December 18, 2006

The markets opened on a gap higher... traded sideways for a few minutes in a tight range with a downward bias... then rallied sharply, much the same way as they have done in the past few weeks... then rolled over and traded lower. As the indices rolled over to the lows of the day, it was quite clear that the NDX was much heavier than both the DJIA and the SPX.

For the past few weeks, this market has felt very bullish: corrections or consolidations were met by sharp rallies. For example, if the Dow corrected 20 points or so over the course of an hour, when the selling abated, the Dow would lift higher by more than the 20 point drop in the course of twenty minutes. An obviously bullish market.

the past two trading days, however, have shown slightly different characteristics.

Two shooting stars on the DJIA and SPX indicate a potential top is forming. NDX failing to make new highs, breaking back into the middle of the consolidation during the past few weeks, and a bearish engulfing pattern are all cause for concern for technology stocks.

Above is the daily DJIA picture. Targets: 12300 easy reach; 50dma at around 12175 looks like a good area of support.

Above is the SPX picture. Notice the shooting star from Friday has held. 1412 on the SPX looks like a good first target for a correction in the SPX. Take out the 1404 area and the next stop is likely the 50dma at around 1388.

Above is the NDX picture. The lows of this consolidation are calling the NDX's name. 1765 area looks like a good area of support, until its not. The 50dma is around 1755-ish.

I am not necessarily looking for a nasty selloff, rather a correction of the previous few weeks. As of today, the bullish characteristics of this recent rally are still present, and until some of these characteristics are no longer evident, this market should be supported.