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Market action looks to be short covering

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Today's mixed markets looks to be caused by short covering by bears looking to lock in some gains when "Black Monday" didn't take hold after the open of trading.

The Semiconductor Index (SOX.X) is currently trading down 1.3% to 507 and this action gives hint that this index just isn't showing the leadership I feel it needs to show for the broader market averages to really catch any type of meaningful fire. My past observations were that the SOX was one of the stronger looking indexes in the NASDAQ market, but failure to lead or show any type of strength is sign that any positives currently showing themselves in other indexes is purely short-covering and not a preemptive move by bulls that now's the time to be getting overly bullish.

On the other end of the scale, I'm going back to recent observations that the GSTI Software Index (GSO.X) was a dog with serious flea problems dating back to the $170 level. The past several sessions we've witnessed this group of stocks trade 52- week lows and today's current gain of 1% to $142.77 looks to be the case of bears locking in some gains as they assess a risk of rally to 61.8% retracement of $158. We had "rolled down" retracement on this index and a current retracement support level might be at the 80.9% level of $131.7. My thinking here at $142.77 is that partial profits are being locked in. I would also note that shares of Microsoft (NASDAQ:MSFT) did test its 80.9% retracement level this morning near $54.64, which could very well have been a retracement level where market makers were buy-side influenced to square up some short inventory as they assess risk to $59.35 (61.8% retracement) and even the $62.26 level (50% retracement). I feel Microsoft (MSFT) is still one of the main stocks institutions would concentrate on from the buy side should they want exposure to the group. Therefore, this is a "key" stock traders should be monitoring against the GSTI Index (GSO.X) and trading action there.

Currently, short-term traders should be identifying some potential bullish trades and making a list of those that have pulled back into some longer-term (6 to 9-month) bases where today's range of trading is a tight range. Often times, these types of technicals will help the bullish trader limit his/her risk tomorrow should the markets look firm to higher. Day like today are not good days to try and step in a buy stocks or establish new bullish positions as many indices represent that of a falling knife, and trying to catch that knife can cause a severe blow to the account. Wait for some consolidation to occur (at least one day) to where you can limit risk to break of Friday's low.

Again... both the NASDAQ-100 Bullish Percent (BPNDX) and S&P 500 Bullish Percent (BPSPX) from stockcharts.com are at similar field position that was found in late March and early April. Risk/reward is unfavorable for establishing full bearish positions at this time as a lot of risk has been removed from the markets in recent weeks. This does not mean stocks can not go lower, but traders should realize that a trading rally could occur at any point and trade/account management and strategy is paramount at current levels.

Some market participants feel the Fed could come in and cut rates before the next Fed meeting and a trader that finds himself "over short" on such a Fed rate cut could have trouble.

Jeff Bailey
Senior Market Technician
Premier Investor

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