Snapshot Notes - October 26, 2006

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THURSDAY, OCTOBER 26, 2006

PostCloseSummary

10/26/06 5:00 PM EST

I've been concentrating on the need for the Russell 2000 and Nasdaq 100 to break their highs from last week before I'd consider going after short-term long setups again, and both indexes did just that this afternoon.

I've approached much of this rally way too gingerly, dodging in and out instead of being consistently and massively long. If this kind of creeper uptrend keeps up, then I will continue to personally under-perform in my trading accounts, as I don't feel comfortable holding onto long-side risk other than for short-term hits when we see things like the Intermediate-term Indicator Score hitting multi-year extremes.

We're at a point now where several technical gauges are at almost unheard-of extremes. Just one example is the 3-period RSI that I mentioned earlier, which is at a point that only one day in the past 8 years can match (June 4, 2003).

Our shortest-term guides are also at true extremes. The STEM.MR model is at 14%, something that put a temporary halt to the spurts higher the other three times it happened since September. The cumulative TICK for the NYSE is also at a point that has been seen only a few times in the past several years.

For those initiating new long positions, the risk has definitely grown that we will get a whipsaw move as breakouts begin to fail. I noted earlier that I was a buyer this afternoon, but was acting gingerly and was very aware of the likelihood of a failure.

If the breakout levels of 770 in the Russell 2000 and 1730 in the NDX hold up over the next couple of days, then I will keep poking around on the long side. Given the concerns above, however, if those indexes fall below their breakout levels, I will try pressing the short side for a relatively quick trade. Shorting is only a possibility here if we see some actual signs of price weakness.

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

ApproachingTheBell

10/26/06 3:25 PM EST

I've been focused on a potential breakout in the Russell 2000 and Nasdaq 100 in order to feel a bit more comfortable concentrating on short-term long positions for the time being, and we got the breakout in each this afternoon.

Neither index has offered much in potential reward since the breakout, but I'm going to give the potential for further upside the benefit of the doubt here as long as we remain above those highs of 770ish and 1730ish, respectively.

I'm a rather poor breakout-type of trader, and so the market over the past couple of months has definitely not been my cup of tea. For the time being, though, I'll play along gingerly as long as those two indexes don't fail.

Such a failure is becoming more and more a risk as we get more and more stretched - one of the very few technical indicators I watch (a 3-period Relative Strength Index) is now at a point on the S&P 500 that has only been matched on June 4, 2003 over the past eight years on a daily and weekly basis combined. This is in addition to our short-term STEM.MR model hitting 14% - something that has coincided with the stalling of the rally the previous times it hit this kind of extreme.

I'm a short-term buyer, but I'm very, very beware and will scoot at the first sign of failure.

LunchtimeLull

10/26/06 12:25 PM EST

I've been focused rather obsessively with the levels mentioned earlier for the RUT and NDX, something which has kept me from being whipsawed lately, but also prevented me from doing much trading at all.

I continue to await some kind of resolution in those indexes. RUT has been trapped between 660 and 670, while the NDX hasn't been able to get out between 1700 and 1730. With the tightening coils seen there and even in some of our indicators like the STEM.MR model, I'm thinking we're going to get a good move soon, but I don't want to anticipate it for fear of more whipsaw-type trading activity.

As I type, the NDX is trying to surmount 1730 yet again - for I think the ninth time in the past two weeks - but I need to see it hold, and the RUT break out as well, to consider some short-term trades again from the long side.

MidMorningOutlook

10/26/06 10:25 AM EST

Good Thursday morning...Coming on the heels of a few positive earnings and economic releases, the major indices are split after the first 45 minutes of trading.

My concentration on a short-term time frame has been to focus on long setups with a move in the Russell 2000 over last week's high of 770ish, and a similar breakout in the Nasdaq 100 over 1730ish. Both indexes have been tickling with those levels since the open.

I am also interested in being quite aggressive with short trades if the NDX would happen to reverse and fall back under 1700, something that proved to be extremely durable support last week.

In terms of our indicators, there really hasn't been much of a change which is why I haven't written a lot about them lately. A good example is the AAII sentiment survey, which came out today with readings essentially unchanged from last week. Ditto Investor's Intelligence and lowrisk.com.

Definitely concerning me from a long perspective, and a reason I'm only willing to take very short-term trades from the long side, is that some of our models, like the Intermediate-Term Indicator Score, continue to creep towards true "overbought" extremes. That score is now the most extreme since late December 2004.

Such extremes are not triggers to get out of long positions entirely, they are only setups, which means we need some evidence of a price reversal before exiting longer-term longs would seem to be a good idea from a risk/reward perspective.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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