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Index Wrap

Down The Home Stretch

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       WE 11-16         WE 11-11         WE 11-02         WE 10-26
DOW     9866.99 +258.99  9608.00 +284.46  9323.54 -221.63  +341.06
Nasdaq  1898.58 + 70.10  1828.48 + 82.75  1745.73 - 23.23  + 97.65
S&P-100  588.07 + 10.08   577.99 + 18.00   559.99 -  7.99  + 14.18
S&P-500 1138.65 + 18.34  1120.31 + 33.11  1087.20 - 17.41  + 31.13
W5000  10486.67 +189.46 10297.21 +280.40 10016.81 -168.72  +290.64
RUT      451.31 + 13.21   438.10 +  5.03   433.07 -  5.58  + 12.95
TRAN    2497.37 +176.68  2320.69 + 74.03  2246.66 -   .92  + 73.30
VIX       27.17 -  1.59    28.76 -  3.64    32.40 +  1.87  -  5.31
VXN       55.04 -  3.55    58.59 -  2.60    61.19 +  4.28  - 12.37
TRIN       0.99             0.90             0.92             0.87
TICK       +750             +784             +701             +828
Put/Call    .50              .74              .70              .53

Down The Home Stretch
Austin Passamonte

Throw out next week's market absence by the big pros and we have less than six calendar weeks left this year. Investors have begun looking forward to next year and reflecting on this one passing as well. Individuals and funds that watched the latest rally go by while waiting for a pullback to jump aboard might be eating themselves up over missing much, most or all of the move.

This is especially true for mutual funds suffering a drubbing on the way down and failing to catch the high flyers up 100% to 300% on the recent ramp higher. Talk about double whammy! What do you think this masse of frustrated folks will do each time the market dips and even pretends to turn higher from there? That's right... hammer up the markets once again.

We can rationalize what stock prices or market levels make sense from an investor's valuation standpoint 'til blue in the face but that means nothing in the midst of an emotional rally. Kind of like those barroom fights I used to be... uh, have seen before where all sense of reason is set aside as fists fly. Once the testosterone wears off and pain sets in, rational regret is soon to follow. Especially if that realization comes in the back seat of a government-owned vehicle while explaining the situation to those outside the action.

Never underestimate crowd mentality to sustain irrational action longer than outside onlookers deem reasonable. Markets are nothing more than human emotion measured with dollars at risk. For the past two weeks we've seen endless technical signs of a very tired market, but adrenaline can take exhausted bodies much farther than one would think.

When I sit down on nights like these to draw up a bunch of charts and try making sense of it all, my intent is not to paint a biased picture either way. On the contrary, I actually think in my mind what revelations might leap out at me this time, almost like a blank canvas comes to life in front of those with a vision for what will materialize soon.

I also like to use a few different tools to mix up my approach and then cross-compare signals and especially price points of significance across different studies and/or time frames for a certain symbol. Care to join me in tonight's endeavor? I sure hope so, or I wasted an hour of my life on a Friday night drawing these things up to share!

(Weekly/Daily Charts: Dow)

The Dow's weekly chart (left) shows retracement from May highs down to September lows and back up again. Readers ask me where I determine relative anchor points to measure. Obviously we need to use lows and highs, with recent lows on this one quite easy to spot. I begin there and then pull the anchor point up to each previous high looking for price congestion to materialize. This tells me where significant points of resistance/support lie, and from there we can measure corresponding fractions above and below.

In this case we see where 9,300 level was a centerline for five straight weeks until price action finally broke away. Using consolidation theory that the pause from 8,100 lows to 9,300 in the Dow was half of the eventual move, we then extrapolate the 1,200 Dow points difference to 9,300 and arrive at 10,500 as an eventual target higher. See any points of reference where that matches up on the weekly chart? Yep, 75% retracement of the entire range!

Should the Dow find its way some 650 points higher in the near future without pulling back to support first, I would look to short that 10,500 level in a serious way. DJX bear-call credit spreads being one clear choice.

But daily charts (right) show the index is now rising in agony as it bumps the resistance line of the ascending channel from 9/21 lows. What we do here is draw a trendline thru the middle of a price pattern that touches a maximum amount of price bar ends. Note how so many end at resistance or support? We then trace a line of support below and resistance above in equidistant measure to gauge deviations from the norm of this price magnet.

Some of the retracement channels I drew by hand while others were "snapped" on using Qcharts toolbar feature. Results are pretty much the same: we'll have an idea of where resistance and support lie within the persistent uptrend right now.

The past three days have held near resistance while next support at the mid-value price magnet (black line) is near 9,600 area and rising. All we have to do is leave this bracket in place on our daily charts, and if the Dow retreats to that center line and holds we go long. If it breaks and closes below, we go short in expectation of the next bounce from red line below.

Stochastic values are mixed to weak in overbought extreme right now, but are not in the midst of a bearish reversal quite yet.

(Weekly/Daily Charts: SPX)

Same with the SPX. It sits on mid-line support with overhead resistance (green line) near 1175 area right now and rising from there. A drop to the black line that holds is a long play while a break AND CLOSE below is a possible put play to the red line target.

Stochastic values are weak on these charts at best.

(Weekly Chart: NDX)

The NDX weekly is a slightly different view. It has ridden a long channel down from all-time highs in early 2000 until now and beyond. For the first time in all of 2001 it is trading ABOVE the mid-line value, a very bullish feat in itself! Yeah for the techs [loud applause]!!!

And they could conceivably run to that nefarious 2,000 index level where three measures of resistance lie in wait: upper channel line, horizontal resistance and emotional resistance to the round, whole number. With weekly stochastic values looking the way they do, I'd guess we buy the next round of buy & hold longs on a drop to the black line of support instead.

(Daily Charts: BTK & SOX)

Here's the daily-chart retracement channel view from techland, where the Biotech (left) and Semi-Conductor (right) depict what's ahead. These two leading components both sit square on support lines and show price highs descending the past three sessions as well. That gives us little wedges (not drawn) to watch for near- term breaks above on a rally resumption or quite possibly below if the move needs a breather for now.

Stochastic values are mixed to weak at best, with SOX signals in the very beginning of a possible bearish reversal right now.

(Daily Charts: BKX & CYC)

How about a view from two of the bigger old-economy sectors? We'll peek at banking and cyclical sectors working their own daily chart channels. Banking (left) bumped heads first while the cyclicals (right) seem to be following suit. Stochastic values are weak at best, and the next high-odds move seems to be a return to support at the black lines soon.

Now, we can plainly see that these indexes are all in strong uptrends. I will leave these channels in place on my daily charts and watch for the first break below the red line of support on more than one leading sector. Indexes will soon follow and that will be very high-odds confirmation that the trend has changed. Bulls (and bears) wonder if the trend will indeed ever change, and the answer is a resounding "yes". We shall see plenty of ups & downs in the daily charts ahead. 1999 is dead and gone, with ramps unable to last nearly as long. Is 2000/01 dead as well? Could be, and perhaps the deep declines are behind us too.

Conclusion
One thing we've noticed and pointed out in here the past two weeks is rapid sector rotation. Certain big caps rally in price as volume declines then flatten as another sector takes its turn. This suggests to me that the same tired dollars are chasing tails looking for the next momentum pop while $2.2 trillion dollars still grows moss on the sidelines. Why isn't it being put to work? We hear all those market bulls drone on about how cash only earns +2.2% return right now and they cannot understand why the floodgates haven't opened to awash these markets far, far higher.

May I suggest a possible answer? Tell those buy-side bulls who never met a chart they wouldn't implore us to buy right now with our money (not theirs) to have a gander at that NDX weekly chart. Which point between Jan 2000 and Oct 2001 would being long the market look better than +2.2% guaranteed return? I have received well over one hundred personal emails from readers who have lost between $100K and $5 million cash from year 2000 to date. How many of them would prefer +2.2% on that money right now instead?

Folks, the masses are not convinced this rally is for real and with good reason. They've been burned too, too many times in the past two years and grow more cautious all the while. We may indeed have seen a bottom on 9/21 and the markets might continue higher for now, but there will not be a straight-up shot without pullback of significance ahead, or the Nasdaq will be at 8,000+ by this time next year. I'll happily trade that and bet a few others in here wouldn't mind seeing it either, but pink elephants will walk under my treestand in the woods long before that happens.

Summation
Next week will either be a very droll, low volume event or a wild, low volume event depending on news-driven catalysts or lack thereof. The biggest players in our arena will be off from now until 11/26 and my tiny footsteps will follow them. Rest assured I will not crack open my broker's browser until Monday after next at the earliest. Feel free to approach next week as you see fit. I do expect the last stretch from then into January to be a very active time with plenty of opportunity to profit from. Which direction may prevail eludes me tonight, but we remain armed with simple tools that give us insight before it happens.

Best Trading Wishes,

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