Option Investor
Index Wrap

Amateur Economist

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        06-14-2001        High      Low     Volume Advance/Decline
DJIA    10690.13 -181.49 10868.48 10659.47 1.22 bln    926/2152	
NASDAQ   2044.07 - 77.59  2101.05  2043.36 1.73 bln   1010/2713
S&P 100   629.42 - 10.50   639.92   628.99   totals   1936/4865
S&P 500  1219.87 - 21.73  1241.60  1218.90           28.5%/71.5%
RUS 2000  495.38 -  9.74   505.12   494.79
DJ TRANS 2710.56 - 64.40  2779.68  2707.64
VIX        26.20 +  1.81    26.43    24.81
Put/Call Ratio      0.72

Amateur Economist
Austin Passamonte

Working in a public environment sure offers plenty of exposure to the public. No end of email reaches me each day and I wouldn't have it any other way. After all, how else do we keep our finger on the pulse without feedback?

The last heavy inflow came when the Dow was pressing above 11,300 and all of CNBCland was giddy with exuberance. Waves of email washed in each time we wrote about weekly chart signals warning of downside risk and the rally seemed dubious at best. Molly & Buzz pointed out numerous fundamental flaws and more negative mail arrived. Matt Kaune called a recent top last Monday and more taunting mail came.

Gosh... we sure know how to generate incoming mail around here!

IS Veteran Readers Were Ready
Readers that I recognized who wrote were decidedly prepared for the downside and told how they were collaring stocks, covering with puts or just plain betting the downside. Trial readers and those new to our site were overwhelmingly bullish with negative with many emails personally insulting or worse. "Don't fight the Fed", "Perma-bears" and other phrases not fit for mention were tossed around en masse. That and a plunging VIX were enough to tell us where the uneducated public were laying their bets.

Let's look past near-term charts (all buried in oversold extreme) to see what might lie ahead from the broad view on down. Care to help me analyze the charts? Let's promise to remain unbiased as possible for our own fiscal good:

(Weekly/Daily: SPX)

In no particular order, the SPX weekly chart (left) showed bearish divergence for weeks now. All we had to do was wait for our ideal entry points on a failed rally and play from there.

Now what? Well, weekly stochastic values have barely begun to cycle down from overbought extreme. The daily chart reveals that highly-watched head & shoulders bearish reversal pattern has been confirmed. If we measure the span from head's crown to neckline (most aggressive measure of targeting this pattern) we come up with 1190 as the next downside target. Weekly chart signals may suggest that is merely the next resting point, but first things first.

(Weekly/Daily: OEX)

Same for its little brother(sister?). The OEX just broke a weekly chart bearish wedge and stochastic values are just now thinking about rolling down from overbought extreme. Long ways to go before cycling into oversold, now isn't it?

Head & Shoulders pattern suggest 610 is the next stop from here as well.

(Weekly/Daily: Dow)

Same picture with the Dow. Head & Shoulders confirmed would suggest 10,400 is our ultimate resting point from here.

(Weekly/Daily: QQQ)

NDX/QQQ just broke a neutral wedge in the weekly chart and H&S pattern over on the daily targets 36.50 area below. Batten down the bullish hatches for sure!

So you tell me: does the technical info seen above look like we should play the upside or down from here? I've learned the hard way too many times in my career not to fade long term charts, a lesson I'll probably ignore a time or two ahead that will end up in painful reminder as well.

Market Bias Is The Kiss Of Fiscal Death
Many have drawn the mistaken idea that I personally have a bearish underlying bias myself. Nothing could be further from the truth. Nor do I have a bullish bias: that's a weakness just as deadly to traders. I possess no market bias and honestly & truly do not care if markets soar to new historical highs or totally crash and implode. Why should I care? Simply because the masses harbor a bullish bias? Not nearly good enough a reason.

Caring about market direction clouds our vision. Lord knows it's tough enough to trade the right direction with eyes wide open let alone while wearing colored glasses. That goes for bias in both directions as well. If we merely tuned out all market noise and listened to our charts last week all is well today.

My Uncle Tom was the first to teach me about a market neutral outlook. Don't care which way the market goes; care about going in harmony with it. Beginning in the futures arena for my trading roots taught me opportunity lays equally well in both directions. That worked beautifully for option trading in 1998, 1999, 2000 and now 2001 with no reason to think all future years will deserve any different approach.

Give Me Forward Guidance
This is not a "told you so" note and I hope it doesn't come across like that. My point being legions of equity traders learned very little from the 2000 implosion, which just about guarantees a repeat of the selloff process from here. Did you notice how heavy trading volume was when the Dow was 500 index points higher from here? See how highest volume logged at the very pinnacle of technology stocks' recent highs? Irrefutable proof that retail traders are still inwardly bullish to an unhealthy extreme at this moment in time.

Bloated-value stocks with no hope for near-term recovery were happily & eagerly bid to the roof by slobbering bulls. Witness JDSU as the latest to come clean. And it is far from the last. Analysts who keep publicly insisting the economy and stock market will soar in Q4 of 2001 should really be careful about what they guarantee unwitting investors by witness of events such as tonight.

Maybe five-plus interest rate cuts will turn the economy around. Certainly should, wouldn't you agree? But common sense from an amateur economist still wonders about a few things.

What major tech innovation will spark massive retail or business buying to clear clogged inventory channels? I own four computers myself that are two years or newer in age. Three of them are 900mhz processors and I'm not about to toss mine for anything on the market or in the drawing boards right now. Software? Nope, I'll stick with Windows 98 after seeing enough of ME to know all about new & disastrous upgrades.

Cell phones? Mine works fine and offers all the features I need. Y2K? That fueled the bubble in 1999 but is no help any more. So what new, incredible catalyst will emerge to justify too many players with overpriced valuations to move higher? Without CSCO growing through mind-numbing acquisitions, what will power it forward from here? Low PEs? Not hardly.

How about fiber? Will JDSU and Corning suddenly get flooded with orders to boost demand? Will it be enough to support them and all other competitors as well? Can all of the chip makers survive or are some doomed to perish? All of the software companies going to be just fine or going by the wayside? Inquiring bulls want to know!

Can we agree that excess build up of supplies and inventory during the great bubble must first be cleared out, losses recovered from and new demand for growth to follow before most tech companies can even begin to match recent valuations before moving forward from there?

If "The Market" looks forward with perfect clarity & timing as many are wont to say, why does it keep screwing up time after volatile time? The Dow is down -700 index points from the recent exuberant high and Nasdaq has followed suit. That's the type of "know all" behavior to keep a fundamentalist broke.

New Market Lows?
Who knows, but look for lower lows going forward from here. It will take an honest, serious and lasting catalyst to offer long- term investors a reason to buy & hold. They are the backbone of any sustained rally and right now conditions simply do not exist that warrant being an investing hero in the teeth of a failing business economy.

I'm looking to play either direction intra-session on Friday for quick day trades but Monday after expiration Friday is usually bearish and that may hold true this time around as well. Simple benchmark for all of us? Key off weekly chart stochastic signals. Right now they have barely begun to reverse down from overbought and I'll get really bullish myself when they return to oversold extremes and begin to turn from there!

Buried Alive
My email inflow is at full speed again now that the wicked worm is dead. Had to reformat the hard drive and begin from scratch... guess who'll be up all night rebuilding Qcharts in this machine?

Needless to say it will take days for me to clear my email inbox of questions. Let me answer the most popular one in bulk: we will not lesson Swing Trade approach in any way. My goal is to include e-mini traders (who far outnumber option traders) and add more flexibility while keeping PTL members and others in good stead. I expect to offer some choices instead of one play entry/exit selection that will vastly improve what we do. Full details in the weekend Swing 101 article, but rest assured we will only simplify & enhance, not detract.

If you thought this week's Swing Trade action was fun, wait until next time when additions are made. Heck, wait until tomorrow when we try to whack the OEX for one or two more solid gains to end the week in style Would you believe a number of other advisory services got killed playing calls all week? A whole bunch of IS traders made big money on their own according to my emails and for that all of us at IS are absolutely thrilled to hear!

Best Trading Wishes,

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