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Index Wrap

Yawn... Another Wasted Session

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       9-24-2001           High     Low     Volume Advance/Decline
DJIA     8603.86 +368.05  8649.39  8242.32  2.0 bln   2414/806
NASDAQ   1499.40 + 76.21  1507.51  1459.47  2.1 bln   2808/1109
S&P 100   513.03 + 21.33   516.35   491.70   Totals   5222/1915
S&P 500  1003.45 + 37.65  1008.44   965.80
RUS 2000  393.79 + 14.90   393.79   378.90
DJ TRANS 2129.99 + 75.15  2156.56  2055.25
VIX        41.33 -  6.94    45.52    40.05
VXN        69.52 -  8.21    77.79    68.93
TRIN        0.53
Put/Call Ratio       .55

Yawn... Another Wasted Session
Austin Passamonte

Don't know about you, but I'm getting tired of these monstrous gap-open sessions lately. All I hear about in the media is what a big day this one or that one was, when none of it really matters to the majority of option traders who didn't hold over the close.

Traders earned stones today unless they were willing to buy October calls (or sell puts) last Friday and hold into the weekend uncertainty. Not many elected to do so from the looks of this morning's time & sales sheet, and I for one was flat myself.

Option prices made minimal gains and entry points were scarce to nonexistent. Still, all was not lost. We did manage to see the VIX return to semi-lofty levels rather than insane, and indexes seem poised for the next directional move. Which way? Not so sure just yet, but we do have some clues to work with:

(Weekly/Daily: SPX)

First up, big picture. Weekly/Daily chart signals for the major indexes are attempting to turn bullish but have not managed to do so just yet. Keep in mind that they cannot call the bottom but will clearly identify the safest "middle chunk" of any trend and that should be to the upside soon. But for now, markets remain in a state of transition and vulnerable either direction.

(60/30 Minute: SPX)

Intraday charts paint a picture of indecision. After the opening pop, price action continued to consolidate as it drifted somewhat higher. A coil formation of consolidation near session highs should break in the direction it was first heading, which of course is up. However, these are bearish patterns and overbought stochastic values just turning bearish reversals warn of lower levels first.

How do we safely play these markets? Bias is obviously to the upside soon but a pullback (or more) could happen first. I would be an aggressive buyer of calls if price action managed to hold at or just above Bollinger Band mid-line levels as stochastic action turned bullish crossovers from there.

I would be a cautious buyer of puts on the way down to these levels while prepared to bail out or lose capital at a moment's notice in the process. Either direction is possible, but more upside potential exists by far right now than considerable downside potential.

(60/30 Minute: Dow)

Similar for the Dow, which might shed almost -200 index points by the time stochastic values return to oversold extreme, which we can expect to happen within the next session or two. Once again, I'd be a call buyer at the noted targets of potential support if stochastics make a bullish turn near oversold extreme at the same time.

(60/30 Minute: QQQ)

The QQQ looks a tad weaker than the leading indexes, which seems a bit odd. This lagging index should have less downside risk than the old-economy leaders, but may have very limited upside potential as well.

Readers still write to me and ask what I think about PCLN, JDSU and SUNW. What's there to think? They are all below $10 and no longer mean very much to market direction at all. I understand it will take many months for some tech bulls to realize these issues and plenty more do not and will likely never again lead market action anywhere at all. Consider them the "Polaroids" of this decade's bubble.

"But that cannot be... SUNW is a leader in its industry" tech bulls may retort. So? Polaroid was a leader in it's niche of instant photographs but it never again led indexes anywhere. Please don't confuse leadership in a sector with market leading stocks, because big-cap techs that bled to death since March 2000 have so much overhead supply just waiting to bail out "at even" that they cannot possibly recover to recent levels in the near future if not beyond.

(60/30 Minute: OEX)

The OEX appears the same as other leading indexes. Poised for a trip lower, but who can say how far? All eyes will be on the first stop at 502 - 505 areas with a successful bounce apt to move much higher indeed. A break below on the other hand would increase selling pressure should that come to materialize.

Shaky Ground
This is where trading will really become tough. If markets do move higher it could be on massive short-squeeze explosions like today that necessitate buying ahead of. A few market-moving reports come out this week, some pre-market and others at 10:00am. Expect plenty of extreme volatility to last at least the rest of this year if not longer. Severe technical damage was done to the markets last week and will take a long time to settle out.

I think it will remain wild & wooly with large-range days and both directions thrown at us. Not the words most traders want to hear and I'd sure love to be wrong about that, but prepare for more of the same and lots of it.

The Bottom Is In?
Define what period we are talking about. If one means for now or possibly this year, I think the answer is probably "yes". If one means a multi-year bottom where the mighty bull market will return, I for one reluctantly don't think so. Stocks are cheap in accordance to what their recent highs used to be, but I'm told Ebay still has a PE above 140 or so. Folks, that is not cheap and we have to ask ourselves how high such valuations can go during a possible recession. I even heard DIS had a valuation in the 90s and think it was Buzz who reported that last week.

Just because the Dow touched 8,000 does not mean it cannot or will not trade far lower in the next quarter or three, but I expect a tradable rally first. Tradable in the sense that we can expect high volatility and challenges to entry points, but once those weekly/daily stochastic values begin heading straight up from oversold I will look to buy & hold bullish plays over several sessions when possible. The results should be favorable indeed.

Summation
Tuesday will be a telling day indeed. Continuation or pullback and bounce should fuel the short covering blaze while further selling could easily test Friday lows once more. Daily news or rumor will drive market action and expect wild swings in either direction. A quiet session here & there would offer ease of entry for the next trades and we'd welcome that too.

Upside bias right now but without strong conviction until we see long-term chart signals steaming higher. Then play the upside with confidence, use the right amount of capital that let's you sleep at night and let a few session's time take over from there. Until then, do not fall in love with either direction!

Best Trading Wishes,

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