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Index Wrap

Bears in the Woods\?

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       7-31-2001          High      Low     Volume Advance/Decline
DJIA    10522.81 +121.09 10595.05 10402.97 1.13 bln   1893/1221	
NASDAQ   2027.12 +  9.28  2057.10  2014.06 1.58 bln   1935/1813
S&P 100   622.16 +  3.27   628.90   618.89   Totals   3828/3034
S&P 500  1211.23 +  6.71  1222.74  1205.32             
RUS 2000  484.78 +  0.07   489.15   483.07 
DJ TRANS 2906.18 -  6.04  2924.63  2891.92 
VIX        23.87 -  0.16    25.02    23.43 
Put/Call Ratio      0.60

Bears in the Woods?
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Said Daddy Bull to Baby Bull, "Make loud noises and they will go away." Baby bull whooped and hollered something about the Chicago PMI reading of 38% (est. 42%) and the further drop in consumer confidence. Baby's enthusiasm stemmed from the misplaced notion that bad economic news means that another one, perhaps two, interest rate cuts would keep bears away for good, with pastures safe and prosperous for hopeful bulls. Maybe for the day, maybe for a week or two.

Still, it is a flimsy excuse since markets were rising even before the information release. But consumer spending still outpaced income growth as rising home values provided some cushion. In the end, consumers will eventually have to pay for the overindulgence.

But for now, bad news is considered good as long as investors pin recovery on more interest rate cuts. Rather than highlight again all the negative factors that when mixed together in a basket become bear food for Yogi and his buddies, remember the bigger picture is that markets are not rational and never have been. They are emotional and flow bullish to bearish and back again just like the ocean tides. While it is easy to defend a position from either bullish or bearish perspective, defending a position rarely makes money for the trader.

No, it is better to be on the right side of the trade than to defy the trend in an attempt to prove ourselves correct. Unfortunately, the market does not care what we think and its cycle carries on whether we like it or not. Bears are still around and waiting, but now is the time for bulls to gather in some sunlight despite the bear food all around. Is there a rational reason for this rising market? No, just a natural emotional cycle, which will reverse at some future point in time, guaranteed. Right now, markets just want to go up!

So what shall we do as traders? Be happy! Every day brings new profit opportunities. Bullish or bearish does not matter. And as Jeff Bailey frequently notes, we must trade what we see and not what we believe. The market has the ability to defy reason much longer than we have the ability to remain solvent. So we go with the flow. It does not pay to stay angry at irrationality as much as it does to participate in it! Be a defender of the direction, right or not, and profit accordingly!

Still, bullish action today was unexpected. While disk drives were upgraded today by JP Morgan (go figure), and S&P cut Lucent's senior debt to BB-, Merrill cut its numbers on DELL citing concerns that the market continues to deteriorate. Not helping matters (or at least it should not have helped matters) was Verizon (VZ) trimmings earnings and revenue going forward along with analyst downgrades in the wireless carrier and wireless equipment sector. However, oil prices were lower and biotech helped out on the NASDAQ, an index that made a half-hearted attempt to play follow the leader to the S&P and Dow.

Now, about those charts that are a bit more telling and allow us to filter out the noise. Even they do not paint a clear picture. But here goes.

Dow Industrial chart (INDU):

For the longer-term players, the weekly and daily charts remain pointed up, but 10,600 again provided resistance. There is a lot of congestion between here and there, which INDU will need to overcome in order to move higher up. For the short term traders, notice the bull flag formed that would portend today's breakout, noise or no noise. Another one is forming now, and as long as the daily chart remains intact as the prevailing trend, let the oscillators cycle down to complete the formation of another flag. As they do, let the break out above the upper trend line offer the guidance to bullish entry.

NASDAQ-100 (NDX) chart:

As for the NASDAQ, it is certainly no leader, and lately, makes a poor follower too. In case you are joining us for the first time, Austin Passamonte has done a masterful job at pointing out the folly in "NASDAQ as the leader theory" over the last eight months. It just is not so. The weekly stochastic offers proof in its candle decline vs. the slight ascent of the oscillator. Daily chart too says this index is topping out. Evidence can be seen in the stochastic and the doji candle in today's price action. Traders may also note the bearish stochastic divergence despite the bull flag that made today's gains seem plausible. Anybody see a bull flag in the last three hours on today's 30-min chart? Nope, me neither. Nonetheless, though 60/30 oscillators are cycling down, the daily is still pointed up despite its toppy look. Accordingly, it is likely that the 1660 range will offer support as long as the daily uptrend and the S&P trend remains intact.

Speaking of which. . .

S&P 500 index (SPX) chart:

Investors take note. The rising weekly stochastic and flat candle movement speak to lack of strength. So does the daily chart, which failed miserably to sustain its breakout. Nonetheless, it did close above its resistance line a notch above 1210 - barely. Whether or not it holds is debatable since the stochastic though still on the upswing is nearing the top. Complicating matters, especially for the traders among us are the mixed signals on the 60-min chart. A bull flag ushered in the day suggesting a bullish move today was possible, bad news be darned. Alas, the final three hours here were a bunch steeper in decline than your average bull flag. The divergence created from a lower overbought level and a higher price level is bearish divergence, which suggests that the immediate trend is down until the 60/30 stochastic lines reverse course. Look for support here above 1200. Should that fail, the decline under the daily declining trendline would signal a longer-term reversal. Careful on the call plays until you see 60/30 reverse up with the daily trend still intact.

The VIX too has fallen substantially to 23.84 from near 29 in the last four days, a rapid reversal from bearish sentiment. But that curve too has begun to flatten over the last two trading sessions. It is not a very telling instrument right now and could fall either way.

All that said, what happens tomorrow? Overall, long term stochastics favor the upside while the daily charts, though still pointed up, are getting toppy as depicted by all markets' inability to hold meaningfully to their gains today. Still, there may be more gains for the investor. For traders, no bull flags are forming now, except for maybe on the Dow chart. Declines were steep and 60/30 oscillators are currently pointed down. It is possible that the major indices could fall back and test very recent support levels, like those from yesterday. Nonetheless, longer trends suggest that "up" is the bigger picture despite the bad news coming from economic reports and the remnants of earnings season. Our best educated guess until proven otherwise is the use weakness in the morning to take bullish trades so long as the short-term oscillators signal us to do so.

Again, trade what you see, not what you believe. See you at the bell!

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