Option Investor
Index Wrap

Open Markets\?

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      10-08-2001          High     Low     Volume Advance/Decline
DJIA     9067.94 - 51.83  9144.81  9012.30  976 mln   1717/1894	
NASDAQ   1605.95 +  0.65  1621.11  1574.65 1.40 bln   1511/1975
S&P 100   544.88 -  4.50   549.38   541.53   Totals   3228/3869
S&P 500  1062.44 -  8.94  1071.37  1056.88             
RUS 2000  412.18 -  2.79   415.13   410.25
DJ TRANS 2183.24 - 26.18  2212.78  2148.31
VIX        25.91 +  1.25    37.55    35.88 
VXN        66.13 +  2.78    66.76    62.93
TRIN        1.09 
Put/Call    0.62

Open Markets?
Austin Passamonte

Are you sure the options markets were open today? I mean, price action never moved all day... did it? Typical light-volume holiday session where bond traders didn't have to show up while smart- money equity traders simply chose not to.

When trading with foresight it is seldom possible to tell which sessions will be dead versus those that may explode from nowhere without warning. Hindsight provides 100% accuracy and this was certainly one of the more dull sessions seen in awhile, although not the only one.

Common reasoning would have hoped that pent-up demand or concern over military action in Asia would release itself on the actual news today. If indeed that's what has market action coiling for the directional move, we'll have to wait until Tuesday or beyond before relief occurs.

A VIX reading in the high 30s continues to kill most day-trading efforts. Good money can be made on small-range sessions like today when the VIX is in its low 20s and worthless extrinsic values are minimal. Such is not the case right now and market makers are having fun just pushing bid/ask spreads around without much actual volume off the floor to keep them honest. Traders who expect to find success day trading need to wait for next Wednesday and the final three days of expiration or the VIX to shed another 15 index points. Expect next week to arrive far sooner than a VIX return to low 20s ahead.

And what does the rest of this week and beyond have in store? Plenty of indecision and potential range-bound chop is my guess. Let's examine why:

(Daily Charts: Dow, NDX, SPX, OEX)

A look at all daily charts show clear weakness. Parabolic uptrend lines warn of weak support. Such trendlines that shoot straight up or down are chart cannot hold for long, as the strongest lines are horizontal and weaken by degree as the angle steepens either way. Candle patterns in the leading indexes could be considered "Evening Star" bearish reversals if we ignore Friday's doji which amounts to nothing.

All stochastic values have begun bearish reversals and are one or two sessions away from rolling out of overbought extreme unless price action moves above last week's price highs. Those highs marked points of resistance at or near important Fibonacci values as well. There is absolutely no evidence of bullish strength in any of these daily charts tonight.

(60/30 Minute Charts: SPX & OEX)

Here is where the picture becomes mixed. S&P indexes show near- term price consolidations in neutral wedges set to break on Tuesday with stochastic values poised for bullish reversal moves.

Higher price lows have been posted the past three sessions on an early drop and subsequent higher intraday close each time. In other words, we've had one directional move and merely sideways noise intrasession the past two trading sessions.

(60/30 Minute Charts: QQQ)

The Qs are mixed with chart signals undecided and wedge patterns incomplete.

(60/30 Minute Charts: Dow)

More like NDX than S&Ps, the Dow remains mixed to bearish near term. This suggests to me we see lower prices early on but the possibility of a bullish reversal in Tuesday's session seems likely.

Mixed Picture: Killer Waves Ahead
Which leaves me with the conclusion that we will continue to see volatile action washing open trades out in either direction. Just what we wanted to hear? Not hardly, but markets appear poised in range-bound fashion. We could see a break out of those near-term wedges to the upside tomorrow, but with daily charts looking that bearish I would not take call plays with more than one-day trading hits in mind.

By the same token, trying to play puts every time all chart signals align in overbought extreme has not worked for the most part, either. Each time we get an alignment it merely serves to mark a slight move up or down before price action bounces and goes flat. When markets manage to stage a decent move it comes out of nowhere and against the grain, which tells us current action is driven by artificial events rather than measured weakness or strength.

Define "artificial events"? The war effort in Asia is a prime example. What happens over there this week has absolutely no material affect on whether chip or bank sector prices should be higher or lower today. I knew a newsletter editor who would argue why such interpretation of the market could be bullish one day and bearish the next. This guy had more financial degrees than a thermometer and always an answer as to why the same fundamental news is bullish on Friday and bearish on Monday, but he also relied on pure technical analysis to select trade entries.

So do I. Right now the technicals are telling us markets are totally undecided about which way to head next. Daily charts suggest the recent ramp was sufficient and needs to be back-filled for strength. Weekly charts indicate recent highs in May to lows last month have markets oversold and ready to run in the days ahead. Which charts are correct? Both, one within the time frame of another.

In the same manner this current rally which stalled last Thursday chopped its way up those charts, we might expect the same gradual decline as well. I'm not sure that daily-chart signals will move straight down into oversold with textbook clarity... they might just drop a bit and reverse part-way between extremes. I do think market action is going to be very noisy for awhile, the type of movement that carves most traders to pieces in both directions and maddens them greatly.

Hopefully this is wrong, we enjoy trending markets that move methodically and everyone gets rich in the process. Before that can happen there must be a return to agreement of all chart signals in unison and that does not exist right now.

Swing Trades Hurt The Most
Recent market behavior hampers swing traders the most. Day traders can try to catch small moves and exit near breakeven or slight gains if they are fortunate and skilled. Buy & hold traders can pick a direction, take 100% risk capital and use it for plays without worry of trying to hold stops during turbulent action.

But swing traders who thrive on catching decent moves over a one to three day period have a hard time right now. Underlying action throws them all around to pick off stops on what seem to be the best of recent entries. Slow, sideways consolidations after that see option values sitting dead in the water and wasting away as expiration ticks closer. It has been a murderous year since January 01 began to play the swing trade game and I don't see any improvement before Jan 02 rolls in if not well beyond.

Taking a high VIX, artificial market influences, poor trading setups and very little intraday price movement on actual option contracts leaves us with the following conclusion: it is one hell of a tough market right now. One or two decent wins are wiped out with one or two adverse moves that counter all technical indication. The use of TINY amounts risk capital, preferably without use of stops should be the #1 approach all traders with no exceptions adopt right now.

I'm playing ridiculously small positions for paltry gains or loss out of total fear for these markets. They do not offer a good risk/reward ratio right now and that is pure fact. Emails continue to pour in from readers and non-readers alike who are taking every manner of long or short stocks, options and spread plays you can imagine while suffering loss in the process. None of these have been IS-suggested plays and they run the spectrum of every scenario possible. What does that tell us? Times are treacherous, so let's not get caught in the prop wash. When market action gives us ideal setups soon we will act with smaller than usual amounts of capital and go from there. Until then, it remains a buyer- beware playground in both directions of the see-saw ride.

Best Trading Wishes,

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