Option Investor
Index Wrap

Empty Excuses

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        WE 8-3           WE 7-27          WE 7-20          WE 7-13
DOW    10512.78 + 96.11 10416.67 -159.98 10576.65 + 37.59  +286.38
Nasdaq  2066.33 + 36.60  2029.73 +   .36  2029.37 - 55.42  + 80.63
S&P-100  623.65 +  3.39   620.26 -  5.33   625.59 -  1.26  + 13.90
S&P-500 1214.35 +  8.42  1205.93 -  4.92  1210.85 -  4.83  + 25.09
W5000  11242.94 + 76.94 11166.00 - 46.37 11212.37 - 59.55  +212.36
RUT      487.15 +  2.13   485.02 -  2.91   487.93 -  2.78  +  7.45
TRAN    2914.02 +  4.14  2909.88 - 55.78  2965.66 + 25.31  +191.43
VIX       22.39 -  2.34    24.73 -   .24    24.97 +  1.10  -  1.10
Put/Call    .76              .47              .82              .65

Empty Excuses
Austin Passamonte

Jobs are better, jobs are worse. Bad news, goods news... all that stuff is just noise. Stocks go up and down based purely on supply & demand and nothing else. Traders sitting on big gains will manufacture excuses to sell while traders sitting on cash likewise justify reasons to buy. Basic human emotion at work, which is "The Market" in essence.

That reality truth drives fundamental traders crazy. In their orderly world, analytical investors and traders like to believe they can justify and reason their way to success using logic. Not likely.

One sport I play to amuse myself these days is dialing up weekly/daily charts when CNBC guest analyst suggest symbols. Invariably they warn against buying something buried in oversold and suggest now is a prime entry point for symbols topping out in overbought on long-term charts. "Logic" used to buy strength and shun weakness during sideways markets while holding on over time is a sure recipe for buying wrong.

But I digress.

Friday's selloff was expected by all: the only question was how far from the open would we slide. Inability to sustain any strength above resistance coupled with some bearish developments in chart action made us wonder, and tightened stops are the defense to survive uncertainty.

Let's begin with a broad horizon tonight, from monthly charts on down. Where does longer-term strength or weakness lie?

(Monthly Charts: Dow and SPX)

For the past six months we've seen the DOW coil itself into a tight wedge where it approaches the apex right now. Could post one more inside month candle to this pattern but eventually will break. Stochastic values remain toppy and bearish.

The SPX has tracked a descending channel for the past eleven months and counting. This is a bull flag formation but only when broken to the upside does it confirm strength and change of trend from there. Stochastic values remain nondescript to weak at best.

(Monthly Charts: NDX and SOX)

Techs look to have less downside risk in the long run, a belief I've held for many months. Too many traders remain fixated on where the Comp or SOX will bottom, a very secondary concern for the markets. A tech bottom in place does not equate to straight up price action from there, although surviving momentum bulls interpret that to be the case.

I expect techs to fall less and chop their way higher more than the old economy indexes by comparison. The Dow and S&Ps have considerable room to decline before they become oversold on a multi-year basis ahead. Might never happen, but I would much rather go long investment-style if it did as opposed to buying in space right now.

(Weekly/Daily Charts: SPX)

Which brings us to the trading time frame. Weekly charts continue to exhibit upward pressure but daily charts warn of weakness ahead. Mixed picture remains.

(Weekly/Daily Charts: Dow)

The Dow is coiled for a break and upside direction remains higher odds. It may be one or two solid sessions up sprinkled amongst a number of choppy days like Friday was. Watch the patterns for a break & close to confirm direction ahead.

(Weekly/Daily Charts: QQQ)

Again, techs have a better chance to hold on or break to the upside but any large moves will come without warning or foresight from here.

Market Call(Guess)?
Today's example of markets failure to sell off is one more case for leaning toward the upside ahead. However, extreme volatility will spook the bejabbers out of call buyers numerous occasions like this. Not to mention the overwhelming desire for many newly-minted put players to short every bit of weakness in sight. I still can't believe how much volume has grown on the put side of index options. Even during 2000 when everyone should have played them it was a thin market. Now that this has changed, markets no longer dive straight down from open to close as they once did.

I'm sticking with a slow grind up the charts with plenty of dips sprinkled in. Trading the expected direction will not come easy. Some traders ask why we don't just buy the next dip and hang on for weeks like the old days. Feel free to do so, but I've witnessed far too many adverse market moves that wipe out solid partial gains and some capital in one fell swoop. These are still very tumultuous times and no guarantee price action won't totally collapse any given day.

We'll try to hit the high-odds entries when they develop and stay out of the prop wash in between. One more round of spread plays before expiration is possible and anything else that seems to be appropriate as changing conditions dictate.

Don't fall in love with a direction or opinion, but slight odds favor the upside overall. How that comes to pass may not be pretty or easily traded, either!

Best Trading Wishes

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