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Is That A Dip Or The Next Market Top\?

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      11-28-2001          High     Low     Volume Advance/Decline
DJIA     9711.86 -160.74  9867.20  9706.61 1.41 bln   1069/1289
NASDAQ   1887.97 - 48.00  1941.79  1887.97 1.87 bln   2078/2365
S&P 100   578.92 - 11.91   590.83   578.69   Totals   3147/3654
S&P 500  1128.52 - 20.98  1149.50  1128.29             
RUS 2000  453.70 -  7.01   460.71   453.70
DJ TRANS 2457.95 - 51.35  2508.52  2457.95
VIX        27.84 +  2.63    27.91    26.09 
VXN        52.21 +  2.94    52.37    49.53
TRIN        2.57 
Put/Call    0.66

Is That A Dip Or The Next Market Top?
Austin Passamonte

This time last week everything was full-bull ahead. The markets staged a big rally ahead of Thanksgiving Day and followed up with a sequel the Friday after. Media pundits were noting how everyone was waiting for the pullback that may likely never happen.

Guess what? It always happens. Right about when the majority of sideline players can't take it anymore and capitulate to chase extended markets higher, the top is in. I learned that reality myself years ago by chasing symbols that just wouldn't come in, only to buy the tip top and regret catching what I chased. Maybe I'm the only one reading these words who has bought exact tops and sold exact bottoms before, but I know others will eventually make the same missteps as well.

No one should be certain right now that the markets will bounce or continue to drop. A strong case could be made either way. There are certainly times when near-term market action is very clear but this ain't one of 'em.

Let's cruise some charts and see if that offers clarity at a time of uncertainty:

(Daily Charts: Dow and SPX)

Daily charts of the Dow and SPX show the indexes rejected at upper resistance in their ascending channels since 9/21 lows. Both have bearish stochastic values and it's prudent to believe the next levels of firm support should be the lower channel lines (red) and targets near there (light blue).

Stochastic values are not plunging straight down with power behind this move, but rather squiggling their way lower for the past few days. Not a sign of downward strength so far, but that could change in a hurry.

(Daily Charts: NDX and OEX)

Similar views for the NDX and OEX. The NDX just broke support today and stochastic values are making a bearish touch or "kiss" at the close, a sign that further downside is ahead. Look for the bottom channel line to offer support, but if daily-chart stochastic lines roll over and turn down, lower prices are in store instead.

Rather than draw a channel for the OEX we connected highs and lows since 9/21 and formed a bearish ascending wedge. With its stochastic values in early decline as well, lower prices are in store.

How much lower? We'll kick that around in a bit.

(60 Min Chart: QQQ)

A look at the QQQ's hourly (60-min) chart shows the past 13 sessions forming a bearish expanding wedge, sign of great instability. You can say that again! Price action has bobbed within a meager three-point range the entire time, or about 120 NDX points instead. Maria and gang call this a major rally? That used to be the range we saw when waiting for confirmation of trade fills back in 1999/2000! Now it takes three full market weeks to cover the same ground.

Stochastic values are trying to turn bullish and soon will, but the pattern calls for a touch of that lower line near 37.50 before a firm upside bounce can be counted on.

(60 Min Chart: OEX)

Here's a messy chart. The OEX (and SPX, not shown) both broke out of bull flag consolidations week before last and rolled higher from there. Since that time, prices have channeled within a meager 18 point range for nearly three market weeks. Up and down, up and down to the delight of day traders and chagrin of everyone else.

Now that the channel is broken, what next? Logical support comes near the center of that previous consolidation or near 576 to be exact. With bullish intraday stochastics, we should see a turn near there. Keep in mind the bigger picture calls for further downside to come, but a bounce higher as the dip buyers return is likely first.

Always A Catalyst
For the past couple of weeks we would think the markets would never sell off again. I began to get heavier streams of email from readers who ask what happens if weekly & daily stochastic values don't release from oversold. Of course they will do so eventually, but the readers want to know how much farther an overbought market can soar. The answer is almost always, "not too far".

It takes a catalyst to push price action out of a coil, which is essentially where the markets have been for two weeks. One big sideways to slightly higher coil. Now enter Enron, total collapse of the 7th largest company on Forbes 500 list and loss of over $66 billion in market cap value. That money did not evaporate into thin air. Someone is holding the stock, bonds and other debt instruments that make up this value. Who is it? Lots of companies feverishly working to hide their mega losses buried in some pro forma B.S. fashion the next earnings cycle around.

But as my great buddy Buzz always says, you can't hide an elephant in a cherry tree. Erase $66 Billion (with a "B") from the marketplace and some brand-name companies will take a hit. We don't know if this will be a hiccup or something other stocks choke on, but it shall impact the markets at least for now.

That's how it goes when rallies seem to have clear blue skies ahead or sell offs envision nothing but darkness and doom. A surprise from left field pops up to possibly change the entire scene. Tonight we don't know if the two-day decline is merely our next high-odds call play dip or start of a different trend.

I'm purely a day trader right now with zero interest in holding much of anything over the close. Sometimes I can feel market direction with certainty while other times I'm left clueless and this is currently the latter. All around me I see great traders making observations, placing trades and getting whacked both directions. If forced to play buy & hold I would have shorted this thing all the way from Dow 9,500 and still be underwater tonight. Instead I'm happy to safely scalp small moves here & there when intraday clarity permits.

This is far from my preference, rest assured. I am also very frustrated right now for readers who desire, expect or demand buy & hold trades on a frequent basis but I just don't see that right now. We could stuff the channels with plays in each model but if the majority don't win, what of it? Hence, my choice to day trade and great reluctance to make buy & hold bets at this time.

Without waffling, I would play the downside from here if forced to pick a direction. Overbought markets can only go so high with all that overhead pressure. When weekly chart signals tip over in the near future, I'll pour on the put play steam myself. For now we are still trapped in the range and looking weak but market bulls won't quit that easy. Expect plenty more volatile days ahead and continual range-bound action is most likely.

The Enron debacle could change all that. Who knows how many skeletons are hidden in countless closets? When this thing unfolds there could be serious surprises for a diverse number of companies and rest assured it can't be good news ahead for them.

Guard your capital zealously. Trade smaller than usual and beware tight range, whipsaw action. The struggle for direction continues with no long-term winner in sight.

Best Trading Wishes,

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