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Index Wrap

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       12-11-2001           High     Low    Volume Advance/Decline
DJIA     9888.37 - 33.08 10015.90  9866.85  1.3 bln   1557/1564
NASDAQ   2001.93 +  9.81  2032.63  1995.09  1.9 bln   1948/1703
S&P 100   579.32 -  1.92   587.42   577.93   Totals   3505/3267
S&P 500  1136.76 -  3.17  1150.89  1134.32
RUS 2000  474.77 +  0.59   478.19   473.43
DJ TRANS 3586.59 - 12.51  2602.70  2573.79
VIX        25.69 -  0.31    26.27    24.96
VXN        50.73 -  1.39    52.10    49.49
TRIN        1.35
Put/Call Ratio       .73

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That sound you hear is the anti-climactic result of another Fed rate cut. Don't get me wrong. Fundamentals Guy has plenty to say on the topic (and its bigger implications) from the top of the nearest soapbox. But it's the same thing he's been saying for over a year now - we've experienced a bubble and it's going to take a while to fully pop. There will be no large capitulation. It will happen one investor at a time, as each decides in their own moment that their money can produce a better return elsewhere. Only when everybody thinks the market stinks and can never smell good again will we see "the bottom".

In the words of Yogi Beara, "It aint over 'til it's over".

Now back to the Fed rate cut - a quarter of a point, or a 25-basis point (bp) cut to 1.75% for the Federal Funds rate and 1.25% for the Discount Rate. I studied economics in college and I can't even remember what those mean anymore. But it doesn't matter. Neither does the Fed-speak that went along with it, which essentially said that inflation isn't a concern (don't look for rate hikes any time soon) and despite early signs of economic stabilization, the economy is still weak (the door is open to another rate cut at the FOMC meeting on January 29-30).

Here's my take, which has little to do with trading and a lot to do with the big picture. Consider for moment that this the lowest Federal funds rate in 40 years and the lowest discount rate in 52 years, both of which are approaching zero, and both of which have been cut for the 11th time this year. Now stand back for a moment to view the expanse in years from the Great Depression until now.

During that period of time, have there ever been economic conditions throughout the world and here at home that have necessitated what I would call veiled panic behavior from the Fed? Have there been warnings from the brightest investors around (Buffett, Templeton) that this could be a bubble-popping that may last from 3-8 years? Have you ever seen so many formerly "stable" utility companies or other industrial companies (and many other technology companies for that matter) living so close to the alchemist-accounting edge? Major drug company calling for flat earnings? The answer to all four is "no".

I might add here that this mis-statement of accounting thing is going to grow some long legs that will carry many of the high and mighty companies down with it. Companies can't evade sound business practices in a popping bubble, but that's another story.

This is a recession like no other that we have seen in the last 70 years, perhaps longer. (Ok, Wingnut. . .we have a padded room for you and your vivid imagination. Nurse, sedate him quickly!). Unlike previous recessions, this one started with the business sector and flowed downhill to the consumer, who is just becoming affected now. In the past, it has been the other way around with the consumer leading business downward. This time, we are going to get to see what happens to business when the consumer weakens in an already weak business environment.

Aside from doing damage caused by the Fed in the first place, now can you see just how desperate the Fed is to prevent economic catastrophe? Frankly it reminds me of Japan 13 years ago, and look what happened to them and their bubble. In the words of Dow Theorist and 42-yr. market veteran, Richard Russell, the Fed MUST "inflate, or die".

It also reminds me of Californians back in the late 1980's (I can say this because I was one back then), who arrogantly believed they were insulated from the fallout of a savings and loan debacle. WRONG! California was the last, but it got clobbered too with defense cuts. If we believe it can't happen to us, contrarian theory says that it will, and is consistent with the market's job as the Great Humiliator.

The point is that the economic picture isn't as rosy as the news reporters would like us to believe, and I'm sure I'll get hate mail for some the above, which I gladly accept. Frankly, like Austin, I would love nothing more than to see the market skyrocket to old highs, but I can't imagine it doing so even in my wildest, bullish analyst-induced hallucination. I'm still looking for a series of mini-bulls and mini-bears in this long-term bearish market.

All that said. It's just my take on a little piece of news among many. And the news means little when the charts tell a bigger story for us traders; especially since market movement was non- existent in front of the Fed announcement today. No, I'm not ready to call MOPO yet. But there is some inherent weakness in the trading.

Take a look over my shoulder and note tonight the experiment with both the 5(3)3 AND 10(5)3 stochastic. I am working under the theory here that I can trust the 533 not to lead me astray if the 1053 is in extreme territory. Remember, it's an experiment or work in progress

Dow industrial chart (INDU):

Contrary to the bullish sentiment that had dip-buyers out en mass on every hint of weakness over the last two months, we see some weakening in the Dow, especially on the 60/30 charts where the oscillators have not been able to reach overbought in the last few days in both the 533 and 1053 settings. Daily chart shows the same thing along with bearish divergence between the candles and stochastic action. Even the 533 on the weekly chart is showing signs of rolling over finally. Bears can also relish the notion that the 200-dma, upper Bollinger band, and 62% retracement level beat those candles over the head with resistance. 9800 is the next horizontal support followed by the 9700 roughly at the 50% retracement off the lows. Maybe the Dow will find some strength again soon having fallen for the past 4 days, but the stochastics suggest decent put trades lay ahead. No MOPO though.

NASDAQ-100 chart (NDX):

NDX charts have the same feel and pattern as the Dow with one exception. The daily chart broke its 200-dma and has remained above it despite the weakness in other major indexes. Today, the NDX bucked the trend and actually posted a 15-point gain, despite the red, golf club-shaped candle. Yet a bearish wedge is forming that would give another downward trading sign were the candles to break under 1630 on the 60-min chart. All said, the 200-dma will fall easily if the broader market falters. Stochastics show weakness across all timeframes - looks like a decent put position trade opportunity if timed correctly on any pop and drop in the morning.

S&P 500 chart (SPX):

SPX too is looking bearish with a stochastic rollover across all time frames and a bounce down from resistance at the 200-dma, upper Bollinger band, and 62% retracement bracket on the daily chart. Yet, following four days of selling, strength may return even though that is the weakest performance we've seen on the SPX chart in a while. Stochastics suggest a fall will continue.

The VIX however at 25.69 tells us nothing except that there is some "worry" still left in the market - too much in fact to predict a great downfall ahead. If the VIX were closer to 20, I could get a lot more excited about the downside.

The facts are that stochastics across the board suggest further price weakness lies ahead, at least for the time being. It may be short-lived, as all dips have been in the last two months, especially since the broad indexes (NASDAQ excepted) have been down for four days now and still held support at the same levels as the lows of last Wednesday's blowoff. That is the latent strength even as the oscillators have fallen.

Once the candles fall through their 50% daily retracements, which have held as support, and the VIX falls into the low 20's, I'll get serious about playing hard to the downside. But the oscillators don't lie, especially when lined up like they are now, and the bearish side looks better now for trading than I've recently seen. Time to sharpen the claws and move toward the stream? Yep, but I could be turned away still. It isn't feeding time. Yet the stream is calling.

See you at the bell!

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