Snapshot Notes - November 28, 2006

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TUESDAY, NOVEMBER 28, 2006

PostCloseSummary

11/28/06 5:00 PM EST

My focus since yesterday afternoon has been on watching how eager buyers are to step in and sellers to step away.

While that's always something to watch, it can be particularly telling for longer-term trades when we see true extremes among a variety of guides like we did yesterday. That type of intense selling pressure is unusual so soon after indices hit new highs, and can often be an early warning sign of more selling to come.

But first we need some evidence that this time is, indeed, different than the other short-term pullbacks seen since July. I mentioned a 3-day RSI indicator on the Russell 2000 in the prior note, and here's why:

A high percentage of the time, when that indicator on the RUT becomes as stretched to the downside as it is now, and while small-caps are in an intermediate-term uptrend (defined simply as a rising 50-day moving average), it will promptly rally. There are times, though, when it fails - and a good percentage of those instances lead to further selling pressure.

Let's look at the last few failed signals. The most recent one was in May of this year, which lead to two more months of downside. The next was early January 2005, which lead to a smallish rebound then two months of selling pressure. The one before that was March 2000, which...well, we know what happened then.

There were a few times where a failed short-term signal was a fakeout before a resumption of the rally, but those were clear exceptions. There were also times when the index rallied smartly as it should have, then rolled over into a downtrend. But I'm looking for evidence of a trend change here, and I'm going to assume the uptrend is fine and dandy until evidence emerges that it's not.

With overly optimistic intermediate-term sentiment indicators, and yesterday's carnage, if we can't get going to the upside off these short-term extremes, then I will become more interested in becoming aggressive with short positions that have a longer time frame.

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

ApproachingTheBell

11/28/06 3:25 PM EST

The song remains the same going into the close, as we haven't seen much of a directional move since the prior note, though we are seeing buyers give it the ol' college try as I type.

I've noted before that I use very, very few technical indicators - only basic moving averages and a 3-period RSI (Relative Strength Index). Scrolling through a few indexes, I noticed that if the Russell 2000 closes poorly today, then its 3-day RSI will fall below 10 for the first time since July.

When it gets this oversold while the 50-day moving average is rising, buying and holding for a week has been relatively successful over the past 15 years. One thing that's noticeable, though, is that the failed signals very often lead to longer-term weakness...if high-beta small-cap stocks couldn't attract buying interest after such extreme short-term oversold conditions, then it was often a precursor of more selling to come.

This fits with what I've been writing about since yesterday afternoon, and is the main reason I'm very focused on how the markets react to the current conditions. I've been less than convinced that this is the same kind of garden-variety pullback like we've seen other times since July, but I don't see any solid confirming evidence yet that supports my skepticism.

LunchtimeLull

11/28/06 12:25 PM EST

After some early-morning volatility, the major indices have settled into a rather low-volume drift heading into the East Coast lunch hour.

Relatively narrow-range days are the norm rather than the exception following very wide-range days like yesterday, so activity like this isn't terribly unexpected assuming it continues.

The trading activity today and tomorrow should go a ways in helping to determine the likelihood of whether we're undergoing a trend change or not - the "overbought" extremes among our intermediate-term guides and the intensity of yesterday's selling suggest a trend change is a distinct possibility, but so far I'm not seeing anything that would further that case.

MidMorningOutlook

11/28/06 10:15 AM EST

Good Tuesday morning...I noted yesterday that we were seeing several readings that were out of the ordinary due to the severity of the selling pressure.

For instance, our short-term STEM.MR model jumped to 80% in a very rare move, the TRIN on the Nasdaq closed well over 3.0 to record its highest reading in two years, implied volatility jumped nearly 20% in a matter of a couple of days, and breadth on the NYSE was one of the worst we've seen in years.

That kind of activity normally shouts "washout", but it's unusual to see so soon after many indices were hitting new highs. That should immediately put us on guard that something else might be going on here, and I'll be watching the next couple of days carefully. If the current situation is similar to the other short-term pullbacks since the July low, then the broader market should form a bottom today or tomorrow at the very latest.

One thing that has been consistent after days like yesterday is for the following day to show a narrower-than-average intraday range. So far this year there have been 9 days (excluding yesterday) in the Nasdaq 100 that had an intraday range more than 75% greater than its quarterly average. The day following those wide-range days showed a range between the intraday high and low that was 17% narrower than average, and 8 of the 9 were narrower than average. Typically the next day continued in the same direction as the wide-range day, but that wasn't nearly as consistent.

What this means is that usually, very short-term traders do better with oscillating-type indicators than breakout-type indicators the day following a day like yesterday. If that doesn't hold up, and we instead have another relatively wide-range down day, then we have another solid piece of evidence that the longer-term uptrend is in trouble.

The current setup looks quite similar to May in terms of the "overbought" extremes among our intermediate-term guides and the intense selling pressure so soon after the major indices had hit new highs, which obviously has some troubling longer-term ramifications. There's of course the chance that what we're seeing now is one of those really wicked short-term shakeouts that leads to another round of new highs, but given the intensity of yesterday's readings and the (so far) lack of a rebound, I think that's unlikely and I continue to be more interested in fading snapback attempts.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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