Option Investor
Index Wrap

True Colors Showing\?

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        07-23-2001        High      Low     Volume Advance/Decline
DJIA    10424.42 -152.23 10595.40 10419.71 1.03 bln   1326/1760	
NASDAQ   1988.56 - 40.81  2047.85  1987.51 1.48 bln   1381/2347
S&P 100   614.41 - 11.18   628.07   614.07   totals   2707/4107
S&P 500  1191.03 - 19.82  1215.22  1190.50           
RUS 2000  487.70 -  5.23   489.51   482.70
DJ TRANS 2961.81 -  3.85  2982.31  2957.00
VIX        26.13 +  1.16    26.77    24.92
Put/Call Ratio      0.45

True Colors Showing?
Austin Passamonte

Our weekend Market Wrap had charts showing ambiguity of direction from Friday's close but chart patterns offered strong clues on where to look for conviction going forth. We may have seen the start of true colors today and that could be red for awhile.

It was a quiet open, the kind we fantasize about during each expiration week but too seldom enjoy. Price action then moved flat for some time before selling off abruptly from there. Swing Trade model picked up some put plays when support gave way and price action moved beautifully lower into the close. Again, where were these moves last week? We could have all easily posted +200% to +300% or greater gains on moves like this but alas, it comes a session or to late for our taste.

Regardless, gains were there for the taking and put players watching key entry points had simple guidelines to follow.

(Daily charts: Dow & QQQ)

The Dow's daily chart (left) shows one long candle breaking down to confirm its Bear Flag pattern (green) AND closed below the 20-DMA in the process. Stochastic values just posted a bearish cross today as fast bar reverses down thru the slow from overbought extreme.

The NDX/QQQ daily chart (right) shows a red bearish engulfing candle today, and the easy entry was right below Friday's session low from there. Stochastic values remain weak as well. The descending channel has held once again and we can expect lower support in the 39.XX area to be tested soon.

(60/30-Minute Charts: )

Clear wedges broke down and falling stochastics confirmed weakness. Just buy puts on a break below 1207 and hunker down for the session from there. The very next hour saw prices levels dive to sub-1200 and we reset our stoploss order below entry to lock in a "free play" without possibility of great loss from there.

Price action consolidated near the 1197 - 1200 area shown in the 30-minute chart (right) to form a bullish ascending triangle pattern. When prices broke below 1197 in the final hour, it too was a late session downside entry point for any who care to hold over the close. For those already long puts, it is confirmation that lower prices were ahead into the bell.

(60/30-Minute Charts: )

Same deal for the Dow. Broke clear wedges with stochstic values falling... markets are going DOWN!

(60/30-Minute Charts: )

The NDX/QQQ followed its leader (Dow) lower after popping higher from the open even while the Dow went negative. If I repeat this mantra too often forgive me, but the Nasdaq is (and has been for a long time now) a LAGGING index worthless for prediction of broad market direction. Today was just one more glaring example to traders with tunnel vision toward techs that ignoring the leading indexes (Dow and S&Ps) can and will point them down the wrong path.

(Daily Fibonacci Chart: OEX)

As I like to do, let's take a totally different look at the index that blends Dow and NDX best: the OEX. Here is a daily chart with Fibonacci retracement values drawn from previous extreme low to recent high.

The 620 area held support but finally broke today. Next price magnet from there is the 606 area which may be reached early as tomorrow. 590 would be the next logical stop from there. Before either of those happen we could easily see one or more tests of the 620 range to test resistance now that the OEX is below it.

Let me point out one other observation as well. The largest price coil within this latest down-move formed a bullish triangle but broke down to confirm further weakness. Often we see such consolidations forming roughly 50% of the way from a current trend's total move. The center of this consolidation pattern is near the OEX 630 area, down 50 index-points from the high near 680.

If a 50-index point decline on the OEX is halfway to the end, we could expect 580 area as an ultimate downside target for this leg of the decline. If distant memory serves me right I think one of our weekend Market Wraps some time ago listed this scenario as forecast on daily or weekly charts as well. Don't have the inclination to dig back in archived time to verify if that's my memory or imagination at work, but it rings a fuzzy bell.

One point I didn't mention after we looked at those 60/30-minute charts above was the fact that all stochastic values remain pointing straight down with zero evidence of a bounce at this time. But they have much less overall relevance than daily chart signals and patterns that broke down and confirmed weakness today. Where uncertainty lie last Friday we have clarity tonight.

The best odds from here are to lay off any rallies that don't last at least a couple of sessions and aggressively sell into them every time 60/30 minute chart signals roll over from near overbought zones. It is basic human nature to doubt we will ever see a counter-move to the trend again before the markets dive lower than Titanic but rest assured, we will. There will be one or two chart signal bounces each week that safely let us in the direction we wish to play. Entry points and trade management from there is then up to us.

Using the same approach we took with the OEX daily chart and Fibanocci retracements, pick your favorite index, sector or stocks and do the same thing. This is one simple way we determine possible entry & exit points that really does a nice job of forecasting future action.

We waited for the charts to lean one direction or the other before targeting buy & hold type plays and I think we have it. My approach will be to take bearish plays the next time near- term chart signals cycle into overbought zones and reverse from there. This is what the weekly & daily charts tell us to do, and I for one am listening!

Best Trading Wishes,

Index Wrap Archives