Option Investor
Index Wrap

Bulls, Nearly Gorged, Slow Their Charge

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       11-15-2001           High     Low    Volume Advance/Decline
DJIA     9872.39 + 48.78  9903.04  9808.25  1.4 bln   1492/1644
NASDAQ   1900.57 -  2.62  1922.12  1882.84  2.0 bln   1721/1917
S&P 100   590.44 +  1.28   592.36   585.86   Totals   3213/3561
S&P 500  1142.24 +  1.03  1146.46  1135.06
RUS 2000  449.39 -  3.43   453.04   449.39
DJ TRANS 2454.00 + 61.03  2458.48  2389.71
VIX        27.78 -  0.82    29.10    27.45
VXN        57.45 +  1.07    59.84    56.64
TRIN        0.95
Put/Call Ratio       .71

Contact Support

Grass in their tummies, or gas in the air, nobody knows the real condition of the bull. We can speculate all we want, but we have no definitive answer as to whether or not the bull is getting ready to roll over, or consolidating for its next run up the charts. As Austin so aptly pointed out in the Market Pulse, with so many wanting so badly for another shorting opportunity, it may be some time before we see it, and it may not last long once it appears.

Yet all indicators of technical significance from points of resistance to Bollinger bands to stochastics, wedge formations, etc., are in extreme overbought territory. However, since everybody knows that, the crowd cannot always be right, and bulls could scale a contrarian wall of worry set up by bears. Call it a good, old-fashioned tug-o-war with the power of the hoof nudging out the power of the claw.

On a sentimental basis, not surprisingly, there is a lot to "feel good" about. The war in Afghanistan is progressing beyond expectation by all reports; the American Airlines crash in New York is currently presumed to be an accident; inflation is nil; rates are low; auto sales are HUGE (amazing how zero interest can stimulate demand even in tough times); jobless claims are not as bad as expected; oil is getting cheaper by the day; and some companies are beating their former guidance.

Don't get me wrong. There is a "yeah, but" rebuttal to each of those points above in favor of the bears. However, the bad news is being shrugged off or ignored simply because people are receptive to feeling good after the mourning of the 9/11 tragedies and the previously "never-ending" declines in the market through the end of September. The last 45 days have been a welcome sigh of relief. People seem to be just waiting for something to feel good about. When something touches their little "feel good" receptors, they spend money and buy stock.

Of course, this should not surprise veteran IS readers as we frequently mention that stock market cycles are based fully on the ebb and flow of human emotion. Lately emotion has been bullish and could remain so for a while longer despite the technically overbought conditions that currently exist. If bulls want a bubble, Greenspan will hand it to them, as he has already, just to keep the economy from cratering in the Earth. The good news is that economic indicators, despite the downward pressure, have begun to surprise to the upside. And it's a darn good thing because at the current rate of 2%, the Fed does not have much more rate-cut rope to work with.

So what does that mean to us as traders? Despising the irrationality of investors and the market's overbought condition, as I might (heck, I was thinking that even at the market lows), I have to say that bulls still have the upper hand. And as illogical as it seems, these overbought markets are not in the mood to sink, which still defying all logic, they can move higher yet.

What? A call for bears to throw in the towel? If you can't beat 'em, join 'em? Well, sort of, as long as you carry a spare towel for later and tread lightly with caution in the hoof prints.

But enough of that. We'll cut it short here tonight and get to the charts with full understanding that charts convey very little right now except their ability to indicate squirrelly upward trade in overbought conditions.

Dow Industrial charts (INDU):

For the Dow, we can see it marching up the weekly chart about to push through another point of resistance just over 9900, which it did briefly today. Yes, the oscillator is overbought, which is to be expected using a 5(3)3 stochastic setting. The question is, will it turn down anytime soon? The daily chart too remains bullish having broken out of its indecisive megaphone pattern. Still the stochastic remains overbought. The 60/30 charts have been following a nice ascending channel over the past two days, but later in the day fell outside of it, suggesting some weakness in the current trend. Yet 30-min charts are turning bullish again.

Similar patterns repeat in the NDX and SPX too.

NASDAQ-100 chart (NDX):

NDX weekly chart shows overbought conditions at resistance. Daily chart shows good strength relative to the other major indexes - impressive given the semiconductor weakness borne of crummy AMAT earnings and guidance. NDX is not as deep in overbought territory and DELL may give it a boost, at least initially, tomorrow morning. Yet like the Dow, NDX fell outside its 60/30 ascending channel, displaying a bit of weakness.

S&P 500 chart (SPX):

The Grand Daddy of them all, the SPX, is looking strong on the weekly and daily too with breakouts over resistance on both timeframes. Yes, both are overbought. Market opinion: who cares? However, the 60/30 charts like the other two above have hiccupped out of their channels, suggesting some weakness. Support into the close also suggests that it will not last and to look for perhaps a bit more strength.

Common across all weekly/daily charts are the clean break over resistance. Across the 60/30, though currently following a decline, both have begun to show signs of recovery. I would look for the 200 dma to become the next major sticking point to bullish progress. Those offer some potential upside targets for now. 10,207 for the Dow; 1702 on the NDX; and 1189 on the SPX.

Will it get there tomorrow? Not likely. But there is every opportunity to bump and grind its way there given the current "feel good" sentiment pervasive in the market right now, and despite the technically overbought conditions. Keep in mind that "overbought is indicated with the current 5(3)3 setting on the weekly charts. Stochastic settings at 10(5)3 show a still ascending line that has yet to enter overbought on the weekly chart. Translation: there may be more bullish move left until we reach some challenging form of resistance, like the 200-dma's across all major indexes.

Other stuff: Fear is still waning as the VIX falls to 27.85, its lowest level since August 30th. Tomorrow is option expiration day and we could see big swings for nice daytrading opportunities. However, please remember to use risk capital only as these are treacherous times even for daytraders. Also, note that the CPI and production rate figures come out before the open tomorrow.

This is an upward chopping market suitable for nothing but daytrading. If you are not inclined to risk only small portions of capital, better to sit this expiration out and wait for a cleaner trend to appear. The trend is your friend, but not if it stabs you in the back.

See you at the bell.

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