Snapshot Notes - July 30, 2008


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WEDNESDAY, JULY 30, 2008

Quickly Cycling To The Other Side

07/30/08 9:25 AM EST

As of:

SPX 1251

HELP ARCHIVE

Good Wednesday morning...We begin the day with a gap up in the major indices as traders react to additional news on government "protections", some surprisingly positive economic data, a slight drop in the price of Oil and strongly positive foreign markets.

Over the past two weeks, we've had an opportunity to go over several intermediate-term positives. We got some signs of panic on the 15th that had been lacking all throughout the June decline, then we got a few different signs of strong upside follow-through that helped bolster the case that we were about to embark on another bear-market hiccup.

One thing we hadn't seen, however, was a day with extremely lopsided positive breadth. Despite a string of three 1% up days in the S&P 500 within one week, none of them showed particularly strong advance/decline or up/down volume numbers. That finally changed yesterday as we were able to enjoy a strong day that carried among most sectors, giving us a day with an Up Issues Ratio of 77% and an Up Volume Ratio of 84%. As we went over yesterday, such a strong day immediately following an extremely weak day has had some pretty bullish connotations when looking out a month.

So from an intermediate-term perspective of one to three months, the risk/reward continues to look skewed to the long side and I see no reason yet why focusing heavily on long-side trades is an errant strategy. We went over such a setup yesterday morning, as we were seeing the first "oversold on support" conditions since the mid-July low.

Buyers took full advantage, and the pressure was enough to move several of our most sensitive indicators into overbought territory. Both the Cumulative TICK and Price Oscillator that we update intraday reached stratospheric levels by the close. We're seeing a fairly large gap up opening this morning, which is unusual after seeing such extremes in those two short-term indicators.

I can find only four other times in the past six years when the Price Oscillator closed over 65% then we gapped up at least 0.5% the next morning (04/21/03, 09/19/07, 11/14/07 and 03/24/08). Two of the instances led to an immediate backing off over the next two to three days, while the other two led to a further push during the day. Those gains proved to be somewhat temporary as the S&P chopped around in the days following.

Yesterday afternoon I noted that while still looking decent on an intermediate-term time frame, and despite some mildly positive seasonality heading into the end of the month, the quick ascent into overbought among our short-term guides made it more likely we'd see choppier conditions. The STEM.MR Models aren't yet overbought, but would be with another decent-sized up move today, and given the instances we discussed in the paragraph above, I think those gains would be mostly given back heading into early August. If the indices continue their upside thrust today, particularly as they begin to challenge last week's highs, I would be more willing to sell and/or sell short.

All the best,

Jason Goepfert

President and CEO

Sundial Capital Research, Inc.

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