Dow Jones 11329.20 -5.76 8:58 am PDT, August 18, 2006 NASDAQ 2147.22 -10.39 For info, visit access.smallcapnetwork.com S & P 500 1295.62 -1.86 Change your subscription status here Russell 2000 706.90 -3.88 VOLUME 06: ISSUE 64 Can the Bulls Continue to Defy the Odds? It's Doubtful. Wow, what a week! Defying most odds, the market rallied firmly early on, and has managed to hold onto those newly-recovered trading levels. We'd be the first to admit we're a bit surprised, after seeing key technical resistance lines quickly shut down the rally begun in mid-June. But, with just three bullish days behind us, we find all the indices above the key resistance points we had pointed out only a few days ago.  In a technical sense, any break to new highs like this one is bullish. However, we'd be kidding ourselves - and you - if we said we're fully convinced the recent rally is the groundwork for a much bigger, bullish move. The fact is, we don't have a lot of bullish conviction...despite the bullish signs. No, if anything, we're still just as expectant of a pullback, partially based on the calendar, and partially based on sentiment.  A contradiction? Yep, no doubt about it. Charts are bullish, yet we're on the bearish side of the camp...at least in the short run. While we'd be the first to say chart discipline should be the core piece of a trader's approach, there also has to be room for reason, and recognition of the scenarios that may override chart patterns. As you may have guessed, we're facing such a scenario right now.  Let's take a look at the ins and outs (the 'why') of our expectation, and establish some specific make-or-break numbers.    What's 'Up' With the VIX? Nothing. That's the Problem.  Above, we mentioned sentiment as the reasoning behind the short-term bearish outlook. Specifically, we were referring to the CBOE Volatility Index (VIX)...also called the 'fear gauge'. We've discussed it in detail before, but as a quick review, we'll remind you it's best used as a contrarian indicator. When fear is at its worst and investors are the most terrified to own stocks, it's time to start buying - since you're probably at a short-term bottom. This is indicated by a peak (or spike) in the VIX. Conversely, when the market is complacent and confident, it's time to get nervous...traders are about to get punished for their assumptions of safety. At these points, the VIX is unusually (relatively) low. Most of the time, the VIX is neither extremely low nor extremely high, which means there may not always be a new 'signal' per se. But, when the VIX is at the far ends of its spectrum, stocks are typically at a turning point...and it's a turn the market rarely expects to see.  And the relevance to now? If you've been impressed by the market the last few days, we can't say we blame you. But, there's something distinctly missing from this rally that was part of every other major bounce we've seen this year (and last year, for that matter). This bounce was born at a point in time when there was practically no fear at all - as indicated by the VIX. This instance may indeed be the exception, but don't be fooled...if you're betting on continued bullishness, you're betting against the odds. Take a look at the nearby chart of the VIX and the S&P 500. Stranger things have happened, but we can't ignore what's staring us right in the face.  The VIX, currently in the mid-12 range, is at three month lows. Remember, unusually low VIX readings reflect a high degree of investor confidence, which typically leads to short-term disappointment (i.e. a significant correction). The only rallies that had any longevity over the last several weeks were all started while fear was peaking. All of the significant and trade-worthy market dips were started when the VIX was at or near the lower end of its recent range...like it is now.  Point being, we're looking for a dip starting in the coming week, although the weakness could last longer than just those five days. For the S&P 500, a retest of support around 1220 isn't out of the question, although it would certainly be at the extreme end of the likely move. For the VIX, as long as it's trending upward, then stocks should be sinking. And, although needless to say, a falling VIX should coincide with bullishness for the market. Clearly there's not much more downside room left for the VIX right now...and you know what that means. The VIX's upper Bollinger band is currently near 17, and is the most likely place any rising VIX will finally be stopped. Be sure to keep an eye on both the VIX and the S&P 500 for hints of when any pullback will finally break.  In the meantime, it may be a good idea to start adding on some put options, shorting, buying an inverse fund, or doing whatever it is you do to take advantage of market weakness. In fact, getting in today would be a nice, high entry level in front of the expected pullback  Counter-view: If we're wrong about this - and the market does the unlikely by actually continuing to rise - we'll know soon enough. The real test for the bulls doesn't come on a strong day. We want to see at what point they'll start to buy again...as opposed to bailing out at the first sign of a rough patch. The best way to gauge this is by using the 10 and 20 day moving averages. If the market finds support there and uses them as a rally point, then we'd be a heck of a lot more inclined to jump on the bullish bandwagon. If instead the bulls freak out, and we see the market break under its short-term average lines, then we'll know our expectation is starting to take shape. If you're looking for a specific confirmation level from the S&P 500, a couple of closes next week above this week's high of 1300.78 will do the trick. Fortunately, we'll have some sort of answer one way or the other pretty soon.    Oil Still Very Trade-Worthy  To say oil prices have been whipped around lately would be an understatement. An armed clash in Lebanon put the OPEC supply in question, pushing the futures higher, only to be followed be an oil sell off on the news of a cease-fire. Sandwiched in between those two events was a thwarted terrorist plot, which sent oil prices tumbling, followed by a quick rebound for oil when it became clear air travel wasn't going to come to a screeching halt. All that pushing and pulling is enough to make a trader tired, even though it provided some great trading volatility.  With all the external pressures put in the past (or at least put on the table), what does it mean for oil now, in the short-term as well as the long-term? As usual, the best way to find an answer is in starting with a chart. The nearby weekly chart of light crude oil futures tells us pretty much all we need to know.  Short-term (the next several days): It's really quite simple...oil prices have been sinking since mid-July, and are still on that same track. It all started with a long-tailed bearish reversal spaced out between July 7th and 21st. Despite a brief surge last week, the downtrend is still in place. In the meantime, we have a set of MACD lines telling the same bearish story. To what extent could the downtrend send light crude oil prices lower in the immediate future? The long-term support line plotted in yellow on our chart is currently at 6550 (or $65.50 per barrel). That's well under the current price of $72.16, but it wouldn't be any different than some of the corrections we've seen since late 2004. By the time the futures get that low, though, the price may be somewhere around $66. Long-term (the next few months): You know the same support line that's going to serve as a short-term target for crude oil? Well, it's clearly pointed higher, and has frequently served as a reversal point, turning any decent dip we've seen in oil prices right back around to even higher highs. Unless the support line breaks - and we have no real reason to think it will - crude futures are likely to repeat the bounce off that support line...as they have all four times it's been tested since 2004. When the time comes, and we see oil futures stop this decline around $65/$66 area, we'd be bullishly buying into this 'bigger picture' uptrend. We don't think $90 for a barrel of oil is out of the question.      We Value Your Feedback   Got comments, questions or suggestions? Send 'em on over: Editor@smallcapnetwork.com If you wish to send a written request or inquiry, please send it to our physical address: TGR Group, LLC 4653 Carmel Mtn Rd Suite 308 #402 San Diego, CA 92130 Execute Sports Adds Craig Warner to its Roster  Earlier this week, Execute Sports (OTCBB: EXCS) announced the addition of Craig Warner to its vest and wetsuit team, as well as the Kampus Footwear team. Warner, a tough personal watercraft competitor, is on the leader board of the American Power Boat Association season standings. More than that, he's within striking distance of the title, with only one race to go before the world championships. Associating with a winner is important for any company, if only for sheer publicity reasons. But, bringing Craig Warner into the fold actually opens up a few new doors for Execute. Prior to signing Craig, most of the company's publicity focus was within the world of wakeskating and wakeboards; there was no personal watercraft icon for Execute to tout. Now, there is. While it may still be a niche market, brand loyalty and name-association are powerful forces in the action sports arena. In other words, this is a big deal.  Although it's not the only reason, this is yet one more reason to purchase EXCS shares. The current price of 13 cents is a bargain, and we're seeing some support here after July's tumble - the dip may be over. Plus, the stock is very oversold, and ripe for a bounce.    Another Handful of Earnings Reports  Tis the season...earnings season, that is. We've detailed the earnings results of many of our featured companies. However, there are still a few more with recently-submitted results to review. All are listed below, with a quick summary, as well as a link to the full quarterly report. Novelos Therapeutics (OTCBB: NVLT) reported a loss of 4 cents per share for their 2nd quarter of 2006, versus a 5 cent loss for the same quarter a year ago. For a six-month period - the first half of their fiscal year - a per-share loss of 8 cents is a penny better than the 9 cent loss for the equivalent period last year. For the full 10Q, click here.  Sense Holdings (OTCBB: SEHO) posted a loss of 1 cent per share for their most recently-completed quarter - the same loss they saw in Q2 of 2005. On a six-month basis, the 4 cent loss is 2 cents greater than the loss incurred for their first half of last year. For the full 10Q, click here.  Xtreme Companies (OTCBB: XTME) filed a 30 cent quarterly loss, compared to a 3 cent loss for the second quarter of last year. On a six-month basis, the company incurred a per-share loss of 85 cents, versus a 10 cent loss in the first half of 2005. For the full 10Q, click here.  In all cases, don't assume the current numbers tell the whole story. Read the fine print, and read the news. Case in point - Network Installation. A year ago, the company had no earnings, but was incurring a lot of debt. The books didn't indicate a major acquisition was being made, however, so the stock spent the better part of the last twelve months moving lower. Had you read the non-numerical information, you would have known about the acquisition...and you would have been paid well for it. NWKI shares are up 72% in the last three days, on earnings news. Very few people saw it coming. Needless to say, we're glad we were watching it closely, and told you about the opportunity earlier this year.  Subscribe Information is power and timely information is profitable. Become informed and profit from SmallCapDigest Profiles and Trading Alerts by becoming a Preferred Member today. There is no cost associated with your email subscription. 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To the degrees enumerated herein, SCD should not be regarded as an independent publication.  Click Here or go to http://access.smallcapnetwork.com/compensation_disclosure.html to view our compensation on every company we have ever covered, or visit the following web address: http://www.smallnetwork.net/profile_disclosure.html for our full profiles and http://access.smallcapnetwork.com/short_term_alerts.html for Trading Alerts.  TGR Group LLC has been paid a fee of $30,000 and 300,000 newly issued restricted shares by Execute Sports for coverage of the company. In addition, one of the prinicipals of TGR Group purchased 100,000 shares of Execute Sports at a cost of $.25 per share prior to the public offering. The shares are now eligible to be free trading.That individual may choose to sell the shares at any time. This should be viewed as a potential conflict of interest. Sense Holdings Inc. has paid TGR Group LLC a fee of $30,000 for coverage of the company. 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