Snapshot Notes - September 20, 2006

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WEDNESDAY, SEPTEMBER 20, 2006

PostCloseSummary

09/20/06 5:00 PM EST

The bulls continue to roll, and today it kicked off right from the get-go and never really let up the remainder of the day.

Buying pressure of this degree has been a bit rare to see on a day the Fed has announced a rate decision. For the 10th time since the inception of the Nasdaq 100 trust, QQQQ gapped up more than 0.5% on the open and held that into the close. This wasn't exactly a good time to get all bulled up, however- three days later, it was lower 8 of the 9 times, and by an average of nearly 4%.

I've written extensively about how the move on a Fed day tends to get reversed in the days following, so I'm not going to keep harping on it. After all, we've had quite a few consistent indicators fail to suggest that a continued move higher over the past few days was a likely event. When we have a good setup that doesn't pan out, at some point we need to just chalk it up to a failure instead of being stubborn and missing out on other potential opportunities.

I've backed off shorting intraday rallies and am just carrying some downside "insurance" in the form of QQQQ puts. But trying to initiate longs here is also fraught with risk, as many of our shortest-term indicators have cycled back to overbought, in addition to the fact that these post-Fed moves tend to get reversed. So I don't see much at this point that looks like a high-probability setup.

Have a good evening and we'll see you tomorrow!

ApproachingTheBell

09/20/06 3:25 PM EST

Now that we're headed into the closing bell, I'm going to mention one last tendency with regard to these Fed days, then I'll leave it alone.

There have been 9 times since the inception of QQQQ that it has gapped up at least 0.5% on a day the Fed released a rate decision, and also closed that day more than 0.5% above the previous close which it looks like a lock to do today. Buying the close and holding for three days resulted in only 1 winning trade out of the 9 attempts, and the average return was -3.8%.

So far we have been given precious little confirmation that a meaningful pullback was imminent. Our short-term guides became oversold yesterday afternoon and we've popped nicely since then, all in keeping with a healthy uptrend. Several of those measures have been flirting with becoming overbought this afternoon, but overbought in an uptrend isn't necessarily a consistently successful sell signal.

I have backed off shorting intraday rallies, and don't plan on resuming unless we see a change in character. I am holding a number of QQQQ Oct 40 puts, which I plan on keeping until expiry and it gives me some exposure just in case we get the typical post-Fed reversal as noted above. As for trying to go long, I really don't see a high-probability setup for that any time soon unless we get another bout of weakness.

LunchtimeLull

09/20/06 12:25 PM EST

Traders have settled down after the buying binge this morning, and volume is beginning to trail off into nothingness as the East Coast lunch hour arrives. It's highly likely we'll see more choppy, very low-volume trading for the next couple of hours.

After the Fed announcement, we most often see very wild swings in the half-hour immediately afterwards, then something of a sustained trend going into the close. I don't have a burning desire to try to fade either extreme - I would have been more willing to short a spike higher if we hadn't seen the strength yesterday afternoon and this morning. I don't have anything on my radar as far as setups I want to pursue.

MidMorningOutlook

09/20/06 10:25 AM EST

Good Wednesday morning...Just when it looked like we were *finally* going to get a bout of extended weakness yesterday, we get a couple of white knights to come in with better than expected earnings.

It's pretty rare to see such a large gap up open on a day the Fed is going to announce its rate decision, but like I said yesterday there doesn't seem to be much of a question surrounding this meeting and it should be a non-event. Just for kicks, though, let's see what's happened the other times QQQQ has gapped up at least 0.5% on a Fed day...it has happened 15 times since its inception, and holding for three days would have resulted in only 5 winning trades, with an average return of -2.5%.

Yeah, yeah, I know...I've pointed out that large gaps up are bearish an up-teenth number of times. We can add it to the pile of indicators and price patterns suggesting a decline that have amounted to nothing much in the short-term. The STEM.MR model became oversold yesterday afternoon, and so perhaps that's all we could have asked for. Certainly the bounce since then is in keeping with a normal, healthy uptrend, so there's not much for shorts to hang their hats on there.

I was thinking that due to the relative severity of the selling pressure yesterday morning, the first reaction back towards the breakdown level would get sold and we'd at least get a test of the morning lows. The gap this morning basically destroyed that theory, so now we're left with trying to figure out if this gap will be sustained. Trusting any kind of move on the day of a Fed decision has been folly more often than not (see above), but again we're not getting any kind of feedback suggesting concentrating on shorts here is a good idea.

I still have short exposure in the form of QQQQ puts as I noted on Monday, and I will likely hold those to expiry. But in the meantime, until after the Fed decision at least, I am backing off trying to short further pushes to new highs for this move.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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