Snapshot Notes - October 11, 2006

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WEDNESDAY, OCTOBER 11, 2006

PostCloseSummary

10/11/06 5:00 PM EST

Over the past week, we haven't gone much of anywhere. But the degree to which we've been stuck is not only unusual, it's nearly historic - at no other time in the past decade have we been trapped in such a tight five-day range.

I highly doubt we will see this continue for even one more day, and I plan on at least temporarily trading in the direction of the break. If we break to the downside, this afternoon's crash in NYC could impact the amount prices travel to the downside, at least initially, as a whole slew of sell stop orders were triggered once the indices (particularly the Nasdaq futures) broke last week's lows.

I've kind of been harping on the tricky nature of these wedges, as they can be hard to trade. Very short-term traders typically do OK trying to chase the breakout for a bit, but there is a tendency for the initial move to reverse in the days following. While not directly applicable to our current situation, I went over a similar situation back in April (click here to read the comment).

Our shortest-term gauges are about as stuck as the indices themselves, so I don't see any edge there. So I'm basically just looking to go with the flow whichever way we break, but will very much be on the lookout for a reversal over the next few days.

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

ApproachingTheBell

10/11/06 3:25 PM EST

The aircraft crash scare in NYC about 1/2 hour ago caused the major indices to slice lower, and in the Nasdaq futures at least, triggered a rash of sell stops when it dipped below last week's low. I certainly hope there were no serious injuries and empathize with those who experienced the terror five years ago - I don't think we can blame anyone for selling first and asking questions later.

That flush quickly reversed and brought us back into the range we had been in. If we do "legitimately" break this range to the downside, then the action over the past 1/2 hour could limit the degree to which the initial break travels, since we just got rid of a bunch of sell stop orders.

With the spike down and immediate reversal, we're still left in pretty much the same position. We're seeing an historically tight range form here in the S&P, and I would be shocked if it lasted another day. I anticipate trading in the direction of the break for a while, but don't want to push things too far as these kinds of things have a marked tendency to be tricky.

LunchtimeLull

10/11/06 12:25 PM EST

The game of sector hot potato continues in full force...brokers getting slammed? No problem, we'll buy semis. Semis getting hit? Not a worry, let's buy biotech. Biotech getting crunched? Big deal, let's go for some internets.

This kind of activity has been going on for weeks, and while several of the sectors just keep churning, it has been enough to keep the major indices levitated. Most of them are cap-weighted, so as long as there is a preference for large-cap stocks, indices like the S&P 500, Nasdaq 100 and DJIA will continue to hold up in the face of numerous underlying sectors that are not keeping pace.

The remarkably tight range over the past few days continues, and it's now approaching historic levels, at least recently. At no point in the past 10 years has the S&P 500 lasted five trading days with a high-to-low range of under 10 points, which it will do today if it doesn't go below 1344 or above 1354.

As I've been noting, it should pay for short-term traders to trade in the direction of the initial break as stop orders get executed and others show relief at being able to spot an identifiable trend. From a bit longer-term perspective, these very tight coils have a nasty history of reversals, so that's something to watch for after the initial surge from the break begins to fade.

MidMorningOutlook

10/11/06 10:25 AM EST

Good Wednesday morning...Bad news from Legg Mason has sent the Amex Broker/Dealer Index (XBD) skidding 4%, and that's dragging the broader market down with it. Many traders consider banks and brokers to be a "canary in the coal mine" - as long as they're doing well, stocks in general should too - so I'll be watching this group even closer than usual.

Investor's Intelligence reported the largest jump in bullishness in its sentiment survey since early April, with the bull ratio (bulls / (bulls + bears)) rising by 3.4%. Each of the three other times the bull ratio jumped by 3% or more this year, the S&P declined over the next week. Even with the substantial increase in bullish sentiment, though, we're still not seeing what I would consider an extreme in optimism from this population.

In the short-term, this morning's weakness has moved us right back down towards the bottom of the little wedge that has formed after the past four days at 1345 in the S&P and 1680 in the NDX. We're getting some very mild oversold readings from things like the cumulative TICK, and we're starting to see buyers come in betting on a continuation of the small trading range.

I don't think this range will last much longer, but when it does break, as noted yesterday these tight coils have a tendency to see the initial move be reversed in the days following. It will probably pay for very short-term traders to chase the initial breakout, those with a bit longer time frame should be more wary, at least looking at the next couple of days.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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