Option Investor
Index Wrap

Cycles Within Cycles

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        06-25-2001        High      Low     Volume Advance/Decline
DJIA    10504.22 -100.37 10644.24 10468.12 1.03 bln   1302/1780	
NASDAQ   2050.87 + 16.03  2060.06  2026.40 1.48 bln   1893/1882
S&P 100   632.03 -  4.12   640.05   629.24   totals   3195/3662
S&P 500  1218.60 -  6.75  1231.50  1213.60           46.6%/53.4%
RUS 2000  484.19 -  4.46   490.20   483.75
DJ TRANS 2646.31 - 30.18  2685.98  2644.03
VIX        23.25 +  0.75    23.82    22.26
Put/Call Ratio      0.63        

Cycles Within Cycles
Austin Passamonte

We'll get to our charts in a minute, but first a few words on cycles. My weekend Market Wrap was written a bit aggressively on the bearish side but much to my surprise elicited no email response all weekend. Heck, the purpose of that was to get people thinking and not a single back-pat or flame? Wasted my time.

Or so I thought until mid-morning when the corporate server dumped a huge pile of comments in my OE box. Mission accomplished!

Most investors and traders hear soothing words in the media each day touting the "Recovery" is right around a corner. That's been one of the longest corners I've ever endured and I don't even own a single share of any stock at this moment in time. But I can personally sympathize with every single person who now holds CSCO bought at $50, INTC at $60, JDSU at $125 and CMGI at $150. Lest you think no one like that still exists, think again.

Day after gut-wrenching day those investors who held "for the long run" watch markets bounce up and down, trapped on an emotional roller-coaster in debilitating distraction from all the joys of life. We refer to these hapless people still praying for their stock to come back "overhead supply".

After months and months of hopes raised & dashed, do you think their frazzled nerves allow them to make unbiased market decisions right now? Do you think they are more apt to believe this next rate cut is the answer, or might they believe less in this one than the five just passed?

Capitulation Is A Process
I bought my first stocks ever in October 1987. I bought them because an unprecedented market crash put in a bottom to end all bottoms. At least that's what we were told all through 1988 by the media until the darned thing tanked again one year later, nearly to the day. Please don't assure me March 2001 lows will hold for years from now, that rings a faint warning bell in my head.

The Fed can continue cutting rates to zero or even pay us to take out loans but that won't negate the inevitable cycle of supply & demand we are in. Supply in the tech arena is grossly high in products and producers. Much of that supply will never be distributed and some of those suppliers will cease to exist. That means some stocks will go from current prices to zero, serving to offset others going higher from here.

"Cheap Tickets" (CTIX?) corporation is getting much cheaper tonight as yet the latest prime example of this fact. Off -45% Monday's closing price in the post-market action, it has plenty of Nasdaq COMP brethren destined to follow suit. Regardless how cheap money supply is, if none of it chases a flawed business model or out-dated product what's the difference to companies who fit this mold?

So whether the Fed cuts rates by whatever amount this week or not, the macro cycle will continue on. All the Fed has managed to do is staunch an arterial bleed into a trickle. The patient will die, just a much slower process. Whether that eases or prolongs the pain is a question I'll leave to you.

Micro Cycle
Ah, but Elliott and Gann wrote volumes of market theory on price action moving in cycles within cycles. How true that is! Let's pick through near-term charts and try to figure out where the indexes are headed next.

(Daily/Hourly Chart: Dow)

The Dow broke support of its daily-chart bear flag (left) today and closed 100 index-points lower. This particular pattern has a high near 10,750 and a low near 10,675 for a 175-point span. That calls for a target of -175 index points from where it broke near 10,600 or eventual hit near 10,425 area soon.

Daily-chart stochastic values are dead and turning bearish as we speak to support this evidence.

(Daily/Hourly Chart: QQQ)

The QQQs continue to form a consolidation below the Head & Shoulders pattern neckline (red ascending line at left) which would serve as resistance just below the 45 area as well.

Hourly chart (right) shows price action bouncing within a wedge from 42.75 to 43.50, a very tight range. A close outside of this would suggest the next direction from here.

Both charts have stochastic values looking quite bullish and I expect the NDX to hold up better than the Dow by comparison, but that is merely a relative statement. Both will soon go where the Dow leads them together.

(Daily/Hourly Chart: SPX)

The SPX is consolidating in its daily-chart as shown with mixed to weakening stochastic values. Hourly chart shows bullish divergence and suggests we could see a price pop soon, but keep in mind this is merely an intrasession chart.

(Daily/Hourly Chart: OEX)

Same setup for the OEX. Looks like it wants to rally in the near term, but weakness from the Dow is reflected here as well.

Charging Grizzly And An Empty Gun Greenspan must be more sleepless right now than retirees holding CMGI down from last year's all-time high. Big Al has fired five massive bullets square into the monstrous bear and has barely been able to slow it down. How many rounds are left in the rate-cut rifle's magazine until it becomes an empty weapon?

One of CNBC's regular analysts is a young guy in charge of retail operations for a major underwriter. His name escapes me right now but was featured this afternoon. When asked where the markets are going he replied the same way as always: UP. I've never once heard this nice kid say anything else.

His forecast is a sustained rally on 50-basis cut, temporary selloff and then sustained rally on a 25-basis cut. Sounds great to me... I'll take it! Sure would make most of our readers happy and my job a whole bunch easier.

The unfortunate part is such was his prediction every time during the last five cuts with no exceptions. Our well-groomed lad with the bullish bias is 0 for 5 and on deck once again. He's not alone and they all could be right, but I myself would be much more bullish if the Dow now rested at 11,500 instead of 1,000 index points lower.

Hindsight will be perfect as always and the closing bell this Friday shall clearly tell the tale!

Best Trading Wishes,

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