Snapshot Notes - April 22, 2008


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TUESDAY, APRIL 22, 2008

Signs Are Turning Back to Neutral

04/22/08 12:15 PM EST

As of:

SPX 1375

HELP ARCHIVE

The short-term negative biases we've been going over for the past few days and earlier this morning have kicked in, taking the indices to their lows of the day.

Unlike several of the days we've seen over the past week or so, I can find little edge with regards to how negative breadth is on the NYSE this far into the day. Last week, we had a couple of opportunities to identify trend days in the making (which happens when the indices open at one extreme and close at the other), but with about 1400 more stocks down on the day than up at noon, the S&P 500 has had mixed results going into the close. Sometimes we saw continuations, other times reversals in the afternoon, and there wasn't much consistent about it that I could find.

The patterns we've been discussing over the past couple of days have been quite short-term in nature, with an effective time frame of only one to three days. We've pretty much met most of the downside projections, and time is running out on when they've been most effective. With that in mind and as the indices approach some potential support (I'm looking mainly at 1360 - 1370 on the S&P), I'm turning neutral. I can't find a real solid edge either way from here in the short-term.

Pullback Continues to Seem More Likely

04/22/08 9:10 AM EST

As of:

SPX 1389

HELP ARCHIVE

Good Tuesday morning...We begin the day with a slight pullback in the pre-market futures after they rallied from a more severe decline in the early morning hours. Commodities and foreign markets are mixed, there are no real earnings surprises that should have an outsized influence on trading, and the only economic release of note today is Home Sales at 9:00am.

On Friday and Monday we went over a few pattern-based studies that suggested we should see limited upside at best in the short-term. Looking at extreme reactions after earnings reports, multiple gap up opens, and low volume, we saw several signs that prices should be pulling back temporarily.

There are a couple more today that I thought were worth a mention. I've noted in the past that one of the few common technical indicators I watch is a 3-period Relative Strength Index (RSI). Over the past four days, that indicator has closed in overbought territory over 75 each day.

I checked the history of the S&P 500 tracking fund (SPY) for any time it has accomplished that, and on the last day it had its lowest volume in at least a month. There were 21 occurrences that popped up, and the next day the S&P was positive only 6 times (a 29% win rate) and had an average return of -0.2%. Only one instance showed a gain the next day of more than +1%, and it gave that all back the following day.

Jason Roney on Minyanville had a study that showed what's happened when the S&P 500 futures carved out five straight positive days heading into the Tuesday after an option expiration. He showed that the next day was negative all nine times it has occurred. I re-created the study, but got one winner out of ten occurrences, and an overall average return of -0.3%.

Forgetting option expiration for a second, I re-did the study looking for five higher closes heading into any Tuesday. Out of 40 chances, the S&P futures closed in positive territory only 12 times (a 30% win rate) and sported an average return of -0.2%. There was only one day that showed a return of more than +1%, and it gave that all back over the next two days.

Given the studies we've discussed over the past couple of days, the potential resistance of the 1400ish level on the S&P just overhead, and the fact that much of the upside yesterday was due to one stock (Apple) that has already jumped mightily heading into tomorrow's earnings report, we seem to be on pretty shaky footing here. Most of the negative biases we've gone over have had an effective time frame of no more than one to three days, and would be mostly invalidated with more than 1% gain in the S&P or another day or so of going nowhere, so I don't plan on sticking around with a modest negative bias here if either of those scenarios unfold.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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