Option Investor
Index Wrap

Plodding Higher

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        12-19-2001        High      Low     Volume Advance/Decline
DJIA    10070.50 + 72.10 10088.30  9919.80 1.45 bln   1528/1643	
NASDAQ   1982.80 - 21.90  2007.76  1971.07 1.90 bln   1605/2059
S&P 100   588.72 +  5.34   590.25   580.10   totals   3133/3702
S&P 500  1149.56 +  6.64  1152.44  1134.75           
RUS 2000  482.07 -  3.42   485.49   480.02
DJ TRANS 2644.66 - 12.61  2662.08  2632.30
VIX        23.57 -  0.59    25.01    22.90
Put/Call Ratio      0.61

Plodding Higher
Austin Passamonte

The gap-down open this morning quickly popped higher and then did absolutely nothing else from there.

(Five-Minute Charts: OEX and QQQ)

The first hour of trading consolidated near Tuesday lows and then zoomed higher upon several bits of good news. President Bush trying his best to posture the incentive package thru both houses of Congress is good news to those who await their pork. Citigroup announced its own spin-off to unlock greater value from the sum of its parts not reflected in the whole. That's about all the spark buyers and shorts covering needed to pop prices back toward recent resistance, where all indexes died soon after.

I tried to buy the first dip after it paused a bit from the lows before spurting higher but was thwarted by cable-access gremlins. Internet access worked fine all night and all day except for the few moments I tried to enter a buy-limit order on SPX 1150 calls at 4.00, their current "ask" at the time. Needless to say they traded up to 8.00 not long after and maybe better, but I didn't have the stomach to look beyond there. My little ten-lot would surely have bought a few lunches this week and next had it cleared.

But missed money is a cliché in the life of option trading that I long ago learned to (almost) make peace with. What does the future hold?

(Weekly/Daily Charts: Dow)

Technicals continue to flash all sorts of bearish warnings but what does price action do? Trudge higher. Should everyone just chuck all the charts and buy every dip like it was 1999 relived? Possibly, but I'll sit out that attempt. Several hundred emails from traders who went broke trying that in 2000 and 2001 still ring in the front of my mind and I impatiently wait high-odds entry points either way.

Dow's weekly chart is cloudy and the daily chart bullish for now. The past four days have tacked on +300 points to this index the hard way, in very choppy fashion. Nothing has come easy the past several weeks and I don't expect that to change for at least a few more ahead.

(Weekly/Daily Charts: QQQ)

We could say that the weekly chart here is weak and the daily chart ready to pop higher. Which will prevail? Beats me... I will not try any buy & hold plays either way until some smokin' hot entry signals present themselves. Scalp, scalp for me until then, but not in this symbol at all.

(60/30 Min Charts: QQQ)

Here's why: the Qs used to behave in a very methodical fashion, offering more & better wedges and stochastic reversals than the S&Ps did. Those days are over for now, and perhaps the rebalance will return this index to better behavior. For now it's just a collection of ugly charts across the board that I see zero signs of directional bias to get in front of.

(60/30 Min Charts: SPX)

Same outlook for the S&Ps (SPX pictured here). There has not been a screaming entry point since December 14th when both 60/30 chart signals aligned in oversold extreme and popped higher from there. Choppy, noisy signals all the way as the trend ended and volatility returned.

As for tomorrow, what do you see? "I see nothing; nothing at all" as affable Sgt. Schultz used to say on Hogan's Heroes. Stochastic values are pinned in overbought extreme, bearish ascending wedges forming but daily-chart signals (not shown) still rising in bullish fashion. What's a trader to do?

Trade carefully. When charts get ugly like this their signals are confused for a reason: the action is artificial, up or down. Right now we have triple-witch unwinding of positions and option pressure is pushing various leadership stocks around. Keep in mind that option volume increases dramatically each year with no end in sight. That makes the study of volume and price action much less reliable than it used to be.

Nowadays we have people writing covered calls on stocks they don't want to hold. We have people writing naked puts on some they desire to invest in, albeit at lower prices. Speculators are steering more and more into buying options than shares due to shrunken trading accounts or desire to lesson overall dollar exposure.

Once upon a time we had a majority of people buying stocks they intended to keep for a while, otherwise known as "strong hands". Now more than ever we have buyers with short-term outlook in mind, which used to be known as "weak hands". Does that sound like less volatility or greater to you? Can you see an end to this pattern or will it grow stronger? My guess is we see the current bubble extend into early 2002 when things might become very interesting indeed.

Meanwhile, each expiration week and especially triple-witch events will endure drawn-out volatile chop as positions get unwound over time. That's a large part of what fogs our mirrors when trying to guess future market action. Great for short-term, reactionary traders but quite tough on most everyone else. I would love to see that change for other people's sake but fear it will only get worse.

My solution for handling times like these when high-odds entry points are scant is to get a bit more defensive. If you can't stand watching market action go by, it's fine to dip your toes in but consider doing so with less money than usual. This has not been a highly prosperous December for me: my broker may soon send get well cards after seeing the volume of trades (and commission) dropping off. I'd love to make three or four trips a day in the market but it simply does not exist. What can I do about that? What can you do about that?

Nothing. Nothing at all. The market will not give us what we want: it will give us what we get and nothing more. It doesn't know or care that we are alive, and never will. Best we can do is try to shape ourselves around it because the market will NEVER mold to us.

I wouldn't say that current trading (other than day trades and a few market neutral approaches) is the pits, but it sure is close. Those who try to eke out profits from the long side of options or stocks are playing in a topsy-turvy stretch where noise outnumbers substance. I feel for the people frustrated by this reality, but there is nothing anyone can do to change that.

We can only hope that Thursday and/or Friday offers something of interest to all. The masses are prepped for a Santa Claus rally that may have begun four days ago. Only time will tell and we'll tag along too if we can, but be stingy with risk capital in the process!

Best Trading Wishes,

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