Snapshot Notes - November 10, 2006

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FRIDAY, NOVEMBER 10, 2006

PostCloseSummary

11/10/06 5:00 PM EST

Yesterday the Nasdaq 100 formed a classic reversal pattern when it punched to a new six-month high, then reversed to close down on the day with volume that was higher than average.

I went over the stats regarding this pattern this morning, and they held up the traditional belief that those kinds of reversals tend to lead to more selling pressure. While in most cases the Nasdaq 100 trust (QQQQ) got a bit of a relief rally the day after the reversal (similar to today), a week after the reversal it was lower in 12 out of 16 cases.

That goes along with some of the other developments we went over this week, like the Down Pressure reading from Wednesday. Extremes like we saw then tend to mark short-term peaks in momentum, with further price gains being temporary.

I've been using the 1740 area on the NDX as a kind of trigger to become more aggressive with short-side trades, betting that the momentum peak will work itself out with lower prices. The index slunk down to that level yesterday and again this morning, but so far has bounced off that area.

Normally when we see short-term oversold readings like we got in our models this morning, in the context of a larger uptrend and with the indices sitting on support, I'd be more inclined to concentrate on the long side, but again Wednesday's momentum peak and Thursday's reversal have me more interested in looking for a further pullback. Adding a teensy-tiny bit of weight to that is that the middle days of November tend to be the least positive of the month (though we all know how ~~crappy~~ inconsistent seasonality has been this year).

The CFTC will not be releasing updated Commitments of Traders data today due to holidays. The next release will be Monday afternoon, so we'll have to wait an extra day to see if commercial traders moved to a new record short position in the index futures.

Have a safe and relaxing weekend and we'll see you next week!

ApproachingTheBell

11/10/06 3:25 PM EST

I noted earlier that a couple of the major indexes were bouncing off obvious support levels, and a few of our intraday guides were reaching oversold territory at the same time.

That kind of setup was enough to suggest that an imminent break of that support wasn't all that likely, and we've been in bounce/drift mode ever since the indices approached those levels.

Normally I'd be a lot more interested in the long side given this kind of setup (longer-term uptrend with short-term oversold model readings as the indices approach obvious support), but given some of the momentum readings we've gone over this week, I just can't get all that excited about the possibility of sustained upside traction here.

I'm not pushing too hard on shorts - I'd be more interested in that if 1740 on the Nasdaq 100 gives way to the downside - but I still think a sustained short-term rally is unlikely.

LunchtimeLull

11/10/06 12:25 PM EST

A slow, drifty day today that's unremarkable in almost every respect. About the only thing sticking out to me so far today is the TRIN on the NYSE, which has risen to 1.63 as I write.

Intraday TRIN readings over 1.50 can be considered extreme, and they've done a decent job at highlighting short-term turning points (bottoms) in the S&P 500 during the uptrend. It's helping to push the STEM.MR model back towards oversold territory, and given that several of the major indices are sitting on or close to obvious support levels, I'm not counting on that support breaking right away.

My focus has been on 1740 in the Nasdaq 100 - if that area fails, then I want to become more aggressive with short trades.

MidMorningOutlook

11/10/06 10:25 AM EST

Good Friday morning...Yesterday the Nasdaq 100 scored a classic reversal day, whereby it hit a new six-month high, then turned tail and closed beneath both its opening and previous closing prices on volume that was greater than average.

Traditional technical analysis suggests that this should be a bearish sign going forward, as it indicates a lack of buying interest at ever-higher prices. There is some truth to this...over the history of the Nasdaq 100 trust (QQQQ), I show that there were 16 instances of it carving out a reversal as defined above (using a 50-day moving average of volume to determine if the reversal days' volume was greater than average).

One week later, QQQQ was positive only 4 of those 16 times (25%) and its average return was -1.8%. Its average maximum gain during the following week was +2.8% compared to an average maximum loss of -5.0%. In 10 of the cases, QQQQ rebounded the day after the reversal, then began a decline after that.

That fits well with the other developments we've been going over (like the Down Pressure indicator) that have suggested we've seen a peak in momentum and it will be difficult to sustain further short-term gains. I've been using the 1740 level on the NDX as an area where, if it holds below, I want to increase my aggressiveness on short trades. It has bounced off that area for now, but it's something I'm going to be watching closely in the days ahead.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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