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Index Wrap

"Greenspan's Put" Fails To Hedge

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        WE 6-22         WE 06-15          WE 6-08          WE 6-01
DOW    10604.59 - 19.05 10623.64 -353.36 10977.00 - 13.41  + 78.47
Nasdaq  2034.82 +  6.39  2028.43 -186.67  2215.10 + 65.66  + 38.95
S&P-100  636.15 +  9.52   626.63 - 25.29   651.92 +  2.31  +  3.38
S&P-500 1225.35 + 10.99  1214.36 - 50.60  1264.96 +  4.28  +  4.85
W5000  11312.45 + 74.45 11238.00 -498.70 11736.70 + 65.13  + 61.20
RUT      488.65 -  6.48   495.13 - 16.51   511.64 +  9.92  +  5.22
TRAN    2676.49 - 17.13  2693.62 -188.47  2882.09 -  4.96  - 58.85
VIX       22.50 -  3.83    26.33 +  4.92    21.41 -  2.55  -  2.00
Put/Call    .69              .73              .54              .53

"Greenspan's Put" Fails To Hedge
Austin Passamonte

Greenspan Put: Slang phrase used by traders for the fact that "Easy Al" can always be counted on to save the markets when times get tough. Or at least he'll try.

Many people hear that phrase and think it means something bearish when in actuality the opposite is true. It's a quip phrase coined by floor traders who joke they can go ahead and buy dips when markets decline because Greenspan policy serves as the "protective put" to hedge their downside risk. They feel he can be counted on to save them from total destruction, a belief that slew numerous dip buyers over the past year.

Only once in financial history have we seen five consecutive rate cuts without positive response by the markets. That lone event occurred during the Great Depression of 1930's. While I'd be amongst the last to say we are headed for anything cataclysmic like that, all must admit that 250-basis points have been slashed from interest rates before the first half of this year completed and we've seen zero response in market action because of it.

Yes we've been told it takes time for these effects to filter through the economy. If indeed that's the case, why do analysts and economists repeatedly hang on every bit of current or past data to project if the markets need additional cuts? Doesn't it strike you as an oxymoron to call rate cuts delayed factors in the market yet "experts" use last month's data to guess if further cuts are needed? Where is the logic in that conflict of rationale?

By "experts" admission we've yet to feel results from cut #1 in January let alone #5 last month. Is it possible the Fed's gone too far already with no way of knowing until several months from now? Strikes me that market participants want their cake and eat it too along with every other fattening desert on the menu!

No one can deny the markets are growing blase` if not immune to Fed action. Each successive cut sees less market lift that dies sooner than the last. One of these meetings will see no further cuts and a shift to neutral bias and that may be an interesting event when it arrives indeed.

Dear Al; Time To Press The Panic Button
People close to Greenspan say that he is secretly as big a knee- jerk reactionary as he appears outwardly unflappable. The maestro, genius, savior and all other monikers formerly attached to him will be judged in history based upon how this current market unfolds from here and it's my personal belief he has far less control over this occasion than any other faced before.

Does anyone with a dollar left in the markets believe a sixth rate cut next week can do what five previous so far clearly have not? Is it fair to assume that the sixth cut will have the least shock value and lasting impact of all? Might we assume that a total inability to rally on rumor into the news is a monstrous clue to what's ahead? Sometimes the future is clearly forecast and this could be one of those events.

But maybe the big picture is too complex for me. Perhaps the blatant double-speak and conflicting logic has merit at levels far above my understanding. Why don't I stick to things more easily quantified in my mind?

Trust The Charts
Before we can trust them we need to look at them. Shall we do that together in the same manner as always? I'm focused on weekly and daily-chart time frames to get a sense of the big picture from here. We'll look at different studies in each one, with the understanding that all of them overlap most of the same patterns and formations.

Let's see what they have to share:

(Weekly/Daily: SPX)

First up: the Pro's Index. Weekly chart at left shows how the SPX is now resting on long-term support the past two weeks dating back to highs of late August 2000. A bearish pennant broke and serves as resistance overhead. We can also see that long-term stochastic values are blatantly reversing in bearish fashion barely underway. Where might the price levels be when said values reach oversold extreme and begin to reverse from there? More on that later.

Daily-chart at right shows a classic bear flag pattern over the past six sessions and gives us further measures to play. A break and close above 1240+ would negate this, while a break and close below 1220 area would confirm significant downside is likely.

(Weekly/Daily: QQQ)

From roughly November 2000 to February 2001 we saw a bear flag formation span 15 index points on the QQQ and break below the 60 area to suggest 45 as an eventual target. That was easily reached and exceeded before long. Now we have a bullish triangle that failed which is very bearish itself.

Said pattern (green & red on left) spans from a low of 40 to a high of 50, or 10 index points. For a downside target we would subtract 10 points from the level broken which was roughly 45. That would predict an ultimate return to the QQQ 35 area before we're through.

A case could also be made for connecting the subsequent lows of each candle to form a larger triangle which price action still remains within. I whole-heartedly agree with that and we could see a breakout to the upside for bullish confirmation. If not, a break to the downside of this larger overall triangle (not drawn) near the 40 area would project an ultimate low near QQQ 30 instead.

I like to use price patterns for zeroing in on entry points and possible price targets. Stochastic values usually guess which way the direction will go correctly. With that in mind, where are weekly stochastic values pointing?

(Weekly/Daily: Dow)

To me the Dow looks weakest of all. Without rehashing other points made before let's just say that a break & close below 10,550 area in the Old Index may open the bombardier chutes for explosive times ahead.

(Weekly/Daily: OEX)

The OEX weekly chart reveals a much larger pattern than shown in the SPX template but the same exists in both. Witness the big Bear Flag formation formed over the past six months? That baby spans 100 index points and this week's lows near the 620 area touched support.

A break & close below 620 area to confirm this pattern would suggest we'll trade 100 points lower over time. How much time? Well, it took six months to coil this one up if that helps us compare long-term definition.

And what about the SPX? If you go back and trace this pattern with your eyes it will show a price range from lows near 1100 to highs near 1300 for a 200-index point span. A break and close below the 1200 area from here suggests we could trade 200-index points lower before the ultimate bottom forms.

Stupid, lying charts. Don't they know that six interest rate cuts plus who knows how many more will save the economy and markets? Don't they realize our economic recovery is now slated for Q1 2002, pushed back several quarters after each earning period subsequently failed to predict a turn for the past year? Don't long term charts realize every analyst who can fog a CNBC camera lens swears on their brokerage-house underwriting that the bottom is in from late March lows?

Nope. Long-term charts are ignorant of such emotional blather. All they're able to do is predict probable price action based on collective buying & selling from everyone involved in the markets with real dollars at stake. Right now that vote is leaning to the downside as chronicled in weekly chart examples.

Market bulls clinging to any hope for continued advance wonder about daily charts. Yes, we clearly see oversold stochastic values trying to leg their way back up from there. This does suggest price action wants to go higher from here, but weekly charts trump daily charts, which trump hourly charts and on down. Over the coming days and weeks we may go higher, and over the coming weeks and months we may go lower. That's what the charts say devoid of emotion, agree or argue with them if you must.

Summertime markets are tough in their own right. Many people ask me what is the best way to handle them. Patience is certainly the cornerstone. Skilled day traders can survive and thrive no matter what the markets throw at us, but everyone else needs to wait for clear catalyst to arrive that push markets in one direction. Other than that, price action is very choppy with hairpin turns in both directions more sessions than not.

I believe Tuesday and Wednesday will begin our next significant move and if held at gunpoint I say we go lower soon. If long- term charts are correct it could be much lower than the "experts" would have us believe.

Best Trading Wishes,

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