Option Investor
Index Wrap

Almost There

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       9-21-2001           High     Low     Volume Advance/Decline
DJIA     8235.81 -140.40  8438.41  8062.34  2.6 bln    802/2440
NASDAQ   1423.19 - 47.74  1454.04  1387.06  2.5 bln   1213/2794
S&P 100   491.70 -  9.32   503.02   480.07   Totals   2015/5234
S&P 500   965.80 - 18.74   984.54   944.75
RUS 2000  378.89 -  8.76   387.65   373.62
DJ TRANS 2054.84 + 20.98  2071.73  1942.01
VIX        48.27 -  0.77    57.31    47.28
VXN        77.73 -  4.76    91.79    77.73
TRIN        0.69
Put/Call Ratio      1.09

Almost There
Austin Passamonte

Thursday night Buzz talked about taking trips with his parents, never reaching the destination and being grateful for it. That may well apply to bullish traders this week as well.

It was a historical market week to follow last week's truly unspeakable crime. More sessions than not were smash down opens with huge gaps that ate up most of a day's move. Only Wednesday was a large-range session that began with a quiet opening: the rest were nearly a waste of time for those who hadn't held the proper direction over each close.

And it doesn't promise to be much different for a while. I think we'll see a few more down sessions, one or two reversal days and then gap-up, bear market short-squeezes opposite of sell offs. Soon we'll merely switch green for red and try it again wildly to the upside.

(Weekly/Daily Charts: Dow)

The above charts pretty much sum up why a rally will break out and stick real soon, likely to begin next week. No market loses this kind of ground without building incredible pressure the opposite way. Yes, there are some perma-bears out there who think the Dow will dive straight to 3,000 from here. They also think the NASDAQ index will just file bankruptcy and cease trading, too.

Then there are weak-hand shorts just beginning to get comfy with the idea that puts are easy money. Just short every up-move and cash in... simple as that. No different than buying dips used to be.

But the smartest shorts will begin to quietly unwind on every dip and scale in longs down there. That will squeeze ignorant perma- bears who will in turn squeeze weak hand shorts until poof! - instant short squeeze explosion. We saw the makings of that early Friday morning and it will happen a few more times next week. A VIX hitting 57+ and put/call ratios thru the roof assure us it's only a matter of time and not much longer at that.

(Daily Charts: SPX & OEX)

We don't really know where support lies on any index. It will be where the sellers exhaust and buyers find value they cannot pass up. We can measure where overhead supply waits to unload and each stop that becomes support will be another base to go long from when price action finally turns.

"When" being the key word because we can be sure a few more sell offs exist right in front of us as Friday lows get tested like all the others did. Failure to hold will simply mean lower lows to test from there.

(60/30 Minute Charts: QQQ)

Oops... misspelled the word "neutral" up there. Oh well, you get the picture. QQQ is coiling again like it usually does and offering entry points on which break to play next. One could draw these patterns as wedges or triangles, the exact interpretation totally subjective to all. A clear break either way should be a tradable event but stochastic values are just meandering their way up to overbought. Don't be surprised if they reverse from there and signal the next visit to 27.00 once again, but an upward move is likely.

(60/30 Minute Charts: Dow)

Same for the Dow, which did manage to hold higher session lows as did the other indexes. I do not think we turned from the bottom on Friday, but may have discovered it for now.

The economy is bad and getting worse, stocks are over-valued and a global recession is about to break out. Who knows if the ultimate bottom will be found this fall, next spring or beyond? We know that media pundits will proclaim the next bear market rally to have the worst behind us, but I for one would never say that. I will say that we go up soon and with power for quite some distance. Treat it as a trading rally only until proven otherwise and do not consider these levels ironclad for the future. I heard that nonsense in 1987 and others bought into it until 1988 rolled around to prove them wrong.

History does repeat!

Compromise A few readers emailed Friday with opposite opinions of our service, so let me start with the negative. My decision to idle Swing Trade and other models for what looked to be an extremely turbulent session was met with voices of extreme dissent once the big morning's pop had completed. They expressed disdain for missing out on what proved in hindsight to be a lucrative (albeit brief) market move.

Let me share my day with those who might care. We had a real good idea there would be a snap-back rally once all Dow components were open. At the time I was busy trying to type observations into Market Pulse a test of initial index lows resulted in higher lows while Dow cash index prices were +100 points above lows for the DJIA futures. These are clear reversal signs as archived in numerous past trading articles within the website.

When all chart signals lined up in oversold extreme I looked at OEX option prices and saw Sep 500 calls at .65 bid / 1.50 ask, so I placed a buy-limit order at 1.5 ask on 20 contracts and turned back to the Market Pulse keyboard for updates. A buy-limit is used because a market order in the S&P pits in a fast market can fill at 2.00, 3.00 or higher as prices pop on days like this. RAES system does not save us from bad fills when bid/asks gyrate all over the place

From there price action popped and I was quite pleased to think those calls could double soon. They were trading well above 3.00 before I knew it, but no order fill confirmation hit my screen. I double-checked the entry and saw that in haste to keep IS friends informed I typed in .15 instead of 1.5 buy-limit. I would have owned 20 contracts instantly at $150.00 each but no one on the floor was willing to sell for $15.00 this morning!

So I scrambled to buy something and ended up with other calls at 8.00 once I missed an entry for 6.50 minutes before. Prices ran away and I made a few bucks on the others but would have rode those 20 Sep 500 call contracts up from $3,000 to $10,000 gross as prices passed thru 5.00 on the way to 6.00 and back down again. Missing $7,000 gravy profits in less than thirty minutes was not fun, let me tell you. I wouldn't call it a fortune by any means and no one here will starve, but can you agree that $7K is worth twenty minute's effort to grab? Keeping others informed in this website hobby can be costly indeed.

I don't share this with you to encourage a flood of emails telling me what a great guy or incredibly-stupid fool I am, although a good case could certainly be made for the latter. Point is we can only accomplish things to a certain degree within this website together and no more. There does not exist a website or advisory service in the entire universe that can come close to duplicating what a skilled trader focused on the task can do. Mere lag time between someone uploading instructions to the recipient who must receive, read and act upon it can change actual entry points dramatically, specially on a day like today.

Our objective here is to teach you how to capture $7,000 or so in twenty minute's time like I missed today, and then we can all do it over and over together. How's that sound?

It Works!
Readers also shared some very encouraging things including this note from a good trader:

..."Oh by the way (again) I followed your instructions from yesterday night's wrap and got the first bounce in the morning and caught the first rally all the way up and sold at the high. I have to admit I am proud of myself - thanks to you guys at IndexSkybox. Hope to see you again in Denver in November. [K] Spain"

Well "K", glad to hear someone caught that excellent move and took advantage of a golden opportunity in expiration week. Anyone who takes the time to learn this game can indeed make incredible sums of money one week each month for the rest of their lives.

So we strive to do the best we can but cannot do it all. Given my preference I'd love to have us all in one room trading together. Wouldn't that be fun? Well, expiration week in November is the OI seminar here in Denver and I'll be trading a $5,000 account VERY aggressively to see where we end up from Monday to Friday. We'll post daily results in the website for those who cannot attend while those who do can share the ecstasy and agony with me in real life. Won't that be fun?

I'm looking for a few more whipsaw sessions that shake out weak longs and shorts alike. The herd is getting restless and will begin to buy real soon. They don't need any more reason than sick of selling to do so, and I'm willing to be large chunks of my trading account in the S&P pits that next Friday closes much higher than this one.

But I will not fall in love with either direction along the way!

Best Trading Wishes,

Index Wrap Archives