The major indices closed around the flat line yesterday; although large cap tech made a sprint into the close ahead of Cisco’s earnings (CSCO – 23.07). Yes we have seen this script before, large cap Tech blows the cover off the ball, and the stocks promptly fall in price. So far CSCO is holding on to gains, but the down sloping 50/20 day convergence provides plenty of resistance at $23.80. The fact is that CSCO will now earn $1.75 in the forward estimate (Jul ’11) and has $4.80 in free cash; so the stock trades at 10.4 x earnings! Don’t tell us it’s already built into the stock, that’s nonsense. What a dichotomy; where some of the non growth capital intensive stocks are commanding multiples north of 20, while the truly great companies like CSCO are being given away? That said if the “cyclical peak” believers are getting the upper hand; let them continue, please, we would love to see these stocks at their 200 day moving averages. Our technical signals have given a near term short signal, and so while we are rampantly bullish on large cap Tech, we have moved to a net short position on this rally. While the character of the market over the past year is to threaten a rollover, and then just as you have applied the necessary defense, to promptly rally sharply, this latest correction appears to be the real thing. We hope so. Ultimately it will far more profitable if we can get a full blown correction down to the 200 day averages (currently 2018 on Nasdaq, and 1018 on S&P 500), and having already seen the Whipsaw show in July and November of last year, we would welcome some meaningful selling pressure. In July we spent 7 sessions below the 50 day, in November 4 consecutive sessions. This present pullback has lasted 9 sessions, and the longer we remain below the 50 and 20 day pivot, the more likely this correction can gather some momentum. The fact that CSCO can give the absolute best commentary possible, and the Nasdaq futures are still down substantially, is a great sign that the selling has not yet concluded. Bring it on. Any test of the 200 day averages that plays out in the next few weeks would turn our present DN/UP condition to an O/S/UP (Oversold) and bring about the single best buying opportunity since March of last year.

S&P 500 (1097.28) set to open below its 10 day average at 1092. 1083 was the old three month range low and also exactly 180 Gann degrees from our 1150 closing high. A close below 1083 would bring on a wave of accelerated selling pressure. Then a move below 1071 would confirm the notion of a full blow correction. 360 Gann degrees down from the closing low is 1019, and this is coincides with the vicinity of the 200 day average. Quicker the better. We would be very aggressive on such a move, but for now defense is the name of the game as the evidence still supports the fact we are rolling over. Only a close back above the 50/20 day average (currently 1113/1116) would give an all clear buy signal. Until then we have to keep our powder dry and look for new lows and a possible test of the 200 day average.

Nasdaq (2190.91) ran into the down sloping 10 day average before pulling back here today. Any move above yesterday’s high at 2195 is now a near term buy signal, but still plenty of resistance at the 50 day at 2230 and then the down sloping 20 day (currently 2244) just ahead. The trend is now lower, and the hope is that having fixed the near term Oversold condition on this rally, it might now be bombs away to the downside. The 20 week is at 2174 and a close below there would suggest accelerated selling. The 200 day average is still some 8% lower, and we have recently moved to a net short position to protect against the likelihood of such a move. We are on a fence and will have to move quickly to either maintain or remove protection as Mr. market makes up its mind as to whether this is just a garden variety pullback, our as we now hope, a full blown correction. A close by CSCO back above its 50 day at $23.81 would be bullish in that CSCO would then change the sell the news character we have seen with INTC, GOOG, AAPL etc. For now, however, the bears still have the upper hand and we are trying to lean short by selling calls against the individual stocks and hold an aggressive short NDX position. The net of this position can change dramatically, but we are looking to be maintain a modestly net short position for the foreseeable future. The 200 week is at 1702 on the NDX (1784.70) and we suspect we have a date with this level, and as such will rotate down strikes if we see continued selling.