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Index Wrap

Just Another Anthrax Wednesday

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      10-17-2001          High     Low     Volume Advance/Decline
DJIA     9232.97 -151.26  9489.33  9226.95 1.44 bln   1143/1964	
NASDAQ   1646.34 - 75.73  1754.01  1646.34 2.26 bln   1415/2215
S&P 100   554.67 -  9.47   569.15   554.26   Totals   2558/4179
S&P 500  1077.09 - 20.45  1107.12  1076.57             
RUS 2000  424.49 - 10.04   437.23   424.48
DJ TRANS 2228.50 - 69.22  2302.24  2228.50
VIX        37.12 +  1.90    37.23    34.23 
VXN        67.11 +  3.10    67.11    63.48
TRIN        1.48 
Put/Call    0.63

Just Another Anthrax Wednesday
Austin Passamonte

What a difference thirty minutes can make. That's how long the markets were able to hold session (and recent) highs before our daily dose of anthrax news infected raging bulls. Once shorts covered their losing bets on IBM & INTC and momentum chasers had flashbacks to 1999 earning runs squelched, reality set in and swiftly collapsed price levels on a moment's notice.

One must question why those lofty index levels were reached in the first place. Surely it wasn't from fundamental reality that IBM or the economy was poised for a recovery anytime soon. And INTC's report was abysmal at best. We have to admire them for doing the best fan-dance act seen in a long time when it comes to fast & loose accounting practices.

Remember all those quarterly reports when venture capital gains INTC amassed in other tech darlings fell to the bottom line and fattened overall performance? One would think that subsequent losses should be handled the exact same way in fairness but no, INTC decided to make those a one-time write down instead. Very tricky mathematics if you ask me, and one of many reasons why I wouldn't buy & hold that company at gunpoint right now.

But such is the sort of stuff that drives IS beloved Fundamentals Guy absolutely nuts. I'm a trader who really doesn't care about market direction, company shenanigans, etc. Just lay out the rules for us to play by and give clear indication of market direction is all I ever ask. Up, down or sideways is beyond my control to affect so valuable time & energy is spent trying to decipher which way price action is headed next.

And that's a yeoman effort these days. Up until now we've had bullish sentiment oblivious to bearish reality, which is nothing new. However, daily injections of new anthrax scares have kept market action gyrating wildly intraday. Up & down or down & up have been the normal daily developments whence more often than not we end up relatively unchanged for the day. That works for intraday traders who can pop in and out on a moment's notice but the way fast-market conditions crop up all the time precludes and prevents viable predetermined entries targeted the night before.

This drives deliberate, analytical traders absolutely bonkers. Some people are simply pre-wired to need time, planning, research and deliberation to take trades. The very thought of making decisions on the fly is terrifying to them, but that's precisely the winning approach right now. Much like a military leader under live fire, the best laid plans can be blown up on a moment's notice and instant decision-making is the difference between life and death. Perhaps financial markets don't carry quite the drama and magnitude military action does, but this loose analogy remains the same for both.

What could possibly face us next? We'll go to the charts for near term guidance subject to change on the next scroll of "breaking news" that crosses our TV screen tomorrow:

(Daily Charts: Dow & QQQ)

All major indexes are once again showing bullish daily charts. Both Dow and NDX(QQQ) stochastic values are about to roll down from overbought extreme. The Dow is sitting smack-dab on 50% retrace from previous high to low with 8,950 area at 38% the next solid point of support. The NDX has formed a very bearish engulfing candle today and expanding wedge which means great instability as well.

(60/30 Minute Charts: Dow)

Near-term market charts show price action plowed thru uptrend support and collapsed from there. Stochastic values are oversold but look to become more so on Thursday with any further weakness ahead.

(60/30 Minute Charts: QQQ)

Same for the QQQs, with 30-minute charts looking to have more room downward before any type of support is reached. My guess is for 28 area to be reached next and could find a bounce near there.

(60/30 Minute Charts: SPX)

S&Ps look much the same as NDX...

(60/30 Minute Charts: OEX)

... as we see in both SPX and OEX mirror indexes. Huge plunge in the final half hour of market action when buyers boycotted the action and large sell-on-close imbalance brought the shorts back in earnest.

Do As They Say
President Bush hits the microphone at least once a day imploring we go on with normal lives and not allow terrorism to affect us. Then numerous cases emerge from governmental offices and things shut down in a hurry. America is not comforted by a congress and other public offices falling prey to this festering pestilence.

And I'm not saying that all such precautions aren't mandated: every step for safety taken so far is imperative and prudent. But it would be ludicrous for anyone to think life has not been vastly altered by the recent global events. No way everyone can just resume activity as normal when continual clouds of fear & doubt rain over us. Those who expected markets to find a certain bottom on September 21st and never look back from there might be mistaken. Stocks have rebounded farther & faster than most people ever thought they would, but that does not make for an end to the bear.

Terrorism has affected us, has changed our way of life and also market behavior. These are as skittish and volatile conditions as any seen in the recent past, and heaven knows we've endured a bunch. I would not expect smooth action to return anytime soon and my guess is we see indexes roll over and plunge on any further negative market or world news.

Forewarned Is Forearmed
I continue to get volumes of email from traders who've applied what we teach about trading index options that are making money and having fun. I get equal amounts of mail from traders who are getting carved to pieces by persistent whipsaw action. Once again let me be perfectly clear in my opinion on trading current markets: if you are not a skilled market veteran who can trade by reflexive action, stay out. If you are not a polished day trader with successful track record, stay out. If you are someone who needs time to make decisions, form a plan of action and become emotionally attached to that, stay out.

Stay flat and out of these markets at least until next week if not longer. We are going to see plenty of up & down volatility as indexes bounce from resistance to support and things will likely remain wild. I nor anyone else I've seen in the website world cannot shelter or protect new traders from this danger. The lure of chasing price action higher or lower results in buying tops and selling bottoms. The decision to overextend risk capital or hang in a trade too long results in painful if not staggering loss. A time & place exists in the market for everyone, but the next two sessions (at least) are only for hardy, battle-tested veterans.

If anyone feels compelled to follow trades tracked in any trading model from months ago when warned until months from now when things may settle down, please know what you are doing. Use 100% risk capital instead of stops when possible and tiny amounts of money at risk besides. It is far easier to lose than make right now and I have the testimonials (outside of IS trades) to prove it!

I have no idea how the next two sessions will go, nor does anyone else. We could see massive selling continue or a sharp bounce off support that rallies into Friday's close. Perhaps investors will come to grips with what anthrax really is: bacteria that is not contagious and easily killed with antibiotics. Or perhaps they realize the war on terrorism is not nearing an end but just about to begin. The herd's emotional take on either side of this clear reality will choose the ultimate direction markets take, and we have no way to quantify what the collective decision will be tonight.

Best Trading Wishes,

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