Snapshot Notes - December 11, 2006

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MONDAY, DECEMBER 11, 2006

PostCloseSummary

12/11/06 5:00 PM EST

Most of us, as traders and investors, suffer from the tendency to project current conditions into the future, something that Dr. Greenspan alluded to just before he vacated the Fed chairmanship.

His statement was in reference to volatility, and that's certainly the case today. The S&P 500 has been stuck in a 10-point range for a week, and we were even seeing that index coil on an intraday timeframe, with several consecutive "inside bars", an unsustainable condition.

Given that lack of volatility, implied volatility (a bet on future price movements) has plummeted, with the VIX index shedding 10% today alone. Given December's reputation as a bad month for betting on an increase in volatility, perhaps traders are simply betting on that historical tendency. But October was supposed to be an excellent month for volatility and it was anything but and besides, this is the kind of drop in volatility we see after a Fed meeting, not before.

When we began to get a large number of "overly optimistic" extremes in our intermediate-term indicators last month, I began watching closely for any sign that the character of the market was changing - such as watching to see if buyers were still interested in stepping in immediately when we got short-term oversold readings. For the most part that has been the case, and there has been little reason to suspect a change in trend.

There are a few possible signs out there now, such as the fact that the high-beta Nasdaq 100 has not been able to make a new high after the severe oversold readings we got in late November. In fact, it's been 12 days since the NDX closed at a new 30-day high, which is 50% longer than any other no-new-high stretch since the rally began this summer. A break below 1760 in that index would seemingly be the proverbial last straw indicating we would now be in a range-bound market at best.

Until we see something like that, though, despite my concerns I'm giving the uptrend the benefit of the doubt for a bit longer. In the S&P, I've been using the breakout level of 141 in SPY and 1420 in the e-mini futures as a line in the sand, with a general long bias above and (more aggressive) short bias below, and that's my continued focus.

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

ApproachingTheBell

12/11/06 3:25 PM EST

I mentioned earlier the tight range we've had in the S&P 500 over the past week, and that has extended to the intraday time frame as that index has now formed three consecutive "inside bars" on a 60-minute chart.

It's very rare to go beyond three consecutive inside bars, even on a short time frame like 60 minutes, so we shouldn't expect this coil to last much longer.

One of the standouts today among the short-term indicators I follow is the VIX, which has dipped by 10% despite pretty anemic gains in the S&P. Since 1990, I can only find 10 other days where the S&P was up less than 0.5% yet the VIX dropped by more than 10%, but unfortunately I couldn't find any edge in that fact as performance going forward was in line with random.

With the indices still sitting above support and most of our intraday guides not giving overbought extremes, a market that is still in the hands of momentum traders should be able to break this intraday coil to the upside. Either way, I expect a quick move one way or the other once it breaks.

LunchtimeLull

12/11/06 12:25 PM EST

The major indices have stalled out after testing Friday's highs, and most have given back nearly half their morning gains.

The S&P 500 has been stuck in a 10-point range for nearly a week now, which makes it difficult to want to press bets either way until there's some resolution to that range. With that index remaining above its breakout area and short-term indicators still mixed at worst, we should see further gains if we're still in a strongly trending market.

MidMorningOutlook

12/11/06 10:15 AM EST

Good Monday morning...On Friday we saw the S&P 500 and Nasdaq 100 dip below their obvious support levels before jumping back above.

We were getting extreme STEM.MR model readings at the time of that support break, which is always a heads-up that we could be seeing a fake move and an increase in volatility was likely. Even with the mid-morning reversal and consolidation the rest of the day, the model for the S&P remained close to oversold territory.

As I noted on Friday afternoon, with the indices still sitting above their support areas and short-term model readings closer to oversold, we should see additional rally attempts here. If not, then we'll have one of the first clues that we're likely not in the momentum-driven tape of the past few months and we should be more successful trading against short-term extremes.

So I'm continuing to watch the breakout level in the S&P (which translates to 141 in SPY and 1420 in the e-mini futures) with a general preference to concentrate on longs as long as we remain above that area and our short-term indicators do not reach overbought extremes.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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