Option Investor
Index Wrap

Pop and Drop, Part II

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        8-02-2001          High      Low    Volume Advance/Decline
DJIA    10551.18 + 41.17 10609.65 10513.47 1.22 bln   1781/1275	
NASDAQ   2087.36 + 19.00  2103.16  2061.75 1.66 bln   1853/1771
S&P 100   626.27 +  2.66   629.20   623.56   totals   3634/2986
S&P 500  1220.75 +  4.82  1226.27  1215.31             
RUS 2000  488.99 -   .25   491.89   486.53
DJ TRANS 2940.59 +  6.81  2941.71  2903.31 
VIX        23.28 +  0.30    23.80    22.57 
Put/Call Ratio      0.55

Pop and Drop, Part II
Contact Support

Equities continue their agonizing rise bolstered by some temporary good news. As you might imagine from the title above, it was not to last, but looked good enough on the surface for bulls to stage a strong early morning showing.

Hmmm. . .what sparked that? A few things. Let us walk through them quickly before turning our attention from the noise to the charts.

First, The Bank of England surprised the markets by announcing an unexpected rate cut. That is truly good for the British economy and ultimately Europe as it seeks to stimulate their slowing economy by making it more attractive for business to borrow, expand and produce. Unfortunately, the ECB did not follow suit and left its key rate unchanged. One cut is better than none, but the lack of follow through from the ECB tempered enthusiasm slightly.

Still, a better than expected initial claims report was cause for more bullish movement. Instead of the 390K unemployment claims expected, only 346K materialized. That points to the notion that fewer people than expected are losing their jobs. However, the severe drop in these figures over the last few weeks is puzzling considering the economic weakness, yet has been partially, though not completely, accounted for by seasonal auto and textile rehiring. Frankly, it just looks like bad data that nobody can explain.

Finally, Craig Barrett, INTC's CEO said he expects the second half numbers to improve. As could be expected, chip stocks rallied, building on yesterday's gains.

The damper came in the form of a 10:00 am release that factory orders had decreased 2.4%. Only a 1.1% decrease was expected. Simultaneously, MSFT took a whacking from the appeals court that refused MSFT's request to reconsider its antitrust case. It was downhill from there as the markets stair-stepped down from their highs throughout the day closing slightly positive on the major indexes.

The long and the short is that these markets continue to rise in agony. And while the bullish percent on the point and figure ("pointy finger") charts suggests that institutional money currently finds it safer to manage risk by being bullish, the technical indicators are maxxed out on daily charts, which tells us a reversal back in favor of the bears may not be far off.

One thing is for sure. The Great Humiliator is alive and well, and when I hear phrases on TV like, "the train is leaving the station", it reminds me that a sucker's rally is just around the corner with a real possibility of a blow-off top. As soon as a flock of investors buy into the media cheerleading, it will be over.

But for now, bulls struggle desperately for hard-fought yardage on the field, the bears never allowing them too much. It is summer folks, and we simply will not see a runaway bull with so little interest in the markets. Both teams are tired and finding it difficult to mount a strong offense or defense. Days like we have seen this week will only cause investors tired of the choppy action to walk away from the market, the very act of which will keep it directionless, perhaps for some time to come.

While we at the Skybox may be weary (or worse, growing cobwebs), rest assured we will be watching (even if toothpicks are necessary to prop our eyes open) for the next potentially profitable entry either up of down.

Now about those charts. . .

Dow Industrial chart (INDU):

Despite best efforts, the Dow has yet to close over 10,600, a point of major resistance. Summer volume may not be enough to get it there. However, if it can clear, the next stop could be 10,700 as represented by the upper Bollinger band. In the meantime, the near-term 60/30 charts have formed a diamond, which more often than not results in breakdown. Frankly, I would be surprised to see any major damage as a result given that the weekly and daily stochastics are still pointed up. 60/30 stochastics are useless right now with such a tight range. Even gun-slinging daytraders to have to work hard to earn a buck here.

NASDAQ 100 chart(NDX):

The bearish divergence we saw Tuesday lasted all of four hours, then it was back up the charts. These charts show major indecision and certainly are not exhibiting the hallmarks of a leading index. Yet NASDAQ struggles upward. Today's daily candle shows another hanging man formation (the second this week, the first of which ultimately was proven wrong), and that generally portends a reversal to the downside if it occurs in an uptrend. This qualifies as an uptrend and is thus potentially bearish, especially since resistance happened around 1750, a former level of support formed back in April. Even if it gets through, the upper Bollinger band and next level of support stemming from May, 1775-1800 will likely thwart further advance, especially coupled with an overbought stochastic that is showing its first signs of rolling over.

S&P 500 chart (SPX):

Now THIS is the market. Two days ago, I would have thought that the hanging man candle formation in an uptrend would produce a selloff. WRONG! Markets have stubbornly rallied because bears appear weary, not because bulls are killing them. Is it not almost time for hibernation? Even so, the long-term weekly chart shows the next resistance level at 1240 will be a hard fought battle, but the stochastic is still on the rise suggesting a longer-term gain is possible. But before it even has a chance, SPX will hit its upper daily Bollinger Band at 1229 coupled with a stochastic bar topping out and just beginning to roll. Suggesting that might happen sooner rather than later is the bear flag forming on the 60-min chart. While bears may have near immediate favor on the downside, the bigger trend says go long.

One plug for the VIX here too. It hit its lower Bollinger band extreme and moved up. We cannot be certain that it has hit bottom (suggesting the S&P will fall), however, it has just bullishly crossed fast over slow stochastic bar in oversold region. Couple that with stiff resistance on the S&P plus weakening stochastics on the daily chart, and it would appear that the bulls' days are numbered in the very near future.

Tomorrow we will see the non-farm payrolls, unemployment rate and the NAPM services index numbers. The consensus for the latter is 51.4%. Much less than 50.4% says that consumers are slowing down their demand for services, which by itself could easily reverse this week's love-fest.

For tomorrow, a coin toss might make a better predictor of market direction as the economic releases can lend support to either bullish or bearish traders depending on the outcome. While both camps are weak, bulls are outrunning bears at the margin and have a slight edge for the moment. It cannot last forever, but it can last long enough to stop us out of put plays taken now in anticipation of the eventual selloff. Making money in this environment is difficult (as if that is news), and sometimes the best thing we can do is nothing. It may sound boring and it is. But if we are to succeed in trading as a business, we must recognize that in addition to making a decision to buy or a decision to sell, making a decision to do nothing is still an appropriate business decision.

See you at the bell.

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