Market Analysis for Feb 9th, 2004

Warning Signals for Those Who are Long
By Mike Paulenoff,

From the last 20 minutes of trading on Friday into all of today's action so far, my work has been indicating that Friday's rally has been peaking. That rally was an extension of the low on Wednesday in the E-mini March S&P from 1122 into around the 1140-42 area. We have yet to actually have a confirmation of the peak, but it seems that we have two tops -- two marginal new recovery highs in intraday trading today -- neither of which has been confirmed by the underlying momentum gauges.

So I'm getting intensifying warning signs that we should not be long these indices and, in fact, we can probably take a chance on being short the E-minis up here. But the bottom line is anybody who participated in the long side of the move on Friday should have taken profits or should have relatively tight stops to protect the long side of the positions.

1139 would be a key level for the E-mini March S&P. If it breaks 1139, that's my initial confirmation that the move is over on the upside from 1132, and an initial downside target is 1135-32 on a pullback. Only a move above 1145 would argue that my work is ill-timed and that we're going up again for a test of 1148. That level, as you might recall, was the rally just ahead of the announcement by the Fed on the 28th of January that they had changed the wording in their policy statement, upon which the market plunged from 1148 to 1124 in that one afternoon.

For time being, though, my signals are that you need to be cautious with tight stops on the long side, or out of the long side altogether, at least for the next several hours, probably between now and Greenspan's testimony on Wednesday morning.

With regard to the QQQs, the Qs have held up very well, to my surprise. They haven't gotten anywhere on the upside, but I thought they would peak earlier in the day. Nonetheless, they can't seem to get above 37.40, and look like, as we speak, they're starting to come off. They're at 37.24, and I expect them to break at 37.20, which would be our first clue that this move is over on the upside -- that is, the move from Wednesday's low of last week at 36.32 into today's high at around 37.38.

A break of 37.20 would be the first trigger, and then a confirmation trigger would be 37.10. A break of 37.10 should take you down to 36.80-.70. That's our first target on the downside for a pullback off of today's projected peak.

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