Option Investor
Market Wrap

A Beautiful Day?

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      01-09-2002          High     Low     Volume Advance/Decline
DJIA    10094.09 - 56.46 10270.88 10069.45 1.45 bln   1527/1599	
NASDAQ   2044.89 - 10.85  2098.88  2034.09 2.28 bln   1693/1946
S&P 100   589.62 -  2.88   600.02   587.80   Totals   3220/3545
S&P 500  1155.14 -  5.57  1174.26  1151.89             
RUS 2000  494.74 -  3.16   503.08   494.74
DJ TRANS 2775.15 - 48.19  2826.65  2769.27
VIX        23.29 +  0.79    23.68    22.03 
VXN        48.28 +  0.87    48.71    45.98
TRIN        1.31 
Put/Call    0.55

A Beautiful Day?

"It's a beautiful day in the neighborhood, a beautiful day for trading" crooned Mr. Rodgers if he played the S&Ps lower this afternoon.

What looked to be a non-trading session early on finished the final two hours with handsome potential gains ripe for the picking, but just beyond outstretched grasp for many. More on that later. First let's deal with what lies ahead.

Purportedly bullish fundamental news propelled markets higher on a gap-up open and rapid ascent to recent index highs ensued from there. But price action soon stalled right where resistance has held on several tests before. Various companies said this & that construed as reasons to buy the open or cover shorts for traders who hang on market news. I never get too caught up in those details myself. That stuff was once very important back in the go- go days of 1999 and early 2000 but as witnessed today, news-driven stocks are often best played on a fade than along with opening momentum.

Different Fed heads strolled up to podiums last night and today after the close, jawboning how recent bad economic indicators are now improved towards benign. Can we therefore kiss any further rate cuts goodbye? Is that their way of telegraphing what comes next in the easing cycle?

Companies are pre-warning less and pre-announcing more, with some insiders believing they sandbagged last time for upside surprises this time around. Such are the usual dynamics of broad market fundamental news found across all the public wire services. In the end, all that stuff is factored into price charts as people with more knowledge and money than us act upon their advantage and cause chart signal movement readily apparent from there. I personally cannot trade market news: I can only trade the market's REACTION to that news.

It was said that today's late-session drop came from global event rumors, dried up volume, etc. I want to know why indexes stalled right at clear points of resistance first thing this morning and failed right from there? If buying volume dried up and there was a lack of selling, why didn't price action trade flat instead of plunging? It appears to me that massive resistance lies near those key measures tested today and yet another firm rejection tells us some we really need to know.

So let's peruse some charts together and see what they have to offer. Our only rule is to enter each picture as a blank canvas and see what vision appears before us without favor or bias. Fair enough? Here we go:

(Daily Chart: SPX)

We begin with professional money's index. Commercial traders rule the S&P, retail traders focus on NASDAQ Comp.

Still trading within a channel and struggling mightily to hold above its 200-DMA and recent highs. Nothing doing. Right now we have price action drifting in space with firm support down near the lower channel line (red) and 50-DMA (green) before looking lower towards Fib retracement levels from September lows to recent highs. Stochastic values are in full-bear mode as well.

(Daily Chart: NDX)

NDX is very similar to the SPX except it holds above 200-DMA. Note how three points of support now converge: 50 and 200-DMA together with that lower channel line. If it cannot hold the fort right there, look for another -100 to -200 points shed in short order. Stochastic values are also beginning to tip over from overbought extreme in bearish fashion as well.

(Daily Chart: Dow)

And the Dow trades right between SPX and NDX with price action sitting squarely on its 200-DMA. Other than that, mirror image of the first two. Currently sitting on support, a break lower from here sees strong arms at 50-DMA near 9,843 and then subsequent retracement levels below.

(60/30-Min Chart: OEX)

For traders with a short-term outlook, I would not be waiting for sustained strength early tomorrow. Using the OEX as a general (and very good) proxy for all major indexes, we see price action in the hourly chart (left) just below 50% retrace of last week's range. It appears looking to drop a few points lower. Intraday stochastic values in full-bear mode would suggest continuation lower for the start of Thursday.

(60/30 Min Charts: QQQ)

Likewise the QQQs for traders who favor this symbol. Hourly chart price action (left) seems to be tracing a bearish expanding wedge pattern. It is bearish because higher-high and lower-low instability expends market energy rather than store it. Therefore, how can it break above resistance while weakening in the process?

Support should be found in the same area we've watched as resistance since last week: its 40.50 price level.

Much as we hate to admit it, market action is still going nowhere for the ninth straight week and counting. Traders who think such sideways action is just working off a rapid ascent and overbought extreme in healthy basing mode may indeed be right, but watch out for that low VIX falling to 20 or below. It's in a relatively neutral zone right now and must remain above 21 level to give bulls comfort that this sideways market will break and trend higher above recent marks.

Those who know me well realize I'm as unbiased for market direction as they come. Up or down 1,000 Dow points from here make zero difference to me. I don't care because I cannot afford to care: biased traders are doomed to face market direction they cannot handle and it parts them from precious capital far quicker than was doled out in the favored times.

That being said, I simply cannot see the indexes breaking out in a big way either direction right now. A strong case with numerous valid points can be made for Dow 12,000 or 8,000 next. I believe the markets will break one way or the other soon, but no clear signs exist for that tonight. Let those ascending channels shown above fail to hold price action within and I'll change my outlook in a hurry!

For now I'm prepared for more sideways, choppy action ahead. If forced to pick a direction at gunpoint it'd still be lower due to overbought oscillators, price action failing to break resistance and a low VIX. But that's not enough to convince me a slide is about to begin from here.

These are indeed very tough markets to trade. By popular email request we'll quickly review what is possible to accomplish, although I'm the first to say that short-term trading in V-turn markets like this is anything but easy at all:

(OI Market Monitor: 12:59pm)

Near 12:59pm EST today we noted that intraday charts were making the first coiled consolidations as price action peaked earlier and moved sideways from there. I remarked that major index intraday charts were looking overbought and bull-flag patterns forming, so watch for a break either way. With bearish stochastic values forming, a downside failure of these patterns coupled with falling oscillators would be a tradable event. Tradable for whom? Risk- averse, daring day traders only! This was a high-odds downside play and limited upside play suited only for those who know how to manage risk in the first place.

(30 Min Charts: SPX)

The left chart has price action backed up to just before 2:00pm levels. Note the highs and lows traced within that pattern for three hours straight (six candles = three hours) hinting of a market pause before continuing the move higher. Traders who only rely on patterns without using a measure of price strength (oscillators) only saw half the story. Stochastic values were bearish all the way, tipping downside odds more in our favor with each passing tick.

The MM posting almost an hour before this market failure noted to watch for a break up or down. Where? We didn't know then... the pattern was still in its formation. But extending trendlines above 30-min highs and lows gave us measures or resistance and support to gauge, noted in green and red. A break either way was tradable in short-term mode with a high bias to the downside via chart signals turned bearish.

Sure enough, support near 1169 broke and traders had ample time to get short this whipsaw market move. Easy? Heck no... who ever said that! But possible for those who've honed their skills by watching & learning within educational services such as this.

Reward For Tedious Study
Pass the short-term trading test and potential gains exist for
those who dare within two market-hour's duration:

SPX Jan 1175 put (SPT-MO)
Entry near 15.50
Current sale 24.00
Gain on contract cost: +54.8%

SPX Jan 1150 Put (SPT-MJ)
Entry near 7.00
Current sale 11.80
Gain on contract cost: +68.6%

S&P e-mini short at 1169 cash index: lowest level 1152 or 17 index points captured @+$50 per index point, which is +$850 per short futures contract. Margin to hold: $3,000 per contract. Gain on contract cost: +28.3%

Folks, this is tough sledding but possible to accomplish. The little book I wrote for annual subscription renewals explains the basics here and how-to articles archived and to follow will continue to help nudge the learning curve along. No need to rush it: the indexes will be trading long after we retire, so let's begin when we're ready and retire rich instead!

Those who know me best also realize I'd prefer to enter plays each Monday and ignore them until Thursday afternoon. Then close out for massive profit and take a three-day weekend before repeating the process. Does that sound good to you? Sounds great to me but the markets just don't care. They refuse to oblige for what I want, instead delivering exactly what they dictate instead.

I can either try to mold my methods with their demand, stand out of the way or get plowed under in the process. For me it's a constant struggle to accomplish the first two while avoiding the third. How about you? These are challenging markets that force me to give it my all and sometimes that falls short of good enough. It won't always be this way, of that I can assure you. Better times are ahead and easier days lie in our path down the road.

But for now we must willingly accept the markets that are given us because nothing changes that fact. My advice is to trade careful, trade a bit smaller than usual (if at all), don't marry a position and for gosh sakes do not fall in love with either direction. That is a sure way to break your heart before long!

Best Trading Wishes,

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