Option Investor
Index Wrap

BEARS & BEAR TRAPS

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THE BOTTOM LINE -
Now I am friendly to bears and other critters and it pays to be friendly to the current bearish correction; read, play puts. However, tomorrow (Friday) or the following trading day (Monday) expect the bulls to raise the roof, if not the market, with the bear holding sway. The market is oversold now on a short-term basis - that's one thing.

The other thing worth noting is about bear "traps". A bear trap is a reversal that occurs AFTER a stock or index goes to a new relative low, followed by a fairly immediate rebound. I keep one eye for this possibility, having gone to sleep before sitting on good put profits figuring I was all comfy and cozy. Anyway, some charts are seen below. That's for those who skip this section - ha, I don't do the same thing the same way all the time.

It's clear where the prior lows were that were exceeded. Watch for any hourly, then daily closes back above those lows noted at the dashed (level) lines - making for a possible bear trap reversal. What was (prior) support should now "become" resistance - if not, well cash in some puts, don't hole up with em.

By the way, or as my e-mail savvy Son says "BTW", as in "BTW Dad I need some more money" - the stochastic "length" setting is 21 - the slow stochastic indicator therefore on an hourly chart measures 21 bars = 21-hours of trading. When that indicator gets this oversold, don't be surprised if there is a rally, even a good one.

Also BTW, if you are a die hard bear, grisly or teddy, an hourly close above those prior lows only suggests being alert to what is happening in the next hour and the hour after that - there is still needed a DAILY (the moment of truth) close above these levels to suggest a possible short or longer-term reversal back to the upside - these levels to watch, for penetration, are: 1118 in the S&P 500 (SPX), 546-547 in the S&P 100 (OEX), 10,282-10,287 in the Dow 30 (INDU), 1978-1980 in the Nasdaq Composite (COMP), 1437 in the Nasdaq 100 (NDX) and 35.75 in QQQ.

TODAY'S TRADING ACTIVITY -
In the too much of a good thing department that I sometimes can't quite figure out - the Commerce Department reported today that the U.S. economy grew at a 4.2% seasonally adjusted annual rate in Q1" was that inflation jumped. Hey, anyone surprised!? Anyone been at the gas pumps lately! The GDP purchases deflator increased at a quarterly rate that represented an annual rate of 3.2%. The so-called "core" rate rose at a 2.3% rate.

Now, 3.2 is not raging inflation, but as I keep saying, when investor and trader psychology are running scared and nervous, the glass is half EMPTY!

The S&P 500 (SPX) closed at 1113.88, a fall of 8.5 points or 0.8% and the Dow 30 Average closed down 70 at 10,272, but this was after reaching 10,407 - and scaring the aforementioned bearish ones. The Nasdaq Composite (COMP) fell 30.7 points (1.5%) to 1,958.78.

Of course, as ALWAYS happens, cause sooner or later given sufficient economic recovery, rates are going to go back up especially with Fed Funds, at what 1% !! - Duh - nevertheless, when the moment of truth arrives, no one seems prepared for this reality. As has been said, those that don't study history are doomed to repeat it.

So, the current down swing or correction, that has been going on for a while can be seen as an attempt to price into the indices, that "easy money" is not going to go on forever. Fear takes over from greed for a while? If you want to see fear, greed and loathing, just participate in the frenzied bidding wars for houses in place like Marin County - that's just an area I know about, there are plenty of others that are too hot not to cool down!

Semiconductors were among the leading sector hit in the tech wreck slide - this after LSI Logic (LSI) put out sales targets for Q2 that were below expectations. Needless to say, the SOX Semiconductor index got hit, and closed down some 2.6%. Networking stocks, oil services on profit taking, computer box and hardware makes and airlines - remember the pump story and hey, even frequent flyer tickets aren't free anymore as there are these fuel surcharge fees creeping in.

OTHER MARKETS -
Bonds also succumbed to inflation fears with the benchmark 10- year T note down 10/32 at 95 23/32 to yield 4.54 percent vs. 4.50 percent on Wednesday - this is the highest yield since early- September. The dollar fell 1.2% - (yea! Opps - I sold an apartment in Spain that will close in Euros) against the euro with the greenback finishing at $1.1984. The dollar was down 0.2 percent against the Yen to 109.82 yen.

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:
Hey guess, where the S&P stopped today - right on that trendline! Amazing sometimes how that works. 1105-1108 is the key support right now - with 1118 as key near resistance as mentioned above.

Given the oversold and the basic bullishness that still out there, I doubt that SPX closes under 1100-1105 absent a very bad event. Put holders, don't let those profits slip away!

The Call to Put ratio is getting more bullish but the S&P is not a bullish play based on this indicator alone - by the end of this correction, I anticipate a reading or two at and below the bullish line - which is when equity put activity gets more heavy than it is now. One of those contrary facts of life, is that the herd is wrong. Maybe bulls should avoid packs and bears only lead a solitary existence.

S&P 100 Index (OEX) - Daily chart:

With the looks of the downtrend channel, the oversold reading coming up and all, downside looks limited to 540, maybe one shot down to 535 - take put profits and run and take a fling in OEX calls if 535 is seen.

Nasdaq 100 (NDX) Index - Daily:

1410, maybe a quick dip to 1400, is my target on NDX, with upside potential back up; to 1450 on a rebound.

Nasdaq 100 tracking Stock (AMEX:QQQ)- Hourly:
Contrary to what I said about a target to 35, then maybe to 34.50 or 34, in the short-term I think that the Q's could rally some first, probably back up to 36.30 or so.

I am covering short positions Friday and play the bounce - but then what else does a trader do but trade - especially if I don't buy options looking for a short bounce at this juncture.

Good Trading Success!

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