Snapshot Notes - October 18, 2006

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WEDNESDAY, OCTOBER 18, 2006

PostCloseSummary

10/18/06 5:00 PM EST

During earnings season, we are subjected to large gap opens with pretty much no way to game whether they will be positive or negative.

While that always causes some concern for those positioned on the wrong side of the gap, more often than not the market is going to do whatever it was going to do anyway regardless of the open.

We saw an example of that today - there was a peak in momentum last week, and subsequent attempts at furthering those gains have faltered. One tip-off to possible trouble this morning came in the form of semiconductors, which nullified their earlier breakout above the September highs (see chart below). The major equity averages, particularly the tech-related ones of course, have a real hard time chugging higher when their most visible sub-sector is suckling the hind teat.

While many bullish-minded folks like to trumpet the fact that so many more stocks are making new yearly highs as opposed to new yearly lows, at some point it can become so skewed that it hits an extreme. Like now.

Over the past ten days, the NYSE New High / New Low Ratio that we post to the site has averaged 95%, and over the past five days 97%. Since the bull began in 2003, there have only been two other time periods with such a lopsided set of ratios - early June 2003 and mid January 2004. If we go back and look at the past decade, then we also get mid June 1997 (good for stocks over the next month), early October 1997 (very, very bad for stocks) and early February 2001 (even worse than the prior one).

Obviously, not an enviable record going forward when we've hit this kind of extreme.

I've been watching the 1700ish level on the NDX as the first line of support, and haven't been very interested in trying to short the market as long as that index remained above it. It still looks vulnerable for a further decline, and I plan on focusing once again on short trades should it fail to hold that area in the coming days.

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

ApproachingTheBell

10/18/06 3:25 PM EST

We've seen a pitched battle most of the day around that 1700 area on the NDX, an area I've been focused on the past couple of days.

We're also seeing a similar kind of conflict within our intraday indicators, as some (like the cumulative TICKS) are hovering near overbought, while others, like the TRIN, are giving off oversold signals. The TICKs tend to be more reliable, and high TRIN readings which come after a rally tend to not be as consistently bullish as those which occur after a decline, so overall I would rate them as modestly bearish for the market.

I think the NDX looks vulnerable here, and that's the index I want to pick on. If we see a decided move under 1700, I plan on focusing on short trades again, as it should at least move to 1680ish (where traders will be able to focus on another round of obvious support).

LunchtimeLull

10/18/06 12:25 PM EST

The indices have stabilized after the nasty rejection of the opening gap up, and we're still seeing a very split market in terms of leading sectors.

I got a couple of questions on the "false breakout" I mentioned in semiconductors, so I think the chart below will clarify what I was looking at:

The Semiconductor HOLDR (SMH) broke out above its September closing highs on October 12th and spurted higher another two days before failing. Today it sliced back below that breakout level, though technically it's still well within its uptrend from the past couple of months.

I mentioned the extremely high TRIN reading on the NYSE yesterday, and today we're seeing a not-quite-as-extreme-but-still-high reading on the Nasdaq. The other times we've seen it this high since late September coincided pretty well with short-term lows in the NDX, though this time none of our other intraday guides are confirming that potential oversold condition.

The NDX looks quite vulnerable here and if it fails to hold 1700ish, I will be focusing on short trades in that index.

MidMorningOutlook

10/18/06 10:25 AM EST

Good Wednesday morning...Ahh, the joys of earnings season - the four times each year where we can expect to wake up to large gaps up and down, with no predictability.

Selling pressure has been consistent since the open, and there is a wide disparity between groups that we normally want to see leading a rally. Retail and brokers have opened strong, while semiconductors are sagging badly and have now scored a "false breakout" from its September highs - definitely something to watch. That sector has been a drag on the NDX, as it has already sunk about 10 points from its open.

I noted yesterday that I was backing off short trades as the S&P and NDX approached their respective breakout levels, and with the move to new highs in the S&P, DJIA and Russell 2000 this morning, I'm not rushing to get back in. Given some of the data we've gone over in the past few days, the risk of a false breakout (ala the semiconductors) seems quite high, so I am also in no hurry to try to buy into this market.

As for short-term setups, about all that's appealing to me right now would be a stiff selloff that takes the major averages back below last week's high, then a reflex rally back towards those highs that begins to peter out. I would consider establishing some short positions in that case, especially on the NDX.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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