes sense to expect more weakness than strength from here, and that's how I will be positioned.

I have not entered the trade just yet...when we see a strong tape all day long, it tends to end that way, so I'm trying not to overly anticipate an end to the buying pressure. However, if we see the slightest signs of a failure into today's close or tomorrow morning, I will be entering the trade, or also if we get a largish gap up open tomorrow.

LunchtimeLull

09/12/06 12:25 PM EST

The NDX finally made it back up to that 1600 level that seemed likely when the breakout level held up this morning. Now that index is testing its early September highs, at the same time the S&P has rallied to the gap area from last Wednesday.

Several of our intraday indicators have cycled into overbought territory, but we don't quite have what I would consider a "confluence" that would make fading the indexes here a high-probability bet. I think the levels just above for both the S&P and NDX will prove difficult to overcome on the first attempt, though, so even without the full support of the short-term indicators, I'm becoming more interested this afternoon in trying a short trade to see if we're going to fade against these levels.

MidMorningOutlook

09/12/06 10:25 AM EST

Good Tuesday morning...Yesterday afternoon, the S&P and NDX were able to break out above last week's highs, and while the S&P couldn't maintain that breakout level into the close, the NDX did.

We now have three distinct levels below that are going to be watched by a large number of short-term traders - the breakout level at 1300 on the S&P and 1580 on the NDX, last week's low at 1295ish on the S&P and 1560 on the NDX, and lastly the prior "swing" low at 1290 on the S&P and 1540 on the NDX. If we rally a bit more and then fail, we'll hear more talk of a "head and shoulders" pattern on the intraday charts, and then those swing lows mentioned just above will become even more of a focus.

My thinking was that if the NDX was able to hold above that 1580 level this morning, then it would likely generate enough buying interest to at least challenge the early-September high just over 1600. We've had a decent little run already this morning, but so far have fallen short of that area.

If we're going to be in for an extended period of trading-range type of activity, then we should see the broader indices back off when we become overbought and rally when oversold. Your definition of those terms depends on what indicators you use, and at what settings...for me, I'm using the short-term breadth and sentiment guides that we update intraday, and as of this morning they're still mostly neutral, so I'm focused on watching for some types of extremes there.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

Forwarding or otherwise distributing this copyrighted material is a breach of your subscriber agreement. Violators are subject to termination of their subscription with any received subscription fees forfeited. Any references to historical performance are based on data we deem to be reliable, but are based upon feeds from third parties. We do not recommend subscribers take positions based on data presented here alone, but rather incorporate it into a comprehensive investment outlook.