Option Investor
Market Wrap

Interpretation, Please?

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      01-23-2002          High     Low     Volume Advance/Decline
DJIA     9730.96 + 17.16  9773.37  9680.51 1.44 bln   1963/1154	
NASDAQ   1922.38 + 39.85  1925.15  1879.24 1.83 bln   2189/1407
S&P 100   573.63 +  3.00   576.18   568.67   Totals   4152/2561
S&P 500  1128.18 +  8.87  1131.94  1117.43             
RUS 2000  477.45 +  8.02   477.45   468.04
DJ TRANS 2755.63 + 95.93  2755.63  2658.21
VIX        23.66 -  1.44    25.86    23.54 
VXN        48.15 -  2.22    51.42    48.03
TRIN        0.73 
Put/Call    0.42

Interpretation, Please?

That's what we'll ask each other when Greenspan speaks tomorrow. Of course the minutes of his speech will be released and knee- jerked to long before Al grabs the microphone but it may be what gets said in Q&A forum that makes a lasting difference.

Regardless, it's earnings season and market-moving news will come along most every session for the next couple weeks. After that we enter the quiet period (several days?) between last stragglers to report and the early birds who may pre-warn. No surprise that the last two March/April periods have driven markets to new yearly lows on perpetual disappointing news. Will we break that cycle two months from now?

Impossible for me to say, or anyone else for that matter. Gotta love the market prognosticators who peer into their crystal balls and try to call the markets for an entire year from right now. Yes, they'll hit a few points right on the head and miss others by a wide country mile. Guess which mark gets trumpeted while the other is buried in obscurity? Yes, you win the prize!

Speaking of calling the markets, dozens of financial websites, newspapers and TV media have been trumpeting Dow 9700, SPX 1120 and NASDAQ Comp 1880 areas to watch for days now. And indeed everyone has. I know that many S&P 500 futures traders in the CME were covering shorts and/or going long near 1120 S&P once it broke lower, held and bounced above. Nice day trade opportunity in there for sure, but was that the bottom? Full bull ahead? Why don't we look at some charts and see if any signs on the roadmap exist for us to measure & weigh?

(Weekly Chart: Dow)

The first scan I do on any symbol of interest is a weekly/daily snapshot. The first thing I look for is stochastic value direction and alignment. Is price action weak or strong? That's priority one for me. In this example of Dow weekly chart it is 100% full-bear roll. Can a rally pop right from here and never look back? Sure can. And any of us can win Powerball's drawing tonight, too. Is that how you want to play financial odds?

From there we ask where lies resistance and support. The Dow now sits firmly on 50% retrace of 2001 yearly lows back towards highs. From there resistance meets in triple-threat fashion at 10,100 via 50 & 200 WMA and 62% retrace as well. A break lower leaves the 9,300 area as next floor below.

(Weekly Chart: NDX)

The NDX "powered higher" (CNBC's words) with all tech sectors firing away on full cylinders. Bottom in place? Maybe, but do you see any evidence of that? I see price action below three measures of quantified resistance coupled with stochastic values in the midst of a full-bear roll. SOX index weekly chart is a mirror image of this.

(Daily Chart: SOX)

Speaking of which, here's the daily-chart view of SOX (and NDX) tonight. The ascending channel from late September until last week will now offer resistance if approached again. So will both moving averages as well. Today's rally erased Tuesday's decline in bullish reversal "tweezer bottom" fashion but not formation. These patterns are most viable at relative lows and the SOX has merely bounced off a round number of support. If stochastic values reverse up from oversold extreme and rise above 20% level it might be time to tentatively test the upside.

(Daily Chart: OEX)

The OEX is a wonderful broad-market proxy because it encompasses so many key components in one orderly index. What's it tells us tonight? This semblance of a channel since early October 2001 has had support line tested three times before and price action bounced. Will there be a fourth? We're about to find out in the next couple days or so.

(Weekly Chart: BKX)

Is the rate-cut grafting nearing its end? Banking Index looks to break this year-long wedge in a week or two, and stochastic values are poised for downside action. Is money quietly exiting banks and flowing somewhere else? Wonder how that may impact the SPX, OEX and Dow with these components within?

Markets are chopping around widely touted levels of support that millions of eyes are watching. We can expect these levels to magnetize price action for awhile before releasing in directional fashion. These are merely four of a few dozen charts I scanned today looking for potential plays to fill Index Gameplans with. Each one began with an objective, unbiased view and evidence observed is weighed to form an opinion. That's the only way I know to assess market action in high-odds fashion... is there any other approach that works? None I've managed to find, and certainly not harboring any silly directional bias or favorites.

The trend is decidedly down in all broad index weekly charts I see. Daily charts show price action clinging near key pivot points while below several measures of resistance. Stochastic values are totally bearish on a weekly basis and oversold but benign in the shorter term. That's the overwhelming market evidence observed.

You may notice a lack of fundamental market news, earnings, etc factored in here. That's of varying importance to some traders but very little use to me. The only time I factor that stuff is when taking short-term plays (two days or less) during expiration week on news-driven symbols. Otherwise it's merely market noise that melts right into the charts.

With this in mind, following the trend as Jim reminds us to do means shorting this broad market with both barrels until the picture turns bullish again. When might that be? I wouldn't venture a guess but weekly charts turning bullish weeks or so from now will tell when it's time to bring in puts and switch to calls once more.

Selling All Rallies
If the trend is our friend, today's failed afternoon pop is our best buddy. The trend is down and we enter swing trades counter to that trend whenever the chance emerges. That counter-move pop setup the following condition tonight:

(60/30 Min Charts: SPX)

We saw a high-odds put play setup emerge in all indexes and many stocks today. This is precisely the scenario trend traders waited for. Using the SPX for our example, price action rapidly spiked from 1120 to 1131 in furious fashion and intraday oscillators chased it right up to overbought extreme. I trapped this picture near 3:00pm in case price action would change by the close.

We had 30-min stochastic values (right) in early bearish reversal and hourly signals following with a bearish touch or kiss. At the same time we had price action fall right back into the days' long descending channel from last week until now. Classic swing trade entry setup if I've ever seen one. Only thing better would have been overbought daily charts as well, but we can't always have everything.

Will these put plays work? Remains to be seen tomorrow, but if we can manage to take ten plays just like this I like our chances to win or exit near par on the vast majority of them!

"Follow The Trend" is age-old advice. Right now that is decidedly down across the broad market arena. If we want the best chance at making money and limiting risk, every attempt to rally that even hints at failure can be whacked to the downside for now. Weekly chart signals will tell us when that ceases to be the best approach down the road and we'll switch targeted directions in a heartbeat when that happens.

I'll be away from the website these next two days as I join Preferred Trade Live and some OI readers in Chicago at the CBOE floor. We'll be in the OEX pits playing at the mock trading session and chatting with floor traders there. You can bet I'll pick all of the local trader's brains with every question possible to see where my money goes and why. For those who'll be down there getting a market education with me, see you then. Hope the rest with live trades in the market out-perform expectations once more!

Best Trading Wishes,

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