Option Investor
Index Wrap

Markets Look For An Excuse To Move. . .

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       10-9-2001           High     Low     Volume Advance/Decline
DJIA     9052.44 - 15.50  9086.97  9004.14  1.1 bln   1488/1595
NASDAQ   1570.19 - 35.76  1607.20  1565.97  1.5 bln   1422/2094
S&P 100   541.84 -  3.04   545.44   540.30   Totals   2910/3688
S&P 500  1056.75 -  5.69  1063.37  1053.83
RUS 2000  408.68 -  3.50   412.27   407.87
DJ TRANS 2128.67 - 54.57  2185.91  2128.67
VIX        36.06 +   .15    36.62    35.57
VXN        66.26 +   .13    67.20    65.86
TRIN        1.18
Put/Call Ratio       .97

Markets Look For An Excuse To Move. . .
Contact Support

. . .But find none. A slow news day and lack of reasons for bullish optimism kept markets in a narrow trading range and knocked more time premium out of puts and calls alike. Some days (and weeks) are tough to trade. This is one of them.

Call it uncertainty, which stems from the unknown associated with war against an enemy practiced in the art of camouflage and hiding. It's the same unknown that will affect and determine corporate profits this quarter and forward quarters. "Visibility" is cloudy and uncertain. The economy, with the exception of the housing market born of cheap money, is in recession. There isn't any justifiable reason for stocks to be rising. Valuations are still high by "ownership of a business" and valuation standards, which means many little pieces of paper still trade with speculative premiums. In the long run, the downside may not be over yet.

A really good friend of mine and I correspond frequently. Today came a "present" in my e-mail, neatly wrapped in a pretty black bow, that sums the market up well: "The market was down, puts lost their volatility even though they were the right play and your guess is as good as mine as to what the media will hype for tomorrow and how the bubblelonians will react to it." Remember, markets are not good or bad. They just are. It takes courage to face the truth, and an extremely good attitude to profit from it as a trader.

Point-wise, MSFT can shoulder much of the blame for all three major indices suffering losses today. Why? The Supreme Court declined to hear MSFT's appeal for a new trial. Owners of that speculative paper, which trades at 42X earnings, saw $3.48 evaporate from the share price to close at $54.56 on nearly 50 mln shares traded. While that is not a record number of shares, it is nearly 50% over the average daily volume and is a major component of the Dow, NASDAQ 100, and the S&P 500.

However, as noted above, we are interested in the future as measured by "visibility", not in the past (except for historical chart patterns that make technical analysis possible). Much hinges on earnings in the coming weeks beginning with Motorola (MOT) tonight. It is not so much that earnings for this quarter will be weak due to the September 11th attacks. Everybody knows that and all transgression will be forgiven if cloaked in those words. Rather, stock prices will be affected by the outlook of coming quarters (which is to say nobody knows for sure what will happen to stock prices). Any company offering an outlook of more than one quarter just is not shooting straight. Thus get ready for sideways market action if uncertainty remains, with mention of the attacks constituting a "get out of jail free" card for companies a little light on revenues or earnings.

As for the charts, shall we?

Dow Industrial chart (INDU):

Here is the rundown on the Dow. Weekly chart appears to be hitting minor resistance around 9150-9200, but the stochastics are still pointed up - bullish. The daily stochastic is rolling over, pointed down, and now crossing down from overbought - bearish. However, the daily chart also shows consolidating price action as the stochastic falls. That means that there is some hidden strength in these minimal declining days, and the low volume confirms that. Sure, investors are not biting, but they are not selling either. More interesting are the 60/30 charts. They have approached support of 9000 and formed bull flags in the process as the stochastics have approached oversold. That indicates a trading bounce may be near. Personally, I will be looking to swing trade calls if the right setup materializes tomorrow.

NASDAQ-100 chart (NDX):

NASDAQ is still the weak hand despite being highly "oversold" on the bullish percent charts. Starting with the weekly chart, stochastic reads bullish, but candles say bearish and it can't get out of its own way. Hmm. . .wonder if this has anything to do with tech stocks? Be that is it may, daily chart are having trouble filling the gap and have run into the ceiling at 1300. Meanwhile the stochastic has rolled over suggesting there is more downside to come. However, for the swing traders among us, we can see a possible bullish divergence formation where lower stochastics couple with a higher low on the candles. If the stochastics can reverse upward from oversold while maintaining a higher candle low, it could very well result in a nice swing trade call play.

S&P 500 chart (SPX):

Not much change from last week on the SPX, but boy, is it getting interesting! Weekly stochastic is pointed bullishly up, but like the NDX is hitting resistance. The daily chart shows bearish divergence from last week holding true as the candles fall from a lower high. Perhaps candles will find support at the 20-dma of 1041 or at historical support at 1045-1050. Either way, the falling daily stochastic suggests the next major move is down.

However, the 60/30 charts are in a downright conflict over the next move. The red bearish triangles suggest failure at 1053 would make a good put entry while the shorter-term bull flags (green) suggest a call play on a (presumably coming) pop up. Stochastics support the latter too.

Confused? So are many others. Don't be. This is the perfect time to practice being absolutely market-neutral without bias. As noted above, the market is not good or bad, it just is. We play what it gives, which is sometimes nothing (like now), and trade only when the signals align for a high odds entry. We don't see any now and the conflicting bigger market picture on the SPX proves that.

The VIX is of no help tonight, showing 36.06, a high level of fear but nowhere near the highs we saw in September. It has plenty of room to fall if investors cast aside their fear and begin to buy. Never mind that they have no fundamental reason to do so. They will. And when they do, we will do our best to take a piece of that trend.

Wish we had more to write tonight about the great trades we will take tomorrow. Unfortunately profitable entry is elusive for now and we will have to remain patient for the next entry.

Oh, for those interested, wholesale inventories will be reported tomorrow. Expect a 0.3% decline. Also, MOT reported earnings in- line, but a bit light in revenue expectation. They are unable forecast sales near-term. Reading between the lines, their estimates are for flat revenue rather than the previously anticipated early-2002 recovery. No visibility there, yet their speculative paper is up to $17.08 after hours from a $16.72 close.

Lam Research (LRCX) reported too and actually beat the street estimates, but offered no guidance. Price of speculative paper is up fractionally after hours.

If those two are any indication, some buyers may trickle into the markets tomorrow. For bulls, the low, consolidating volume is a positive - meaning no sellers - but that is about it.

See you at the bell.

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