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Index Wrap

Basing Or Topping: That Is My Question

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       WE 11-11         WE 11-02         WE 10-26         WE 10-19
DOW     9608.00 +284.46  9323.54 -221.63  9545.17 +341.06  -140.05
Nasdaq  1828.48 + 82.75  1745.73 - 23.23  1768.96 + 97.65  - 32.09
S&P-100  577.99 + 18.00   559.99 -  7.99   567.98 + 14.18  -  6.98
S&P-500 1120.31 + 33.11  1087.20 - 17.41  1104.61 + 31.13  - 18.17
W5000  10297.21 +280.40 10016.81 -168.72 10185.53 +290.64  -154.23
RUT      438.10 +  5.03   433.07 -  5.58   438.65 + 12.95  -  2.89
TRAN    2320.69 + 74.03  2246.66 -   .92  2247.58 + 73.30  - 60.45
VIX       28.76 -  3.64    32.40 +  1.87    30.53 -  5.31  -   .61
VXN       58.59 -  2.60    61.19 +  4.28    56.91 - 12.37  +  3.30
TRIN       0.90             0.92             0.87             1.19
TICK       +784             +701             +828             +342
Put/Call    .74              .70              .53              .80

Basing Or Topping: That Is My Question
Austin Passamonte

On a daily basis I communicate with traders who have anticipated holding periods that range from many months to an hour or less in duration. Each of them asks me where I think the markets are going, and each deserves a different answer. Does the buy & hold trader looking to sell deep into 2002 or later really care if 60/30 minute charts are overbought right now? By the same token, does a daytrader care if monthly charts are turning bullish for the first time in years?

The answer should be "no" to each question.

(Daily Chart: Dow)

Did you hear that the Dow closed above its September 11th high for the first time tonight? Marvelous, but is still banging its head against resistance. We bisect a descending trendline from late May 2001 and ascending channel from September 25th to see where any traffic jams lie. Looks like a break and close above 9,700 takes it higher while break below 9,450 is not what bulls want to see.

Stochastics turning bearish.

(Daily Chart: NDX)

Similar for the NDX, except it is well above that May/Nov line, which should now be support near 1400. Not to mention the fact that ascending channel's lower line comes into play near 1450 as well. So it is there we seek support while 1600 looms above if challenged. Stochastics clearly bearish.

(Daily Chart: SPX)

SPX and OEX (not shown) are a blend of the previous two. Neither well above descending resistance nor under, the S&Ps split the difference and rest right on support.

Break below 1115 - 1117 area where both lines X would leave next support around 1075 based on this study alone. Stochastic values are also just tipping bearish as well.

Therein lie our points of bearish and bullish lines to play as price action dictates next week.

I'll Let History Speak For Me Ever lament the fact that you get boring email? Not the case at my house! Readers Write:

"So, I've been a trial member here. U guys are just bears, right? Seems that way... "

Another:
"And u are such an a------! A bear masquerading, and using your service as a prop, to move forward your agenda. We're on to you...the word is out... "

My agenda???

If it seems like I've been too bearish lately, you're right. Could have bought calls last week and rode them through choppy waters up to nice gains by now. And I won't offer any excuses about missing some upside gains in a market that I still believe is much closer to a near term top than bottom.

But there will be no lengthy verbal soliloquies tonight or anything droll as that. Nope, if a picture is worth 1,000 words like the old saying goes, we can cut this Market Wrap real short and move onto other writings instead.

(Weekly Chart: OEX)

O.K. fellow peers in the trenches, let's reflect on recent history together and see if you can help me out here. We've chosen the OEX as our example but any major equity index will do. Dial up your favorite and play along... doesn't make one iota's difference.

Since January 2000, over a full & solid 23 months of market action we've had exactly six times where weekly chart stochastic values turned bearish, four times within overbought extreme. I went ahead and projected lines of reference up from each of those six events out of the last two years into price action at the time. Notice how I traced each move early, not the actual bearish cross.

Here's my question: how many of those six events, on average one every four calendar months was a screaming call play entry? If you had bought calls or call LEAPS at each of those points in time, how rich would you be right now? Where did the market head soon after?

Do you see any correlation at all between those previous six events and right now? Do you think the media was overtly bullish or bearish each time? Do you think the VIX was high or low relative to recent range it was in each time? Do you think put/call ratios were bullish or bearish? Do you think hot money was screaming into SOX, NWX, INX and all the other kinky sectors filled with dead stocks walking, or were buyers cautious and defensive?

But It's Different This Time...
Is it? Why? Don't fight the Fed? Fighting the Fed worked like crazy on each of those six overbought events for two years straight, didn't it? What has changed? Is the economy certain to improve in 2002 or do we just hear the same raging-bull analyst lips flapping like rudders on a duck's posterior each time?

Have markets truly bottomed this time, instead of like they told us the past six overbought events? Will the markets just keep running away this time whereas they failed to do so the past six events? Weren't we goaded by those same buy-side analysts who never met a chart they didn't like to buy the farm today or forever miss out? How many times has that train circled the tracks and run over those former analyst "market gods" in the past 23 months? Has it changed course to steam straight forward this time instead?

Summation
It's your money. Lay your bets the way you choose. If call plays and long shares seem a lead-pipe lock right now, rest assured we've seen the same thing six times before. I happen to believe that history repeats itself until thwarted by powerful forces that change variables involved. With numerous tech stocks up +100% to +300% since 9/21 lows, have the variables changed in market behavior since early 2000?

Notice how many sentences were questions tonight, steering in nature or otherwise. I thought it would be more fun to ask instead of profess or profound, and suggest you study some weekly charts to see if this is merely an anomaly or not.

History does not guarantee future results, but winners tend to win and losers tend to lose. Trends continue until conditions change to thwart them. Are we there yet?

Best Trading Wishes,

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