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A Bear in Bull's Clothing

I'm going to close my bearish position in the Powershares QQQ Trust.

I thought I would take a break from my very bearish posts to make the bull case today. I admit, I'm not at all bullish, but I am realistic. Currently, bearish sentiment is so high that some sort of near-term rally seems likely. Now, I doubt that rally, should it come, will be a game changer, but we need to be aware that the bulls do have one card left to play.

The good news for bulls is that such a rally would come against the backdrop of Hindenburg Omens and broken charts, and it would validate all of the people who continually make the case that technical analysis is silly. The bad news for bulls, ironically, is that any such near-term rally would be based almost totally on technical analysis.

Okay, so the SPX fell through the support level at 1060 yesterday and bears tell us a decline to test July lows is now inevitable. Between those lows at SPX 1010 and current levels lies the 1040 level. This is a bit convoluted, but that level would test the June lows and possibly set up a head-and-shoulders bottom (bullish) pattern.

For bulls, the SPX 1040 level must hold. The question is, will it? What we need to understand about technical analysis is that it is not magic. In fact, technical analysis works because it is self-fulfilling. Enough people see the same points on the chart and they behave accordingly.

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Enough people see SPX 1040. My guess is that we are going to get an oversold rally from the SPX 1040 level. This will facilitate two prerequisites to a bigger decline in September. First, it will allow bullish pundits to do their anti-technical analysis rants in the financial press. That skepticism will entice many buyers back into the market. Second, it will give bears a chance to reload short positions and press much harder in September.

Today, I am going to close my bearish position in the

Powershares QQQ Trust

(QQQQ)

. The position was purchased for just $1.20 and is now changing hands at $2.66. With the lower open today, this is a solid trade.

Trade: Sell to close QQQQ September 46 puts at $2.70 or greater.

At the time of publication, Terry Bedford was short QQQQ, long QQQQ September 46 puts.

Terry is the Founder and President of Bedford & Associates Research Group. Terry writes for AOL Finance and MSN Money and is regularly quoted by the financial media.

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