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Index Wrap

"What's To Stop Us\?," Bull Say

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        06-05-2001        High      Low     Volume Advance/Decline
DJIA    11175.84 +114.32 11196.53 11043.44 1.11 bln   1987/1091	
NASDAQ   2233.66 + 77.73  2244.23  2167.24 1.82 bln   2461/1363
S&P 100   662.09 +  7.61   663.93   654.05   totals   4448/2454
S&P 500  1283.57 + 16.46  1286.62  1267.11           64.5%/35.5%
RUS 2000  516.48 +  9.16   516.48   507.32
DJ TRANS 2917.42 + 39.18  2920.73  2875.03
VIX        21.22 -  1.61    23.00    21.11
Put/Call Ratio      0.55

"What's To Stop Us?," Bull Say

I think I recall that Austin listed some caveats to trading the other day, "Never short a dull market" and "If it's not going up, it must be going down." I think I'll add, "But if it's not going down anymore after an already powerful move, and small subsequent pullback, it must be preparing to go up more." Sounds pretty easy, doesn't it? We had our sell off last week, where were you? These are fast moving markets; they're tough to trade not because the charts aren't working but because of all of the psychological factors. Want a glimpse into my own jumbled mind? I bet it's not so different from your own:

The fundamentals stink. No one is really making money. Their businesses have seen orders shrink and cancelled. It's warnings season too. When is the next bomb going to be dropped by a big name? Then the question becomes, do "they" think it's already priced in? Will they rally it on the bad news or is bad news going to be bad news again? Everyone wants to be a contrarian anymore that it's hard to figure out just who is who anymore. It's all become quite perverse. It's the 'everyone is "bearish" so I want to be bullish' or 'these stocks are acting well on bad news so I want to buy bad news.' Who can figure out whom is bearish and who is bullish and how to react to it anymore?

It's a recession when two consecutive quarters of GDP go negative. Isn't it really a recession when Joe Blow can't pay his bills because he's lost his job or had his hours cut back? The economic numbers out this morning were bad. Very bad. They reflect the reality but the market says it already knows that so tell it something new. So a semiconductor (XLNX) and Lucent reaffirms modest sales and earnings; the market didn't expect that so it rallies. Obviously at this point in time the sentiment is that of looking for a reason to buy rather than a reason to sell.

Yet, this economic slowdown is just now starting to affect the average citizen. They're starting to notice that it takes $40 to fill up the gas tank and that the months just keep coming and the bills just keep getting higher and adding up. When is the market going to reflect that? It already has?? Wow. That was pretty mild then.

The Nasdaq wasn't mild but then again, it got to lows of just the past two years. If historically a bubble erases all of its gains, do I really want to be going long tech stocks? The market started its trajectory in July of '95. We have a ways to go to correct that. But I could go long for just a trade maybe? Then I'm playing into the greater fool theory and I've been the one to be the greater fool before. I lost. Fool me once, shame on you; fool me twice, shame on me. I know the fund managers all know the market is overvalued too, but they've got to put money to work. Where is the greatest risk? To the upside or the downside?

So in the end, how does this big picture impact my own trading for the next play? How do I pull out just a small piece of the pie in the short-term? The index charts look like they're going to roll over but all these individual equity charts look bullish. The market is a forward-looking entity but do they REALLY think that in just a few short months that the economy is going to be worthy of all time highs? But that's not even the question I need to ask. The question I need to ask is: How do I make money TODAY?

Do you see what I mean? We can read about global slowdowns, technology woes, personal and corporate debt heights, and historical probabilities until the cows come home. But, it's got nothing to do with trading. They are separate and the latter is very difficult to survive much less master. Our job as traders is to 1) Survive by not overtrading 2) Survive by NOT losing 3) Make money by searching out high probability trades and then managing the trade with predetermined targets and points to get out.

I can't stress it enough. You have to know what kind of a trader you are. If you don't know, you need to figure it out, write it down and live by it. Are you a position trader or are you a scalper? Are you playing by the charts or are you chasing momentum whether it be to upside or the downside? Are you a trend follower or do you try to be a contrarian? If you're trying to go against the herd then you need to know the rules to playing the contrarian game because I assure you, it's a sharp sword to fall upon when you're right at the wrong time.

Different people make different kind of traders. YOU are the one that has to determine your own risk tolerance, your time frames, your bias and your financial resources. From that you can determine what is the most realistic type of trader you strive to be.

Enough of my soapbox. What happened today?

I'll tell you what happened. Buying begat buying. The Nasdaq opened strong, the Dow traded red a little while and when moving averages weren't crossed, buyers stepped in to carry it up. I've included a fifteen-minute chart of the action today.

Clearly, it was a trend day which makes sense because yesterday was such a narrow ranged choppy day. A narrow ranged and choppy day serves to lower the ADX to low readings. I mentioned the ADX in the Market Pulse window today and started to get the flood of emails asking about this indicator.

Let's make this easy. The ADX is one component of the directional movement index or the DMI. The DMI's value is that it confirms the presence or absence of a trend. The other two components of the DMI are the + di and the - di. A +di component represents buying pressure or the positive directional movement while the -di denotes selling pressure or a negative directional movement. The ADX is a smoothed version of the directional movement and as it rises and falls, points to trending in the stock or index whether it is up or down.

Without going into all the finer details of this indicator here, let me just say that a flat lined and low lying ADX is begging for a change in action. The flatter and lower it is, the more it's begging and the longer the time framed chart it's on, the more powerful move that is coming. Once a trend starts, the ADX rises no matter if the trend is going up or going down. Contrarily, a very high ADX is likewise begging a return to equilibrium and a counter move should be anticipated. Shall we look at a chart or two to see what I'm talking about?

As I said, the longer term a chart is and the lower the ADX gets, the more powerful the move.

That sufficient? So, the market will try to force an equilibrium and you'll see the ADX come back down off that blow off top but just like all charts, you have to look at it in different time frames.

So how about tomorrow?

We sit here in overbought territory on the short-term time frames of course and bullish for the longer term ones. No mystery. The VIX is at an eight month low. "Buy puts!?" you ask? To which I reply, "For a quick trade or for a position?" I can see a pullback but volume was good, breadth was excellent and there's little to stop this train in terms of resistance until the highs of May 22 are now taken out. For the Dow that's 11,350; the S&P 500 it's 1316 and for the Nasdaq it's 2328. The market wants to test the top of that range and see what it does there. Barring bad news - which I can't imagine at this point what would be bad enough to make them flinch now - the train is in motion to the upside. Still, nothing has changed fundamentally, history is sitting there laughing and this market WILL revisit those lowest lows. You can count on that.

Good luck.

MKE

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