Option Investor
Index Wrap

Brief-Squeeze Rallies

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      09-05-2001          High      Low     Volume Advance/Decline
DJIA    10033.27 + 35.78 10066.69  9885.88 1.36 bln   1248/1874	
NASDAQ   1759.01 - 11.77  1782.50  1715.86 1.92 bln   1319/2308
S&P 100   578.89 +  0.85   581.01   568.92   Totals   2952/3750
S&P 500  1131.74 -  1.20  1135.52  1114.86             
RUS 2000  462.51 -  4.45   466.95   458.78 
DJ TRANS 2835.17 -  0.48  2842.22  2812.12 
VIX        28.96 +  0.30    30.50    28.58 
Put/Call Ratio      0.75

Brief-Squeeze Rallies
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Anyone who thought September's return would bring a halt to ceaseless market volatility may have changed their minds the past two days. We continue to be plagued by short-squeeze rallies that wipe out bearish plays within minutes, but call plays taken during these times have brief and narrow life spans as well. Is there an end to this in sight? More on that later.

I get frequent mail from readers who ask how I can waffle back and forth from bullish to bearish on what seems to be a daily basis. My market bias always depends on the time frame we are discussing to trade. Let's look at a bunch of different charts to see what the long, medium and near-term future all may have in store.

Did you expect one simple answer? If so, let today's action prove continual and persistent market uncertainty. First of all, we had plenty of bullish reversal warnings in our midst this session. Spiking VIX over 30 ushered in the afternoon short-squeeze event. Some say there was a bit of manipulation in the Dow today by shorts trying to run up the market on artificial buying so they could sell into it.

But all that's mere noise. Here's a broad view instead.

(Weekly/Daily Charts: SPX)

In the past twelve months SPX weekly stochastic values (left) have reached oversold extreme only three times before now. Note the results from there. Up 125 index points last fall, up 225 points this spring and another 85 points in early summer. That is a lot of distance for the big index to cover for sure.

Now we have slow bar values nearing oversold for only the fourth event in one year. Care to buy puts and hunker down for weeks! Bear beware!

Four times since early July we've seen daily chart stochastics (right) reach oversold extreme as before now. Look what happened each time: would you feel better about having had long calls or puts at those events?

Realize that we appear near another market bottom right now but haven't yet turned the corner. When will markets turn? Obviously not today, but we must remain cognizant of the fact that they soon will in the same manner as before without exception. Is this then the ultimate bottom? Not in my opinion, but we'll save that discussion for last.

(60/30-Minute Charts: SPX)

Dialed down to intraday charts, we see a clear call play entry at 2:00pm when price action sold off to new session lows and buried stochastic values in oversold extreme reversed to head higher. Solid entry points were found above the descending trendline (green) on each respective 30-minute chart.

Yesterday saw price action break neutral wedges just past 10:00am and rally strong most of the session from there. The move held up very well indeed with no signs of looking back until 3:00pm EST when the rug got snatched out from under this rally and price action plunged.

I sat right in my chair watching 60/30 and 10/5 (not shown) minute chart signals all line up in bearish reversal fashion but dismissed the notion of loading up on puts. Stupid charts... it was 3:00pm and the Dow up +220 points. Who in their right mind would fade that?

I've seen this setup happen literally hundreds of times and ought to know better than to doubt such powerful alignments. So I set stops on open calls and played two measly put options just to have a toe in the water should things dip from there. Set my stops and took a brief nap to shake off utter exhaustion from our weekend road trip across the country.

I woke up 40 minutes later to see the puts had since swelled in a big way. Can you believe the Dow shed almost 200 index points in less than 40 minutes? I can and should have at the time. Chart signals supercede logic but heeding them is another matter of mind over emotion in itself.

So when today's selloff spiked the VIX above 30.00 and all 60/30 and 10/5 minute charts went bullish from the lows, aggressive day traders had a green light to pounce on high-risk call plays. I happen to know that SPX 1150 calls were clearing at 9.50 when this happened, and they reached a high sale of 15.50 not long after when the afternoon surge rocketed from there.

Trust the charts!

(60/30-Minute Charts: Dow)

Right now the Dow seems poised to continue its late-day recovery from the lows. Thought we couldn't use Fibonacci values for intraday charts? Nonsense! Just look at how price action tends to magnetize at these values. We can also determine support when prices move back down as well.

The 30-minute chart at right shows two trendlines in place: support and resistance. This will also help us determine intraday strength and weakness tomorrow as well.

(60/30-Minute Charts: QQQ)

The QQQs continue to post ascending consolidations, which are bearish patterns. Hourly stochastic values (left) have plenty of room to ascend while thirty-minute signals (right) show the first little hint of weakness.

As these charts show, the QQQ has been a very tough index to trade lately in comparison to the S&Ps. While the OEX and SPX offer trades in both directions, the QQQ has moved continually down. By the same token it has been immune to numerous rogue spikes and dips to blow out directional trades, so put plays have worked quite well.

(60/30 Minute Charts: OEX)

As with the SPX and Dow, the OEX looks to ascend on Thursday itself but plenty of overhead resistance exists. The 582 area lies at the lower trendline of the hourly bearish pennant and it also happens to be a 62% retracement bounce from Tuesday highs to Wednesday lows.

Wonder where these stochastic values might possibly make a bearish reversal? If 582 stalls price ascent out while stochastics turn down, buy puts with confidence!

(Monthly Charts: Dow & NDX)

Broadest picture of all. Monthly charts show the Dow and NDX recent history from "pre-bubble" until now.

The Dow remains relatively overbought on a historical basis or at the very least is far from oversold. Stochastic values are bearish and suggest the long-term decline has merely begun.

NDX is much farther along in the shakeout process but lacks any sign of bullish reversal itself. It has fallen from a historical high of 4,800 down to 1,400+ and stares at an uphill battle all the way from here. I would wager that 1,055 is more likely to be reached than 3,800 area by the end of 2002 or before.

Here is one reason I believe broad market action will continue to grind sideways to lower into the future, quite possibly for years. Those who think a bottom is in or right around the corner at most must be looking at other proof than I have to work with. Just like today's screaming put-play signals at 3:00pm that I refused to believe, monthly chart studies forecast what lies ahead for years to come.

Bullish? Bearish? Confused?
So to recap, I'm bearish for the near term as shown in 60/30 minute charts. I'm bullish for the medium term as shown in weekly/daily charts. And I'm bearish for the long term as shown in monthly charts. Any questions?

One might reasonably ask how this can be. Why not just buy distant-month puts right now and take a much longer nap? Excellent question!

What if you & I had done that the past four times weekly/daily chart signals were in oversold extreme since last October? How well would our put plays have done on the subsequent bear market rallies that follow a VIX above the 30.00 level? Not good at all. We need to trade the time horizons that affect our chosen vehicles. Just because I believe the markets will churn sideways to lower for years means nothing about next week. Markets could be at the zenith of another failed rally and we'd lose big money holding puts thru that.

Nothing frustrates most traders more than volatile, whipsaw markets like these. Just when a favored market bias is developed and backed by emotional comfort, markets lurch the other way. It remains a skilled day trader's market right now and all others who try to force buy & hold or part-time tactics on current action suffer. I don't like that fact at all, but the markets don't care about my preference nor do they even know I'm alive. All we can do is play in harmony with that which the markets have to offer.

You'll notice I've not mentioned anything about HWP & CPQ, MSFT reaffirming earnings smoke & mirrors, INTC's usual misguidance, Thursday's NAPM or any other details like that. I omitted them for a reason: they do not matter for more than a few hours at most. All we need to know is reflected in the charts as an actual measure of dollars at work in the market. Right now that reflection suggests lower prices at first, then higher prices ahead but only to a certain degree. Make sense? Each timeframe is a directional bias in itself.

So, the warning remains in place: do not fall in love with either direction. We are destined to see plenty of both straight ahead, and sometimes in the same session as endured today!

Best Trading Wishes,

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