Option Investor
Market Wrap

Bovine / Ursa Battle Continues

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        WE 6-01          WE 5-18          WE 5-11          WE 5-04
DOW    10990.41 + 78.47 11005.37 -296.37 11301.74 +480.43  -129.93
Nasdaq  2149.44 + 38.95  2251.03 + 52.15  2198.88 + 91.45  - 84.10
S&P-100  649.61 +  3.38   658.29 - 10.09   668.38 + 22.95  - 13.31
S&P-500 1260.67 +  4.85  1277.89 - 14.07  1291.96 + 46.29  - 20.94
W5000  11671.40 + 61.20 11849.89 - 73.63 11923.52 +432.18  -195.93
RUT      501.72 +  5.22   508.62 +  2.34   506.28 + 18.92  -  5.53
TRAN    2887.05 - 58.85  2929.20 - 49.75  2978.95 + 99.39  + 10.37
VIX       23.96 -  2.00    23.15 -  1.11    24.26 -  3.22  -   .24
Put/Call    .53              .62              .47              .63

Bovine / Ursa Battle Continues

Directional markets are slightly less common lately than Ally McBeal making her third pass to an all-you-can-eat buffet. Of the two I'd say broad market action is far more erratic and slightly less rational than Fox TV's malnourished starlet. Bulls & Bears continue to jockey, wager and guess which way equities are destined next in seesaw fashion.

Yes we saw several sessions sell off from last week into this as markets dove on bad news, but can you really keep up with market perception of news being bad or good? One session's negative economic reports is cause for concern that a recovery is further away than hoped, while the next interprets negative economic news as assurance of further rate cuts ahead.

Which is it? Enough already: negative economic news is either good or bad. Pick a conviction and please convict to it!

We must ask ourselves if "The Market" knows all and precludes near-term direction. Sometimes I think the market is clueless and hapless on where to go from here. Price action sure looks that way to me. If markets were predictive and all knowing, why have we endured so many extreme gap moves and short-squeeze rallies this year?

On the subject of news, let's forego what took place on Friday concerning who announced what and all that. By now anyone who cares has read the news, seen the news and is quite likely tired of news. On a personal note I really don't care if analysts are upgrading or downgrading the chip sector last, which seems to happen both directions every week these days. I concern myself only with how the market behaves and what it hints of next. The rest I'll leave to fundamentalists!

I had to do my weekly/daily chart work for the upcoming sessions ahead and figured it was just as easy to have you peek over my shoulder. Care to help me out? Let's go...

(Weekly/Daily Charts: Dow)

O.K. First up is the old index and it wants to blow away that 11,000 level no matter what. From here a strong catalyst is needed worse than a Mt. Everest climber needs air to do so. Both have tested high peaks numerous times and now remain in danger of sudden storms cropping up in the near future that may sweep them from their respective lofty peaks.

The Dow's weekly chart (left) shows historical resistant strength of 11,000 and we now see long-term stochastic action topping out in overbought extremes. This is not my favorite setup from which to enter bullish plays with reckless abandon... as a matter of fact I'd be looking for those weekly stochastic values to cycle down near oversold extremes before betting long-term upside from here. Bearish plays may be high-odds in the offing.

We also see what could very well be a double-top failure near the 11,400 level which is another less than bullish pattern. The daily chart (right) offers more upside hope. A steep bull flag channel has formed over the past eleven days as stochastic values cycled down near oversold levels now. Could continue down but a pop to the upside at any time is more likely now than it was back near 11,400 when everything was extended in overbought.

(Weekly/Daily Charts: COMPX)

The Nasdaq appears a bit mixed as well. Weekly chart at left shows rock-solid resistance at 2250, a point Jim has been speaking of as the line of declination for weeks now. Stochastic values are extended but could go higher as well.

Daily chart at right shows stochastic values falling straight down in bearish fashion and a tiny little three-day bear flag is shaping up as well. That's a bit brief to make determinations from but it's all we've got to work with right now. We need to see if it continues to build from there and will play a break to the downside as bearish confirmation as well.

(Weekly/Daily Charts: SPX)

The SPX looks feeble at best. Weekly chart shows a seven-week Bear Pennant forming, stochastic values curling over in bearish fashion and bearish stochastic/price action divergence as well. Fair for us to say that isn't an overall bullish setup right now?

The last three days have been forming a neutral wedge over in the daily chart at right. Again, too brief for conclusions but I'd be watching for a close below the projected formation as a sign of continued downside movement from there. Beware intrasession fakes breaking down and then recovering back within!

(Weekly/Daily Charts: BTK)

Biotechs look better than most for bullish speculators right now. "Biotech Investor" is an oxymoron, isn't it? Anyway, we gamblers love this sector and I'd look here for near-term strength in relation to the previous markets we viewed.

Weekly chart has stochastic values still rising straight up in healthy fashion, albeit within overbought extreme. Still has room to run. The descending channel (Bull Flag formation) dating back to August 2000 for the first time since saw price action close above the upper confines if ever so slightly.

Better than that, the daily chart at right shows stochastic values turning up and a clear Bullish Pennant broke out and confirmed strength on Friday. With a pattern low near 580 and high near 650, that gives us a 70-point upside target from the break to shoot for. A break at the 610 area plus 70 index points suggest the BTK could see 680 level before long.

Up Or Down?
So that's our view of the markets. Mixed to weak in the broad indexes while certain sectors show strength as usual. My best guess is we see choppy action (big surprise) with a downward bias through the summer. Pre-warn will challenge the bulls while June's upcoming FOMC will challenge the bears.

Make no mistake: traders are now addicted to the "Greenspan Put" rate-cut injection and will inwardly or outwardly expect the same once more. That's how addiction goes in hand with denial: the time will come when no more cuts are in the offing. Companies must stand on their own PE's to attract actual buyers who intend to hold for awhile instead of shorts getting squeezed to cover who can't wait to dump unwanted issues instead. That's the type of "buying" we've had since January's first Greenspan surprise and it is not actual investing to base a new bull market from.

We should expect strong volatility, mixed sessions and no clear trend from here for some time. Past the FOMC could see one sustained move in either direction. That's the best anyone can predict right now.

Cheap & Priceless Education
If it weren't for day-trading lately, Wendy would be buying far fewer shoes. Tough to buy & hold (or short & hold) anything without getting washed out at stops. Buy & hold is my favorite trading (allows for plenty of play time) while day trading is not but we must go where the money is. I'm looking forward to Sunday night's webcast seminar that will cover many of the fine points to day trading stocks, e-minis and options. There's still a bit of room in each session for any last-minute traders who'd like to join our interactive fun. Details are elsewhere in this newsletter.

Out Of Retirement
A few weeks ago I retired from writing at OI to focus on work over at IndexSkybox. Now I'm well rested and I miss you guys! Can I come back? Will you have me back? Hope so, because I'll see you again in Monday's Trader Corner.

Last time I left off on the first article of a series that covers the basics of daily-chart investing using technical studies similar to the examples we perused above. If interested, you can find that in the OI Trader's Corner archives or use the hotlink below:


Two more articles in IS built on from there and my next visit here will cover using weekly chart studies for buy & hold stocks and LEAPs as well. Anyone interested in catching up on the middle two articles are quite welcome to send a blank email to: Contact Support with "send OI articles" or something like that in the subject line. I'll forward articles #2 and #3 in the series in Wordpad format and we'll be all caught up and ready to go from here in one fell swoop. Fair enough?

As always, I enjoyed my time spent here with you immensely. Look forward to our next visit and hope you have a prosperous week while playing the right direction!

Best Trading Wishes,
Austin Passamonte
Contributing Editor

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