Option Investor
Index Wrap

"Don't Fight The Fed"

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        05-30-2001        High      Low     Volume Advance/Decline
DJIA    10872.64 -166.50 11042.13 10864.83 1.15 bln   1093/1965	
NASDAQ   2084.50 - 91.04  2137.67  2077.98 1.93 bln   1095/2759
S&P 100   642.82 -  9.94   652.90   641.82   totals   2188/4724
S&P 500  1248.08 - 19.85  1267.93  1245.96           31.6%/68.3%
RUS 2000  493.96 -  8.41   493.96   502.37
DJ TRANS 2901.61 - 19.66  2922.39  2893.53
VIX        25.79 +  1.11    26.19    24.74
Put/Call Ratio      0.74

"Don't Fight The Fed"
Austin Passamonte

That was a very common email theme I received May 19th as when markets yawned over the last FOMC meeting. Our attempt to play apparent weakness in puts didn't last long, as we saw an incredible short-squeeze rally that blew away all manner of overhead resistance in one fell swoop. CNBC guest analysts chided those who weren't aboard, saying the ship had sailed without them. Everyone crowed that this rally was for real, the bull was back and bear market died a final death.

Massive volume back then told us plenty went long and guess where? Ding - ding - ding... you guessed it: right at the tippy, tippy top!

But that's not what long-term chart stochastic signals were saying at the time as they quietly moved into overbought extremes. I suppose a rate cut every three weeks would keep pushing us toward new index highs but would that be actual investment buying or merely artificial gains on short-covering?

Don't you just love that Charles Schwab commercial on CNBC? You know the one where an audience gathers around a Schwab analyst who tells everyone to "Just relax: with a portfolio of bonds, some cash and a few stocks you can weather anything the market delivers". Fascinating.

And just how many of those "average" investors seated in that anxious circle hold such a diversified portfolio weighted in bonds like he verbally implies? How many of that cross-spectrum hold mostly if not solely tech stocks that have been gutted, trampled and left for dead over the past year only to show Lazarus-like resurrection these past few weeks? How many investors thought the worst was over and there's no place for markets to go but up from there?

No reason the average investor shouldn't have thought so, because the vast majority still invests via new releases and analyst comments contained within. Nothing amazes me more than the power market analysts still possess to move markets up or down, but I suppose that will never change.

Buzz did a fine job of blasting such folly in his Wrap last night and I won't pile it on in here, but don't you see a fundamental problem with the exact-same analysts saying the worst is definitely over one time and a few weeks later recant that stance and warn terrible times still lie ahead? Tough enough for us short-term traders trying to time the markets between such nonsense, let alone the masses of part-time investors buying, holding and watching price action go up and then sharply down because of it!

Price action has been straight down since Friday morning with nary a pause from there. What do near-term charts portend may be ahead?

(60/30-Minute Chart:)

The Dow gave a few feeble sell signals over the past two sessions but was not matched with the other indexes already flat-lined in oversold extremes. These conditions may persist and indeed have, but can be reversed upon at any time without warning.

Daily-chart stochastic signals [not shown] fell straight down and never paused, of course. Individual traders who bought those signals to the downside and stood poised to cover should things go wrong watched price action go very right instead!

The 30-minute chart (right) shows a weak bull flag consolidation but it doesn't cover very much time. The top line near 10,925 would likely be an excellent short from there.

(60/30-Minute Chart:)

The QQQ broke out of its bearish triangle in the hourly chart (left, black) near 48.50 and dove from there. It too is trying to form a bullish flag or wedge (left, green lines) and attempt a recovery from here. Again, we view any subsequent rally as a gift to short with impunity.

(60/30-Minute Chart:)

Friday's entry was slight at best but sure was the last clear sign we've seen of upside failure since then. Nothing but a straight down channel since then (left) and a short-term wedge broke to the downside in the final half-hour of trading.

(60/30-Minute Chart:)

Likewise the OEX. Two complete sessions of zero entries using our favored parameters and no chart formations to key off either. Just buy puts on a pause, hang on and prepare to exit on a moment's notice.

Bottom line? Short-term charts are grossly oversold and scream for the slightest relief. For three straight days we've looked on in agony from the website waiting for any slight blip upward to go short on, but none was forthcoming. That is the basis of our system and chucking it to the wind just to buy puts at whim lies outside our parameters and fairness to readers.

Like all systems with no exceptions it has a flaw, and that is for entering straight-up or down moves that never pause. These conditions are best suited for more nimble maneuvers and we will try to incorporate some of those in our Swing Trade model as well.

Pioneers Take The Most Arrows While Mining For Gold Last week I shared a brief email exchange with a competing website operator who provides broad market calls for $49.95 monthly, and live applet commentary for an additional $49.95 as well. Fairly comparable to what we do, minus any instructional or "how-to" content on their part. Entry targets and stop loss exit points are pre-listed for customers and the rest is totally up to them.

I was curious as to why they didn't also list specific option contracts to trade, track entry & exits prices, etc and the answer was pretty much as expected. They said no matter what was tried, it never pleased the majority. Wins, losses, missed and passed trades were all highly criticized by readership. While I won't comment on some of the emails received around here that sounds very familiar to me.

I still think what we're attempting to do here is viable, and have learned plenty about limitations along the way. Trying to duplicate individual trading efforts with no audience or concern for others versus doing so in front of all remains a challenge to perfect. There are many variables and nuances involved with group trading that weren't apparent from the start. However, I believe we can accomplish positive results and serve to educate a majority as the basis of this approach.

We could always evolve to a service offering generic trade entries for all markets that traders could follow on their own and still remain below competitor's cost. I still prefer to demonstrate by example when logistically possible.

One phenomenon I've observed since our inception continues even now. If we signal a losing play on puts, negative email comes our way. If we signal a losing play on calls, no one complains at all. A few readers may share exactly why they didn't play calls but that's the most heated it gets. Does that mean the masses still prefer to play the upside, or are put players more vocal?

Regardless, IS exists to serve the readership and that's what we're striving to do. I've tried to take a Swing Trade approach that works for me on a flexible basis and conform it to the fixed parameters of a website. This is a far different experience to accomplish altogether. My goal is to simplify, streamline and improve what we do in Swing Trade to suit the majority and create success. Waves of email suggestions have been heeded and we'll continue to evolve from here. Tonight's Gameplan section lists some of the refinements asked for by many and I think they are more steps in the right direction.

Sunday Night's Main Event!
I'm really looking forward to the "Day Trading A-Z" webcast seminars this Sunday night. Many people have signed up so far... looks like the concept of picking up a few thousand dollars here & there most sessions appeals to many.

Day trading is in my opinion the toughest to learn but easiest to accomplish once mastered. However, there is much more to it than first meets the eye. One thing is certain... a ton of potential profits wait to be made almost every day in the markets by those who learn this money-printing approach.

I've spent at least 50 man-hours just compiling the PowerPoint documents alone not to mention dry run practices and upgrades. Each time I run through it another fact or two here and tidbit there emerge that I hadn't thought of before. Funny how so many "little things" fall by the wayside in our minds until forced to show themselves in the light of day during a project like this.

There is still space left for each session so it's possible a few more may join our fun. I can promise you two things for sure: it will be two hours of jam-packed information and we'll have a real good time in the process. My motto always is, "If we can't have fun doing it, it's just not worth doing at all"!

Hope to see you there.

Where To From Here
I've believed for a while that the rally was false and we'd sell off hard but expected that to ensue later than this. For gosh sakes, we haven't even reached pre-warn season and Big Caps are lining up to dump on us already. Those who believe all the bad news was priced in and Santa Greenspan could cure all ills got the initial dose of reality today with plenty more to come if weekly & daily chart indications are correct. Not my opinion, just the charts.

Will we plunge straight down from here like the March decline unfolded? I'd tend to think there is less overall fear this time than then and expect to bounce up & down along the way. In my opinion the only thing that will press markets higher to stay from here would be another surprise rate cut of 50-basis by the Fed. After two of those in the past few months in unprecedented fashion, anything is possible but my guess is that the rate cut six-shooter Alan holds is empty until the next FOMC meeting to come.

Best Trading Wishes,

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