We're Still in the Trading Range. 3-22-06

Good Afternoon.

The NASDAQ managed to make a token new high yesterday at 2332.95. The move came on a vicious spike that was made up of short covering and true capitulation by some of the underinvested Bulls. Surprisingly the savvier Bears were still emboldened enough to fade the strength, pulling the rug out from the newly minted Bulls. We say surprisingly because we believed that once the NASDAQ broke above 2325 that the MOMO players would be able to keep the Bears at bay. Unfortunately this was not the case and the Bulls have now demonstrated another failed rally.

The NASDAQ now holds a double top formation which is a little ominous. To add insult to injury, Microsoft's (MSFT) delay if its consumer version of Vista has provided a convenient fundamental excuse to further embolden the Bears and temper the Bulls.

However, the action today further demonstrates how neither side is still unable to gain much traction once they have the advantage. The NASDAQ has recovered from this morning's lows and is hovering just under 2300. Since it is clear that the MOMO players do not intend on showing their face until significantly higher levels than our original assumption, we are forced to become range traders again as opposed to trend traders. Therefore, since the market is towards the upper end of its recent trading range we have decided to lighten significant exposure around these levels (NASDAQ 2297). We did some selling into strength yesterday but clearly not enough.

The MSFT news while negative is likely only a temporary hiccup in the grand technology scheme of things. Vista will ultimately ship, creating further PC demand as the replacement cycle is inevitable. In fact the Christmas selling season is so important to the Original Equipment Manufacturers (OEM's) that we are confident that financial incentives will be provided to consumers who are willing to purchase new PC's prior to Vista's actual release. Most consumers will most likely not hold back from an attractive PC upgrade if they were promised perhaps a free upgrade to Vista (when available) with a proof of purchase (or something to that effect). Corporate margins will suffer a little due to financial incentives but the fear over the demise of the long term technology rally is being overblown.

Nonetheless, your friendly neighborhood Kcap team believes that rallies should be sold at this point as the Bears seem to be a little too brave at the moment. Declines in the market will most likely be quick but not too severe. The lower end of the range of NASDAQ 2240ish seems like an appropriate place for the Bulls to make another stand.

Hope you traded well.

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