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No Reason to Buy

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With the U.N. meeting this week and President Bush giving his State of the Union address tomorrow, the market is suffering from geo-political nervousness not seen since the months following 9/11. Some traders might be using this jitteriness to their advantage by spreading rumors. For example, bonds briefly sold off this morning after "reports" that Saddam Hussein had accepted exile began circulating on the trading floors. It's times like these that mere speculation can really move the market.

As was the case last week, the NASDAQ continues to be the anchor of relative strength that keeps the overall market from completely breaking down. The Composite is trading lower but still holding above support in the 1315-1320 area. Even though that's a potential sign that a rebound could be forthcoming, tech bulls also need to be aware of the recent weakness in Microsoft. Shares of the software giant are underperforming the market and have pulled back to bullish support ($48.00) on the point-and-figure chart. The bar chart shows that it could be very rough going if this level fails.

Annotated chart - MSFT:

It looks the only defensive buying that's going on today is concentrated in the bond market. A scan through the major sector indices shows that every group is currently trading in the red. Even the XAU.X gold/silver index is pulling back to consolidate some of its recent gains. The growing fear is reflected in the VIX.X volatility index, which tagged an intraday high of $40.89 after rising sharply on Friday. But as rapid as these gains have been, the index faces a couple overhead resistance levels that could keep a lid on a continued advance. One such obstacle is the 61% retracement bracket from the October highs to November lows. Traders will recall that the VIX.X previously found resistance at the 38% retracement near $35.50. The 61% level at $41.28 roughly coincides with loose resistance on the daily chart. This also happens to be the location of the long-term descending trend of lower highs that Linda Piazza pointed out in the OptionInvestor market monitor today.

Annotated chart - VIX.X:

While there's certainly no reason why the VIX.X couldn't move through these levels, it's interesting to see that the index is hovering just below resistance while the Dow and NASDAQ are trading near critical support regions (8800 and 1315, respectively).

Market breadth is decidedly negative across the board, with down volume swamping up volume by a ratio of almost 7:1 on the NYSE. The Big Board is also showing 104 new lows versus 43 new highs. The NASDAQ is faring slightly better with down volume beating up volume by a factor of 4:1 and new lows ticking in at 84 compared to 38 new highs.

With the major indices sitting near their worst levels of the session it seems unlikely that we'll get any substantial end-of-day rebound. Investors who would otherwise be hunting for bargains have been scared away by the geo-political uncertainty, and the lack of any major earnings announcements after the bell will only exacerbate the impact that the Iraq situation is having on the market.

Kent Barton

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