Today is May 24, 2006

Our current signal is BUY

This signal was initiated after the close on June 27, 2005

Tonight we are going to talk about corrections during longer-term trends. Currently, we believe the stock market is in a long-term uptrend and we have so far witnessed a drop of a little over 8% in the NASDAQ Composite. Typically, corrections last from 7%-12% with the majority above 10%. Therefore, the current pullback can easily be labeled as a correction and not a new downtrend. Not only did our system not even come close to triggering a sell at the top last month, but the recent drop has been on enormously high volume and sentiment has become quite bearish. The high volume suggests a magnitude of selling and reversals occur when the selling has exhausted. Today, QQQQ had its highest volume day ever with a total of 235 million shares trading hands! The ETF was much more volatile today than it has been in months and after all of these shares traded hands, the gain was rather contained. This suggests that there is an incredible struggle going on now between the bulls and bears and there is currently an indecision in the stock market. Supply and demand are matching. Usually after such a day, the stock market will begin to reverse. Therefore, we believe that today's intraday low very possibly marked the bottom of this correction. If not, with volume being so high and sentiment so bearish, the bottom should only be a few percent lower.

The first chart shows an uptrend line from May-present on the NASDAQ Composite. Even though this is a weaker trendline, as it is not even drawn from the May bottom, it should still act at least as minor support, as it already did today. The higher support line shows major support. It was broken earlier today, but the index finished above the line. The lower support line shows the lowest this correction should go. If the NASDAQ did not find its bottom today, it will most likely not be able to break 2100. This would be a total fall of a little more than 11%. Still within the definition of correction.

The second chart shows the put/call ratio with a 10 day exponential moving average as an overlay. The put/call was at 1.42 today, a tie for the second highest level ever. Just last week the sentiment indicator hit an all time high of 1.52! The 10 day exponential moving average is also at an all time high with a current value of 1.2! The put/call ratio is a contrary indicator and high levels usually mark bottoms.

The third chart is of the Dow Jones Industrial Average. We placed the support line on the chart back in March. Today the index finally hit this support level, suggesting that the fall in the index may be over.

Even though it is possible than this move has a few percent lower to go, at this point, we are convinced that this is only a correction, not a new downtrend.

Take Care,

Stephen Brown
Founder of Nasdaq Wizard, LLC