Snapshot Notes - November 6, 2006

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MONDAY, NOVEMBER 6, 2006

PostCloseSummary

11/06/06 5:00 PM EST

On Friday, we had a setup where equities were exhibiting deeply oversold conditions on a short-term time frame, during an intermediate-term uptrend, with positive seasonality.

Such a trifecta is typically a recipe for good gains going forward, but we didn't see that kick in on Friday. Rather, the Nasdaq 100 turned tail and was in danger of violating the 1700 area that we have been watching so closely. It did temporarily drop below 1700 proper, but held on within a few points.

This morning that all changed, as we saw gaps up across the board. Unlike recent occurrences, the gap held during the first half-hour and the indices were able to score new intraday highs - a good tip-off that the positives might be about to finally kick in. From that point, we saw classic "trend day" behavior.

I defined earlier how I judge whether a trend day is likely, and today met those requirements. It followed through in perfect fashion, though by late afternoon our STEM.MR model had become so stretched that it ventured outside of its "excessive optimism" trading band for the first time since October 27th.

Such overbought model extremes are typically not good signals to sell short within the context of a strong intermediate-term uptrend like we have - rather, they are best used as indications of peak momentum. That means that further price gains are nearly always given back within the following week, something that we have seen work time and again over the past couple of months.

How the markets react to tomorrow's elections are a toss-up. I wouldn't rule out any kind of reaction on Wednesday, and I don't suspect we'll see another big up day in anticipation tomorrow. Given our short-term model readings, I would be more interested in fading an approach to the October highs rather than anticipate a sustained breakout at this time.

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

ApproachingTheBell

11/06/06 3:25 PM EST

I noted in the prior note that the major indices were displaying classic "trend day" qualities, and since it persisted past 11:00am EST, it was likely to continue to do so.

That it has done, as each foray of the NYSE TICK into negative territory has brought buying pressure and pushed the S&P to a new intraday high, and +1000 readings in the TICK have resulted in pullbacks under 2-3 points.

Since it has been such a classic trend day, it would be highly unusual to see a meaningful pullback into the close - these days have a very high likelihood of closing at or near the day's high.

Our short-term STEM.MR model on the S&P 500 has just entered "too far, too fast" territory for the first time since October 27th. While this is not a good signal to sell short within strong uptrends, it has been effective at identifying peaks in momentum - meaning that further prices gains from the point where the model became overbought have nearly always been reversed in the days following. I don't think we'll see a breakdown going into the close, but given the model readings and the approaching election, I've cinched my stops up tighter just in case.

LunchtimeLull

11/06/06 12:25 PM EST

Over the years, I've outlined many times the way I quantify the likelihood of us seeing a "trend" day, where the major indices open at their lows, close near their highs, and see minimal retracements in between.

The main qualifier is that the NYSE TICK rarely goes below zero, and when it does, buying pressure immediately comes in and presses the S&P 500 to a new intraday high. We usually see the TICK hit +1000 at that time, after which the S&P should decline no more than 2-3 points. If we see this kind of activity consistently before 11:00am EST or so, then the chances are good that the rest of the day will continue in trend mode.

We're seeing such a thing so far today, and it's rare to get afternoon reversals in cases like this. It's also relatively rare to see a lot more upside, so for those trying to initiate new long positions, the risk/reward isn't all that great. These days are frustrating for all but those who happened to be long before the day began, or hopped on relatively early, in which case they can trail stops closely underneath.

I'll assume that the day will continue in trend mode as long as the qualifications in the second paragraph hold true.

MidMorningOutlook

11/06/06 10:25 AM EST

Good Monday morning...We start the new week with strength across the board ahead of tomorrow's elections.

By Friday's close, we had a rather confusing short-term picture. Our models had become exceedingly oversold, and due to a combination of several factors, I was using the 1700 area on the Nasdaq 100 as a pivotal level.

During the day on Friday, we fell below 1700 proper but were still hovering in the general area. I did not wish to short given the positive conditions (short-term oversold within a larger uptrend during a traditionally seasonally positive time), but the failure of 1700 proper to hold was enough of a caution sign that I didn't feel comfortable holding short-term long side trades.

This morning we find that the test of 1700 has held and the positives appear to be kicking in. Despite getting shaken out on Friday, I once again started to focus on long-side trades in the NDX this morning when the opening gap held and we moved to a new intraday high.

That index has already seen quite a rally in a very short period of time, and given the uncertainty of elections tomorrow I'm not sure how much traders are going to be willing to push. I'm also becoming more concerned about the intermediate-term sustainability of further gains here due to developments like commercial trader positions in the index futures.

Speaking in the very short-term, I've reverted back to a generally positive bias and am using fairly tight trailing stops from this morning's trades. I don't think we'll see a sustained move above the NDX high from the 26th, so if we approach that area, or if our models reach overbought, I'll be out of any positions. I'm using about a 7-point trailing stop as well, so if we get a minor intraday reversal that will also have me out.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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