Snapshot Notes - October 23, 2006

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MONDAY, OCTOBER 23, 2006

PostCloseSummary

10/23/06 5:00 PM EST

On Thursday and Friday of last week, the S&P 500 wound into a range so tight that it was on a level rarely seen in the past decade.

Over the past couple of years, such an absence of intraday volatility had almost without exception lead to a break that paid for very short-term traders to chase, at least for a bit. For those with a little longer time frame, breakouts from tight coils have a habit of reversing in the days following.

Despite the early-morning breakout and buying pressure, the high-beta Russell 2000 and Nasdaq 100 indices were not able to overtake last week's highs, and until they do (and hold it), I'm not interested in chasing additional rally attempts. Last week, I was focused on a potential downward break of 1700 on the NDX as a signal that it should pay to be more aggressive with short entries, but we never really got the chance to do so since it kept popping right back above.

It's entirely possible that we're going to be subject to a couple more days of go-nowhere action as traders await the FOMC rate decision and statement. For the time being, I'm going to watch for the RUT and NDX to break out and hold over last week's highs, in which case I'll once again concentrate on scalping from the long side as long as those highs hold. If the NDX should turn tail and lose that 1700 area, based on some of the negatives I went over last week, I'm still interested in pushing short trades in that case.

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

ApproachingTheBell

10/23/06 3:25 PM EST

Nothing new to add here, as the major indices drifted lower off the morning spike, but have rallied back a bit over the past hour.

I noted earlier that I was backing off long-side scalps as the Russell 2000 and NDX were not able to overcome last week's highs. With the decline off the morning highs, that's obviously still the case, and I'm not doing anything trading-wise until both those indexes trade and hold at new highs (in which case I want to concentrate on short-term long scalps again), or the NDX fails to hold 1700, in which case I will be focusing on shorts.

LunchtimeLull

10/23/06 12:25 PM EST

Last week, I touched on the intraday TRIN readings for the NYSE and Nasdaq, both of which were exceedingly high.

That kind of concentrated selling pressure most often results in a short-term bottoming process, though it's not as consistently bullish when it occurs after an extended rally like we'd seen as opposed to after a decline.

Today we're getting somewhat the opposite, at least on the Nasdaq, as the TRIN for that exchange has dropped down to 0.39 as I type. That's the lowest since September 25th, and we've seen such low readings consistently precede a moderation of the gains over the past few months.

Like the high TRINs from last week, though, today's numbers are about the only ones hitting extremes. The cumulative TICKs that we follow for both exchanges are high, but they've been high for most of the past two weeks and the major indices have been able to hold together quite well.

I noted earlier that on a very short-term time frame, I was willing to chase this breakout (from Thursday and Friday's tight range) and that's what I've been focused on. The high-beta Russell 2000 and Nasdaq 100 have still not overtaken last week's highs, though, so I've already backed off and am waiting to see if those two indices in particular will be able to score new highs and hold them. If so, I'll be following along as long as those highs hold.

MidMorningOutlook

10/23/06 10:25 AM EST

Good Monday morning...We start the week with the equity index futures already seeing a move larger than they've seen over the past few days.

In overnight trading, the futures saw a large spike higher on very heavy volume (for overnight trading) - in a span of two minutes, the S&P futures jumped 22 points on almost 10,000 contracts. In pouring over the time & sales, I can't find any particularly unusual trades, and according to Globex all trades will stand.

I can't recall a more unusual overnight development that wasn't either news-related or due to someone making a keying error for a trade. The most likely situation seems to be that traders pushed the futures higher until all the stop orders resting just above last week's range were hit.

The futures sold off steadily from that point, resulting in a gap down open in regular trading hours, but we've snapped back and are now trading above the tight range from late last week.

When we see very tight ranges like we did to end last week, it usually pays for very short-term traders to chase the breakout for a bit, but these things have a nasty habit of reversing once traders get sucked into the breakout. The S&P and NDX have poked above the upper level of the range from Thursday and Friday, so if they hold for a bit, we should see at least a little more upside (though given the shenanigans from the overnight session which wiped out a bunch of resting stop orders, there is at least one layer of demand that has already been satisfied).

Due to a number of factors I went over last week, I had been focused on the 1700 level on the NDX, looking to press short-side bets if the index fell and held below that area. It did that - seven times! - but kept popping right back above, never really giving any good short setups. If we fail again and fall below that area, I will again look to press shorts, but if an upside break holds here, for the time being anyway I'll look to scalp from the long side as long as we remain above last week's highs.

On a side note, on Friday I showed a chart of the nominal dollar value of commercial positions in the equity index futures. That indicator has been added here as well as the equivalent calculation for small speculators.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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