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Struck by Lightning

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Struck by Lightning
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Hairs on the back of my neck are starting to rise and I cannot exactly put my finger on it. Perhaps fostering that sensation is that today marks the first time in over a year that the NASDAQ has closed up for six days straight. Barely, but it counts in the statistician's book. While it hardly signals a 180-degree market reversal - or that I will soon be struck by lightning - maybe a successful put play is near?

The fact is that that NDX and the QQQ were down today, albeit in small amounts ($9.63 and $0.15, respectively). That shows us that the big caps like INTC, ORCL, SUNW, JDSU, and QCOM were not keeping pace with the mid-size and smaller issues, MSFT, DELL, and CSCO being fractional exceptions. Big market advances will need to be led by the generals to sustain the momentum. Today's action does not make it look all that promising.

In really simple terms, following 6 days of gains on the COMPX, it is nearly time to see a down day. I would not be a call buyer at this time, despite the overall bullish tint to the market, unless I was daytrading only on the 10/5-minute chart setups. I think investors have become a bit too complacent in the expectation of a rising tech market thanks to Ciena (CIEN), Microsoft (MSFT), and WorldCom, and to some extent Cisco (CSCO).

Evidence please? Well, cyclical stocks like Alcoa (AA) and International Paper (IP) were down today as were drugs and consumer products, which had a negative effect on the SPX and Dow.

Also, how about the VIX falling to 23.49, a level not seen since February? A bunch of call-buying is taking place telling us that puts may soon be the next high odds swing or position trade. Also as Eric Utley pointed out last night on our sister site, OptionInvestor.com, the NYSE ARMS Index had touched down to an extremely bullish 0.65. Just as the ARMS Index (or TRIN as it also known) called a bottom earlier this year, so to may it be telling us of a short-term top.

Does this mean the end is near, that we should build an ark for the floods about to happen? Naw, just get an umbrella for a day or so, and rubber booties if it lasts longer.

Reality is that dips have been buyable over the last six weeks, and until the market gives us reason to change our sentiment on a longer-term basis, that is still the theme. The market has proven that correct. Still on a fundamental basis, there is not much of a reason to go up, unless you believe that the economy has bottomed and companies will be in Fat City 6-9 months from now. Even so, the market does not care what we believe. We only need trade what we see. What we see is a market in need of a breather.

Let us go to the charts, NASDAQ-100 first. Since we trade the QQQ as its proxy, we will use that chart.

NASDAQ-100 chart (QQQ):

Forget the weekly chart. It is still looking strong. However, the 30-min chart is like a two year old that cannot decide between chocolate or vanilla and remains locked in a $0.75 range, hence the indecisive stochastic. The 60-min clearly shows a downturn though, even though support remains good at $50.50. Falling oscillator plus flat price equals relative strength. It is pretty tough to short that combination for big gains.

However, the daily chart tells a different story. Check out the following QQQ daily chart. I swear I did not draw retracement lines to fit the movement. The candles just swerved into the path they were expected to!

QQQ daily chart:

For Fundamentals Guy, this chart is uncanny, and for those trading on fundamentals, it would be easy to waive off the coincidence. But a true technician knows the charts do not lie. As a trader, even Fundamentals Guy has to respect the chart. Notice the indecision - that is a doji - some might consider an evening star. That would signify a long red candle might follow tomorrow after hitting the Bollinger band and the 50% retracement off the lows from March today. By no means is that a guarantee, but it would take some interesting fundamental news to get that formation moving up again. Looks like weakness from here until the overbought daily stochastic at least fakes a downward trend like in early May.

Dow Industrial chart (INDU):

The weekly story here is a bit different. The Dow is looking a bit top-heavy and well. . .weakly, having approached, but not yet hit its upper Bollinger band. The daily is setting up for weakness too by showing off its newly acquired bear flag formation. 60-min oscillators show weakness too, however the price has only moved down 100 points and found support. But the 30-min chart is right at support, and having zig-zagged its way down, looks ready to zag down again. That would confirm the daily bear flag. A call credit spread in the making? Perhaps so on a bounced down from resistance at 11,350, or a fall from its current level under 11,240 support.

S&P 500 chart (SPX):

For the SPX, flip a coin. Weekly still looks good. Daily, after six days up, SPX was due for some downside, but today's 3-point loss was minimal. Still, while not a gravestone doji or shooting star, the daily candle shows that like the Dow, some pullback is a real possibility. Meanwhile, today's action was stubborn. Oscillators were falling as the price remained flat. Perhaps that head and shoulders on the 30-min chart might have bearish meaning for daytrading, but the range is so narrow. But with the 60/30 oscillators pointed down, there could be some follow-through to the downside. 1300, then 1280 look like the next levels of support. Still, do not count on sudden death for the index. The market continues to show it is no mood to sell off.

So what about tomorrow? Hard to say for sure, but in late chip news, the book to bill came in at .40 - extremely low and no turnaround in business to be seen in the near future. Visibility? Forgeddahboudit. As Scott McNealy, CEO of SUNW, has noted, if you did not see the cliff coming, how do you know where the bottom is? His new word for "guidance" is "guess". Perhaps that will push the NASDAQ over the edge where the others may follow in sympathy.

Bet on the downside based on the chart oscillators, VIX, chip-based sentiment, and the general need for correction after strong moves up.

Trade smart and as Austin says, "See you at the bell!"

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