Pamplona Moves To Wall Street
After watching slow-footed runners get tangled up with stampeding bulls in Spain, it reminds me of what we might see here in the next week or two. Market bears are getting nervous, a few of them have recently been gored and if you & I want to make money trading options we might better do that running ahead of the bulls instead of standing in front of them for now.
There are clear & present technical indications we will see a modest to sustained rally emerge soon. We'll talk about long term later on, but let's focus on short to medium term for now. A look at the most current charts is our best place to begin:
(Weekly/Daily Charts: SPX)
Weekly chart patterns in the Dow and S&P indexes look much the same. We see descending pennant-shaped wedges forming since early April 2001 that behaved very orderly in the end but were mighty volatile at the time.
Weekly chart big picture (left) shows we are now about two-thirds the way into this formation, right where breaks most commonly occur. Stochastic values are still bearish and pointing down but could see that fast bar (blue line) bounce near oversold extreme and curl up from here. That would portend the start of a long-term move but such action takes several sessions to unfold.
Meanwhile, daily chart stochastic values just turned bullish the past two sessions. Note that stochastic slow bar (red line) extreme lows held higher lows than the last trip down to oversold while price action fell to much lower lows. Divergence that occurs in any order within oversold zone is bullish which means we have bullish divergence here, a strong reversal signal.
Thursday finished a bullish reversal "Morning Star" candle pattern formed by Tuesday's extreme drop, Wednesday's doji stalemate and Thursday's white candle that actually "engulfed" or exceeded Tuesday's bearishness. Confirmed by higher prices on Friday, it's also a powerful reversal signal.
The final test for next week will be a break AND CLOSE above the green descending trendline that creates this Bearish Pennant channel as well. Have the SPX close above 1220 and we've got a confirmed bullish breakout on our hands!
To be fair, a rejection near resistance would look to retrace at least half of the last low to high, which was 1180 to 1218 or 38 index points. A drop from the 1218 area would revisit half that 38-point span or the 1199 area, which served as a price magnet earlier this week.
(Weekly/Daily Charts: Dow)
Same story in the Dow so we can be brief. Weekly chart remains bearish but lags the daily, which is bullish. The old index is strongest of all with a clear upturn reversal of its stochastics AND has successfully broken and closed above upper resistance besides.
Traders new to this game who cut their teeth during the NASDAQ bubble still cling to the COMP and NDX (lesser extent) as the markets when in fact they no longer are. For many months now the Dow and SPX have led market action in spite of habitual focus on the techs by recent traders still in denial.
This is not opinion, it's pure fact. Just watch for yourself which index is the first to break resistance or support each time over the coming days and weeks... the Dow will lead every time and techs will follow. Personally, I don't expect this to change anytime soon while the COMP remains loaded with numerous dead fish companies that will never recover from here.
(Weekly/Daily Charts: SPX)
No surprise... the NDX/QQQ appears weakest of all. Old-time lingo would call it the "Weak Sister" with the Dow being our "Strong Horse". Note how many times the index pops above resistance in the daily chart only to close below it. A decisive close above the 44.00 level would confirm a test of the 50.00 area next.
Keep in mind that descending channels are a bullish flag formation only confirmed WHEN resistance is broken. These patterns eventually break to the upside once enough pressure builds, but plenty of bounces lower occur along the way.
One important clue to note here is the relative location of price action to stochastic values. The last time stochastic values in the daily chart were buried in oversold was mid-June when prices traded near support. Stochastic action cycled all the way up from oversold to overbought while price action moved from support near 41 to resistance near 47 in the process.
Now look where the relationship is. Price action is poised just below resistance, not on support. Stochastic action is about to pop from oversold. Can you see how this suggests a break above resistance and higher price levels for the next stochastic cycle from oversold to overbought?
That's a key to identifying potential breakouts versus more rangebound action using this study. Find markets where price action is poised to break resistance when stochastics are primed at oversold for rallies, while price action resting on support when stochastics are overbought portends breakdowns through the range as well.
(Weekly/Daily Charts: SPX)
Let's muddy up the OEX as a proxy for the Dow and SPX with our customary different view. This index advance was halted Friday by the simultaneous merger of 20-week and 20-day moving averages alike. The next close above 628 should find clear sailing with possible stops at the Fibanocci values listed. The same study can be applied to SPX, Dow and to a lesser extent the NDX as well.
A summer rally is expected and quite frankly should emerge. There are lots of weak-handed shorts playing with fire in a market they aren't equipped to handle right now. IBM reports sometime on Monday, Greenspan speaks later this week and expiration Thursday & Friday are typically bullish events. All of these factors combined could see one or two phenomenal sessions and with most of the worthless time premium drained away from our July contracts the leverage is unparalleled in moving markets.
We are bound to hear how the bottom is finally in, the worst is over, recovery has begun, etc ad nausea. I'll reserve that announcement for September and October if you don't mind; 1988 comes to mind quite clearly even still. When the "recovery" does return, we can be very sure that most traders will be grossly disappointed in the muted performance normal growth offers versus 1999, a period we won't relive anytime soon. Then we'll begin to hear things like "valuation" and "PE ratios" applied to all companies but that stage is still far off down the road.
At the latest who's who CEO symposium this week, Warren Buffett once again reiterated that the markets remain grossly overvalued by historical measure. Most recent traders scoff at this idea after witnessing their beloved tech darlings smashed to a fraction of former worth. Understand that current share price versus mania highs has nothing to do with future fair value. Expedia at a PE of 433 times estimated earnings is far from alone and all we need to say on this matter as well.
Buy & hold investors who think they can "buy the bottom" this summer and wait for stratospheric returns when time takes over better be very darn good at specific stock picking. Those still holding CSCO from $60, MSFT from $120, INTC from $70 and JDSU from $125 and waiting to break even better have time horizons measured in years or decades rather than months or quarters.
But we are traders who needn't worry ourselves with such futuristic drivel. It's time to make money this week, next week and the week after that first. Time will take care of our future for us if we just work hard at managing the present.
Regrettably, I Cannot Help
A growing volume of email reaches me that ask specific trading advice. When to buy, when to sell, should one hold over, how does this symbol or chart look, etc. I cannot answer any specific trading questions due to SEC regulations for your fiscal safety and mine. Even when the sender states they won't hold me to opinions it does not matter. I'm always happy to expand on a thought or point made in educational context but when it comes to anything trade specific, I can't help.
A good rule of thumb would be if it seems borderline like specific trade advice, it's already over the line. I just want to bring everyone's attention to this so no one feels slighted when I cannot provide specific answers to certain questions.
That's it for the broad view tonight. We'll look at macro details in Trading 101 and the best five sessions of each month are straight ahead of us - expiration week! Unequaled leverage and moving markets offer more than a few golden opportunities for massive profit. Let's do the best we can to glean our share while it lasts!
Best Trading Wishes