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Give us some more "bad news" ... please!

HAVING TROUBLE PRINTING?
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Stocks have recovered from the opening bell as the major market averages now trade near unchanged levels marked to yesterday's close. Bulls have got to be thinking "give us some more bad news" as this is perhaps the first positive market action stocks have seen fore sometime.

But bulls that think like this, should probably be careful what they wish for. Most likely, today's action is simply a near-term "unleashing" of some short-term risk/reward adjustments. It will most likely take a couple of weeks for bulls to really get any sense of just what today's action has on things in respect to what lies ahead in the coming months.

Earlier today I shows a bar chart of the Gold/Silver Index (XAU.X) 79.47 -5.08% and how that group of stocks is still in a bullish upward channel. While the sector continues to decline today, we must remember its still in an bullish trend.

Conversely, I mentioned the NASDAQ-100 Trust (AMEX:QQQ) $28.37 - 1.83 which recouped the bulk of earlier losses in the past hour after "filling" its gap lower from this morning. However, the only thing a bull would have liked to have seen today was some type of sign of "capitulation." "Capitulation" isn't necessarily determined by price action, but VOLUME. The QQQ shows there wasn't much volume today, thus I don't think we can say we've seen any capitulation.

NASDAQ-100 Trust Chart - Daily Interval

If we look at the QQQ chart (we've shown this one several times in recent weeks) traders will remember me profiling a bullish trade for 1/2 position long the QQQ in the Sep. $30 calls (QAVID) on the last test, we see there hasn't really been a lot of volume today. See that volume spike up at $33? That's the kind of volume spike a "capitulator" would like to see. Instead, we see that volume spike coming right at our 38.2% retracement level, almost as if a smart bear was saying..."you want some Q? Here you go." A bull would have much rather seen some "book end" type of volume today for capitulation.

That didn't happen today. So, I would still suggest that any call option traders try and buy some time and avoid buying near- month (June/July) expirations. Always try and buy more time than you think you'll need. If it costs a little more, then trim back your contract size. Don't make all your bets on the same day. Scatter your bets over time and only add bullish trades to your account once you start seeing some success from other trades.

Near-term, any rally in the QQQ would most likely find formidable resistance at the $30.26 level, which would be right near the crisscrossing of the mid-point regression and the 19.1% retracement level.

Bears in the QQQ can perhaps make some corollary observations to the QQQ trading near the lower end of regression that is almost and identical tie in with the May low reading in the NASDAQ-100 Bullish % ($BPNDX) during that time. If a bear was bothered by the QQQ rally from $28 to $33, then they should factor in the possibility of a rally from current levels to about $32. Make sure you've got your account strategy set up for such an event, and to from there.

Jeff Bailey
Senior Market Technician
Option Investor

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