Snapshot Notes - September 15, 2006

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FRIDAY, SEPTEMBER 15, 2006

PostCloseSummary

09/15/06 5:00 PM EST

For the past few days, I've been expecting a pullback in the major equity indices to begin, particularly the NDX, based on that index's overall negative technical condition, and the extreme overbought status that many of our short-term guides were registering there, in addition to a slew of potential resistance points that were hovering at 1630.

I hadn't been too concerned with the slight buying pressure we were seeing as the week progressed, but this morning's gap up open and subsequent early rally was unexpected and concerning. As I noted in the first note this morning, though, I was not yet ready to give up the ghost on the idea of a deeper pullback unless the buying pressure persisted through Monday.

We did see a substantial fade of the morning's rally and the major indices closed near their lows of the day. If history holds true, then we should continue to see weakness in the days ahead. If we just gently consolidate again, however, it will be time to relax the idea of a pullback and instead become more open to a trade in either direction. A few of our shortest-term guides are actually kissing their oversold levels (!), so early next week will be a put-up or shut-up test for the pullback scenario.

Have a safe and relaxing weekend and we'll see you next week!

ApproachingTheBell

09/15/06 3:25 PM EST

As we approach the end of trading for the week, we see that the major indices haven't moved much over the past couple of hours. The fade of the opening rally has been enough to move our short-term indicators out of their extreme overbought conditions, and most are back to a neutral status.

When we see a market rally in spite of being overbought in the short-term, then continue to hold together as the overbought condition gets worked off, it's a fairly consistent signal that there's more upside to come. I'm in the camp that believes that that's not going to be the case this time around, as I continue to believe that we're going to be in for a pullback next week. If we don't see some selling pressure come in by Monday, though, it's going to make me even more concerned than I mentioned I was in the first post this morning.

LunchtimeLull

09/15/06 12:25 PM EST

The major indices have faded steadily from the morning highs, and we're surely seeing a bunch of traders scrambling to clean up their positions.

Most options traders square their positions by buying or selling stock and/or rolling over their options to a new expiration month by mid-week, which is why we usually see big moves on Tuesday or Wednesday. By Thursday and Friday, it's getting pretty late in the game (too late for some options). Today, though, we're seeing unusual readings in many put/call ratios, along with very heavy volume, suggesting that the gap and fade today has more than a few people wondering what to do.

It's confusing and usually fruitless to try to make sense of options gauges surrounding an expiration day, and today is no different. The ISE Sentiment Index is showing an historically low reading, which would suggest that an excessive number of put options are being bought (which should be bullish for the market). But the CBOE is telling us that they're seeing a huge number of call contracts being traded - usually a market negative. One possible explanation is that a bunch of call contracts are being sold today, which makes sense and would tie together both ratios. Whatever the reason, it's generally not a good idea to read too much into put/call readings on days like today.

I expect to see the indices continue to trade lower in the short-term as noted earlier. While it's impossible to rule out spiky moves today as more expiring positions get squared away, the general drift should be lower in the coming days.

MidMorningOutlook

09/15/06 10:25 AM EST

Good Friday morning...For those looking for a pullback lately (like me), a big gap up open is the kind of thing that makes you want to pull a Jim Cramer and throw a few keyboards around.

There is reason for hope, though. I've written quite a bit about gap openings and their negative tendencies, but I want to touch briefly on it again. Over the past decade, whenever we've seen the S&P gap up above the prior day's high on an expiration day, buying that open and holding through Monday's close lead to 39% successful trades, with an average return of -0.1%.

If we also stipulate that the S&P rallied at least 1% during expiration week, as it has this week, then buying the equivalent of today's open and holding for a week would have netted you only 1 positive trade out of 7 occurrences, with an average return of -1.1%.

I can point to all kinds of things that suggest in no uncertain terms that the high-probability idea here is to look for lower prices over the next week or so. I've been pointing those out for the past few days, yet prices have so far continued to bump higher.

I haven't been too concerned with it...until this morning. We have had a very good setup to look for a pullback, but this morning's gap has pushed the NDX above the cluster of resistance points I've been pointing out this week. In addition, it is beginning to strain the stats that we looked at before like the overbought cumulative TICK and the STEM.MR models.

Because it is expiration and we can see some funky moves around these days, and the seasonality immediately after expiry tends to be very negative, I'm willing to let the idea of this move failing run a bit further before pulling the plug. I'm already back on my heels on this one, and I don't want to let it get out of hand, but I just don't trust a gap up open after we've already rallied, on an expiration week, when the overall technical picture of the NDX is negative, and we're grossly overbought.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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