Option Investor
Index Wrap

Held By A Hair

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Those who wondered about the Dow holding critical support at 11,000 fear not: it held admirably, as did Nasdaq Comp above 2250.

But not without a degree of worry. Three hundred Dow points ago, exuberant traders were admonishing me about not buying calls on the break above 11,300 and holding long from there. No thanks, I'd rather not buy such calls after chasing the market... I have enough trouble trying to hit entries on pullbacks as it is!

Seriously, the natural chase instinct is not reserved to canines alone. No one wants to "miss the boat" and media cheerleaders were goading investors on. Now we have much better entry points for the next leg up, if support holds from here.

"If support holds from here," you ask? This is a new bull market! Maybe. We'll call this a normal, healthy pullback until proven otherwise. Pullbacks occur on light volume and today was the lightest volume for year 2001 to date.

Let's revisit longer-term charts again:

(Weekly/Daily: QQQ)

The NDX/QQQ weekly chart still looks healthy. Toppy but healthy. This week's price action closed right on resistance of a fourteen week bullish triangle left unbroken the past six weeks straight. My top resistance line should be up a smidge higher than it is, but drawing on these crazy charts isn't pinpoint precise.

Daily chart stochastic values are turning bearish. That green bull flag had an upside target of 52 and the greater wedge pattern it is in (not drawn) suggests 55 as an upside area. Now we have a new little wedge inside other patterns looking to break consolidation from there.

I try not to get real analytical about patterns: to me they are price coils offering good entry points on a break either way. I favor the direction to be predicted by stochastic action and find that to confirm a good majority of the time.

(Weekly/Daily: SOX)

Semi-Conductors lead NDX and have advanced signals by comparison for this fact. Note the weekly Bull Flag formation (black) from the past twenty-four weeks of price action. With a low near 460 and high near 740, that pattern has a 280-point width. Added to a break above current 650 area gives us a bullish objective at 930 on the SOX.

Or it could meander back down towards the lower level of support as current higher stochastic highs compared to January are met with lower price highs in relative comparison. Divergence of any kind in overbought zones is bearish, so that's not good for market bulls.

Daily chart signals reflect the past four sessions in red and are clearly rolling down from here. Support lies at the two lines from our previous bullish pennant (green and black lines) if the move down is brief.

(Weekly/Daily: Dow)

The Old Index is trading within a clear ascending channel, otherwise known as a Bear Flag. Fine to trade bounces off the lower channel until it eventually breaks. Right now we have three combined points of support beneath it: the ascending channel line, 20-DMA and venerable 11,000 level that was resistance for so very long.

If we don't see a bounce from here, first real support lies at the green line on weekly chart (left) near 10,950 area. Then we look for the lower Bollinger band at 10,630 area and go from there.

OEX and to a lesser extent SPX chart signals and formations look just like the Dow. We'll save time by making simple note of that here.

(Weekly/Daily: XAU)

Gold fever! What an incredible spike that was last week... got the gold bugs all stirred up. And the glittering metal may chase higher up the charts this year as our economy heats up but for now we see downside potential for XAU in spades.

First, commodity stocks rise and fall ahead of the underlying. Second, this parabolic move was based greatly on technical buying and small speculator short squeeze. Third, COT report shows gold commercials at a five-year net short position from being net long just three weeks ago, an incredibly quick move. Fourth, small specs are at a five-year net long position as speculation runs rampant.

Fifth and for what it's worth, on Monday a big player bought 2,000 June 60/55 bear put debit spreads for 1.00 net debit or $200,000. Today we saw 1,000 of those contracts closed for 1.60 net credit or $160,000 booked. More may have been closed to make this a "free trade" to ride from there, but remains viable still.

Lastly, weekly & daily stochastic values are way overbought and due for return cycle into oversold before long. Lower prices are almost sure to be the result from there.

Forward Looking On Jerky Knees
So today's dismal durable goods report coupled with weak new housing starts were blamed for this decline? Hmmm. Help me understand something here: I thought the markets were the best discounting vehicle known to man. Always looking ahead six to nine months while ignoring what occurs today. Didn't a whole slew of CEOs from tech companies (recently gutted like fish) just tell us the bottom's in and year-end is looking up? Didn't Big Al just tell us Thursday night the Fed stands prepared to act further in saving the weakened economy they helped kill? Isn't that on top of five massive rate cuts in four month's span already?

Even the Market Maestro himself said in Thursday's speech the economy will pick up later this year. What am I missing? Why aren't traders discounting past history that these meaningless reports detail?

Because equity markets are no longer a discounting machine. Too many momentum players now involved for that. The markets are one big emotional package of fear & greed with a timetable vastly shorter than before. Back when we used live brokers charging $200 - $300 per round turn on a hundred-lot share order, we all had to look ahead. Going in the hole -$200 on a one-lot of IP takes six to nine months just to break even on -$2 share transaction cost!

Those days are long gone and so is the notion that markets will look further forward than the next deadbeat analyst's dart throwing session for picking price targets on today's hot stocks. Knee-jerk reaction replaced forward-looking investment long ago and will not change anytime soon.

Speaking of which, did I hear Maria correctly on CNBC Friday morning when she announced some analysts had upgraded the chip sector again? Is it just me or do we get an upgrade AND downgrade on the SOX about once a week these days? Are they kidding us or what?

I'm not sure what these Wall Street analysts are smoking but it must be far stronger than anything passed around when I was a kid. Either the chip business has bottomed and turned or is headed for the toilet, one of the two. How fast can fundamental dynamics actually change? Four times monthly is a bit tumultuous, wouldn't you agree?

Personally, I believe Bill Fleckenstein is right when he says most of these companies are in dire fundamental condition. Two friends of mine work deep in the chip and computer industry and tell me insiders are quietly preparing for very tough times ahead (please don't trade off that information... it is simply rumor until proven otherwise).

Whenever I see product prices plunging like chips are and a glut of oversupply from too many competitors, it doesn't spell opportunity to me. Silicon products are just a tad more expensive these days than the bucket of sand it takes to produce them. Witness long-distance and the telecom sector for a recent example of this analogy. We heard all about how huge the telecom market is and rock-bottom prices wouldn't affect profit margins due to offsetting volume sales to make up for price wars.

Where are all these telecom giants and second-tier high flyers trading now? T or WCOM anyone? Let's not even mention some of the others to save investors still holding long the painful thought.

I disagree with Fleck the "permabear" (Ursa Negativus; new bear species that's very grumpy and always looking for the world to end) that all those chip symbols will trade to zero and file bankruptcy. Too many "investors" (read: tech gamblers) deify this sector and will not let that happen anytime soon. But return to new highs? May be awhile.

I'm Envious... But Happy!
A few of us surviving traders learned the ropes long before this information age. And I've still got rope burn scars to prove it!

Now there are magazine, books, videos, websites and seminars like we couldn't imagine just a mere decade ago. No one is saying the learning curve is any easier or less painful now than it was then but for gosh sakes should be much shorter in duration.

Past attendees of the OptionInvestor seminars have raved about the quality & quantity of education delivered there. I was one such recipient myself in the past and whole-heartedly agree. Now Jim Brown has discovered a way to deliver specialized segments of live seminars to the comfort of your own P.C.

Next Sunday night (June 3rd) I'll begin my little personal series of topics, first which is day trading from A to Z. Anyone interested in that? Hope I won't be there alone. For two hours each session we'll be connected by computer and telephone, seeing the same things onscreen, visiting by phone and communicate via instant messaging as well.

I have about 50 powerpoint slide to go through which is 250% more than I used at my live seminars in Denver this spring. We will cover everything imaginable, then switch to a web browser and Qcharts to answer questions and freelance from there. It should cover the next six months of IS day trading articles in one night's time for those who want said info now. Cost is $149 for the initial session and $75 for refreshers on this topic in the future.

Everyone has a choice: I'll cover 80% of this material in the website over the next six months for those without a sense of urgency. The remaining 20% being those "little things" that come up in conversation that never make their way on paper due to forgetfulness. For the average day-trade profit of one measly SPX contract you can have it all right now. Either way the information will be available, please choose for yourself.

Soon I'll delve into "Basic & Intermediate Technical Analysis", "Trading Option Spreads" (all types from simple to advanced) and "LEAPs, Shares & Covered Call Investment Strategies". Who knows what we'll cover from there but rest assured it will come from reader feedback and requests. There are plenty of other topics to be offered as by the likes of Jim Brown, Jeff Bailey and plenty more.

That's why I'm envious! Where was all this instant education when I was struggling to learn? Actually, I still am as trading education is a terminal affliction: it continues until we're done. It cost me and countless others many years and massive dollars lost to glean our lessons the hard way by experience alone. That my friends is by far the most costly school of all.

Plenty of traders have wiped out five, six, seven and eight-figure accounts for their tuition before and will surely do so again. $1500 invested here would deliver ten lessons on a variety of subjects drilled down in great detail, live and interactive as well. The potential benefit just boggles my mind!

And I am very happy it exists, for now we have what I feel is an incredible educational vehicle to shave trader's learning curves to pieces. My whole objective here at IndexSkybox is to teach, train and learn by sharing with others, and I'm very excited about the opportunity this gives us. Hope to visit with you live during one of these events that may serve your needs in the near future. Details at: http://www.premierinvestorseminars.com/onlineseminars/austin060201.asp

Long Weekend, Short Week
We are a tad light in content this weekend for a reason: most of you will be playing with family & friends. Enjoy yourselves immensely as summertime officially unfolds. Market action will not cease and trading continues each session from here but there are some changes that occur we need to be aware of. But all in good time. For now have fun, rest up for the action ahead and if you live in the U.S like I do, please take time on Monday to thank any military veterans you know. Without their service & sacrifice for centuries now and counting, there would be no Wall Street or "Great Game" for us to play. Never forget that.

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