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Index Wrap

Dog Day Afternoons

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        08-01-2001        High      Low     Volume Advance/Decline
DJIA    10510.01 - 12.80 10599.96 10484.20 1.30 bln   1817/1271	
NASDAQ   2068.38 + 41.25  2078.36  2045.13 1.76 bln   2185/1528
S&P 100   623.61 +  1.45   627.45   621.82   totals   4002/2799
S&P 500  1215.93 +  4.70  1223.04  1211.23           
RUS 2000  489.24 +  4.46   489.98   484.78
DJ TRANS 2933.78 + 27.60  2933.78  2894.16
VIX        22.99 -  0.88    23.91    22.84
Put/Call Ratio      0.50

Dog Day Afternoons
Austin Passamonte

"Pop -N- Drop" for the Dow and S&Ps was a repeat performance encore today. Looks like the heat of summer has settled in for a long, dull market ahead. Traders who thrive on volatility and large-range days might have a tough time sitting thru 6.5 hours of mostly flat action ahead.

(60/30 Minute Charts: Dow)

The Dow has been fiercely rejected at the 10,600 level two days straight. One touch each time and sellers start dumping supply like there's no tomorrow. Gone for now are the +300 index point short-squeeze sessions that blew markets off their bottoms earlier this year. Bears will lose their grip one long claw at a time over the next few weeks ahead... if they lose at all.

Near-term chart signals are bearish widening formations that suggest instability and weakness, pretty much what we've witnessed this week.

(60/30 Minute Charts: QQQ)

Remember when the Qs used to gain or shed 4+ points a day? Now it takes an entire week to move this distance on a close over close basis, and expecting things to sizzle before September may be asking too much from the shriveled index. I'd look for this recent wedge to keep prices contained at for at least Thursday's session as chart signals remain mixed.

(60/30 Minute Charts: SPX)

The SPX shows bearish ascending pennants while the OEX (not shown) has neutral wedges over the same time frame. This is unusual when both S&Ps do not form mirror patterns and leaves us with indecision amongst the two, although I'd say there is more near-term weakness than strength right now.

(Daily Chart: SOX)

The SOX has rallied the past six sessions straight and have market bulls wondering if the bottom is in for techs. Can't say for sure, but the daily chart stochastic values are nearly topped out while price action is just below relative high near 651. That is the next little hurdle to make before stochastic values turn down to negate bearish divergence. 665 offers the next overhead supply from there.

More sideways chop. As we can readily see in the near-term charts right now, signals are mixed in confusion. I stick to the same outlook from before, and that is for index prices to stagger and struggle their way higher over time. Classic dull market rally where things grind on onward & upward. Buying calls on deep dips with some time premium left (yuck!) to negate vega decay slippage is a good approach for now. Should weekly/daily stochastic values turn down from overbought extreme across the markets, we'll change that forecast immediately.

The New Recovery Paradigm
Momentum traders had a boost in adrenaline in the pre-market this morning. Yet another vague analyst upgrade on second-tier chip stock companies had tech bulls beating a hooved path straight to the SOX.

Once the popular names got bid up a bit, traders moved to the lesser known names as a proxy. A rising SOX lifts all ships, right? Everyone knows that if things are improving for chips, that must mean chip users are rising too! Throw some money at the mobile phones and other handheld toys. And they need materials to build, so who supplies their plastics, leather, etc?

While we're at it, let's buy some raw material manufacturers as well. Who do we know that controls vast acreage of barren desert? Sand is the basic raw material for chips, so let's get in on the near-term demand for sand!

Cross-sector buying approach worked in 1999 and early 2000 when the bubble was still inflating. Something's rising = everything's rising will not work in 2001, 2002 or quite awhile ahead. Good news for a certain stock or some stocks in a sector means just that and little more. The new economy will sure be an adjustment for most equity traders who cut their teeth in the latter 1990s.

A fair number of chip makers hanging on for dear life awaiting the economic recovery will lose their grip and plunge into the bankruptcy abyss by this time next year. Why? Too many players. Even when production channels clear, there remain too many suppliers and not enough normal consumption. We must keep in mind that 1999 created an artificial demand and over-production that kept every existing company in the game. That demand won't even come close to repeating for several year minimum, and plenty of fringe players in all sectors will shake out accordingly.

Beware playing second-tier proxies when the first-tier symbols get bid up beyond reason. Many traders will suffer the agony of buying tops on second-tier companies that shall soon haven't any tiers in the food chain at all.

Best Trading Wishes,

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