Option Investor
Market Wrap

Sellers Ambush Yet Another Rally

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        08-02-2000        High      Low     Volume Advance/Decline
DJIA    10687.50 + 80.60 10724.50 10587.50  990 mln   1582/1275
NASDAQ   3658.46 - 27.06  3753.95  3651.81 1.48 bln   1916/2058
S&P 100   783.02 -  0.99   790.94   781.51   totals   3498/3333   
S&P 500  1438.70 +  0.60  1451.59  1433.49           51.2%/48.8%
RUS 2000  500.22 +  2.45   501.95   496.41
DJ TRANS 2874.54 -  0.90  2876.34  2854.50
VIX        22.76 -  0.11    22.84    22.15
Put/Call Ratio       .50

Sellers Ambush Yet Another Rally

Hiding at every rally top are sellers that keep the NASDAQ's technical picture looking bleak. Today was the third spoiled rally attempt in the past four trading sessions as buyside conviction wanes. Choppiness continues to be the theme in the NASDAQ with fairly wide price swings. The onslaught that the sellers brought to the market late in the session was directed at many of the NASDAQ generals. CSCO traded down $2.25 to the critical $60 level. DELL gapped down on a downgrade and finished off $2.00 at $39.56. INTC felt the weakness also, losing $1.88 to $62.75. JDSU lost $4.25 to close below its 50-dma at $112.63. The theme: the big-cap leaders are feeling the selling heat as traders sell the rallies.

If you haven't noticed yet, I am very tech oriented. The NASDAQ is the market to me. And the sentiment for this index is deteriorating with every downtick. This growing negative trend is, as Jim has pointed out, seasonal. I won't go on about the seasonal factors that attribute to the recent trading pattern, as they have been rehashed over and over in the Market Wraps. What is important though are the results of these factors. Thin, choppy trading, more exaggerated moves, and a lack of true buying conviction. Does this mean that the markets are doomed? Not at all. We are just experiencing typical summer trading. And as a trader, this provides plenty of opportunity, yet caution is necessary. Because of the lighter volume, market moves can occur much quicker and more dramatically so short-term psychology is essential. Take your profits when you have them and cut your losses before they get too steep. If short-term trading isn't viable right now, go to cash. The silver lining of summer trading is the tremendous bargains that come about after the selling, especially with the blue-chip tech stocks like those previously mentioned. Build your treasure chest and make that shopping list as buying opportunities will follow. Until then, prepare for a rough ride to the FOMC meeting on August 22nd.

With earnings season all but over, the focus will be on interest rates and the Fed. Every piece of economic data is analyzed, digested, and questioned. Today was a perfect example of how investors and traders are indecisive at best when it comes to economic data. New Home Sales came in below market expectations at 829K vs. 868K, the lowest level in two years. The markets jumped up on the news released a half hour into today's session and the sailing appeared to be smooth. But this is just one piece of the puzzle. Waiting in the wings is Friday's Nonfarm Payrolls and the Unemployment Rate. The NASDAQ spent most of the day near 3750, a recent resistance level that sellers have held. It was in the last hour of trading that the sellers ambushed the tech index and dropped it to the lows of day. So what's happening here? Technical trading. Traders are staging calculated trades at key support and resistance levels. Most importantly, they are selling the rallies. This should be triggering red flags and caution lights.

In the 30-minute NASDAQ chart below, since we have broken the 3850 last Friday, you can see that we have entered into a new range. Last Friday's attempted bounce failed on GDP concerns. Monday was a classic dead-cat bounce as the bears snatched back those gains on Tuesday. And today, we got both sides of the action all rolled into one session, closing off 27 points to 3657. The question for the rest of the week is: Can the NASDAQ hold 3650? I would be amazed to see the NASDAQ hang onto 3650 in August. On Monday, the morning dip took the NASDAQ to 3615. I mentioned last week that the NASDAQ probably had its sights set on the 3580 level, the June 1st close prior to the gap up. Many analysts on the Street forecast the NASDAQ to test support in the 3500 to 3550 range. Volume has been declining and tells us that these pseudo rallies aren't with conviction. Today the NASDAQ volume was only 1.46 bln, not very strong. Should we be hanging our heads in dismay? Heck no! We are option traders and must seize this chance. Trading in QQQ puts has been very profitable in this recent decline.

Notice below how $90 on the QQQ's has provided very profitable intraday entries for quick trades. This is one of my favorite trades, if it goes my way, because not only do you benefit from the intrinsic value, but the volatility increases as the market sells off. As a result, in general, you are selling higher volatility on the exit side of the trade. It's a win-win situation, but timing entry and exit points is essential. The NDX.X, the NASDAQ 100 index, closed below the key psychological level of 3500, finishing at 3490.

Watching some of the NASDAQ 100 companies is a good way to gauge the overall market sentiment, and to trade the QQQ's. As I mentioned earlier, CSCO is trading near its critical support of $60. Many consider its health as a bellwether for the tech outlook. INTC also fell to the hands of profit takers and closed right at the low of the day. However, the big news of the day was DELL. U.S. Bancorp Pipper Jaffrey downgraded the hardware heavyweight to a Buy from a Strong Buy, stating that a 30% forecasted revenue growth is "unsustainable." They also cited concerns about weakness in the desktop business. As the hardware stocks continue to stumble, DELL below the key $40 level, closing at $39.56, a level not seen since February. The Biotechs had a good day today, minimizing the overall losses on the NASDAQ. Leading the charge was PDLI(+15.19), MLNM(+5.56), and HGSI(+3.63). Yesterday, PDLI posted better-than-expected earnings of $0.23, beating the Street by 5 cents, buoyed by higher sales of humanized antibodies that are made using their technology.

What about the INDU? I don't know, you tell me. Seriously, the INDU has put together two days of back-to-back gains that actually has made the chart a little bit attractive. After holding the key support level of 10500, minus the intraday candlesticks below, the INDU launched from there to stage what appears to be a decent rally. The index has received a nice boost from the financials, elevating it 200 points in just three days and poising it to challenge that difficult resistance at 10800. Yet, before heading to this point, the 200-dma lies at 10769 and may turn out to be a level of contention. If the buying interest continues in the financials, the INDU very well may take a shot at 10800. This would further drive the divergence between the NASDAQ and the INDU, which we haven't seen since the Spring. LEH lead the way, adding $5.75 to $118.50 after Bear Stearns raised its rating to a Buy from an Accumulate. Tagging along were: MER(+1.38), MWD(+1.25), and BSC, up $3.38 to a 52-week high of $58.63. Overall the INDU was very strong today with XOM(+2.88) on news that oil inventory levels were significantly lower than thought. Summing up the positive sentiment on the INDU is that INTC was the biggest loser on the day with a loss of $1.31. Not bad at all. Tomorrow, traders will be looking for follow through to confirm the INDU's strength. After the close today, Gap(GPS) warned that it will miss earnings estimates of $0.23 by 2 or 3 cents. GPS is down over $5 in after hours trading and may be a drag on the markets tomorrow.

Looking forward, Initial Jobless Claims will be released at 8:30 am EDT tomorrow as a precursor to Friday's economic data. Given traders' recent indecision, they may or may not react, but with the lack of any clear catalysts and concern over interest rates, the markets will most likely gyrate as it digests the data. I expect volatility to increase with the lack of positive news to drive the markets. Technical trading will continue to be the trend. Buyers beware: opening any long positions should be done so with extreme caution. The sentiment here is short-term bearish and I certainly will stay close to my QQQ puts. If it doesn't feel right, then stay on the sidelines in this choppy market. Remember that this is typical summer trading and patience will pay off in the Fall. Take your profits quickly and when in doubt, stay out.

Matt Russ
Asst. Editor

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