Option Investor
Market Wrap

Split Decision

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02-13-2002               High     Low     Volume Advance/Decline
DJIA     9989.67 +125.93  9998.25  9856.99 1.09 bln   1520/1560
NASDAQ   1859.16 + 24.95  1862.42  1844.12 1.59 bln   1708/1804
S&P 100   567.79 +  5.28   569.64   562.51   Totals   3228/3364
S&P 500  1118.51 + 11.01  1120.56  1107.50
RUS 2000  476.33 +  4.32   476.33   472.01
DJ TRANS 2711.59 - 19.17  2744.14  2702.93
VIX        22.44 -  1.07    23.60    22.14
VXN        44.17 -  1.28    45.59    44.08
TRIN        0.93
PUT/CALL    0.76

Split Decision

As noted in my last three Index Wrap sections, we have expected rising index prices this week. Indeed our charts were correct and higher levels prevail, but it's not been a straight-up ascent.

Along the way we endured tough to read intraday charts that are the lifeblood of short-term traders but merely market noise to those with longer-term plays in mind. I do get mail from readers who confuse the two, wondering why we see bullish charts in the Wrap sections and bearish looking intraday charts within. Two completely different topics of discussion for separate market players entirely.

This nightly section is designed to offer guidance towards the next few sessions ahead and we usually focus on weekly/daily time frame charts within our little corner. No change in that approach tonight, so let's see what the mid-term future may hold.

(Weekly/Daily Charts: SPX)

First up, big index. Weekly chart at left shows why the 1119 area acts as such a price magnet; it's roughly 50% retrace from 2001 high to low span. A break & close above there could bring the 1160 area into play, and all stochastic values are still bullish right now. No reason to try shorting this one from here by any means.

(Weekly/Daily Charts: NDX)

The Nasdaq is rather subdued these days and not likely to be the mover & shaker market it was for a brief moment in time. Still, plenty of tech addicts exist and their comfort zone for this sector will linger far into the future. For now we see bullish stochastic values, a pending break from it's 2002 descending channel and clear sailing up to the 1600 area where both 50 and 200 DMAs lie in wait to halt upward progress there.

(Weekly/Daily Charts: Dow)

Likewise the Dow seems to be movin' on up, but weekly chart shows both moving averages and 62% retrace of year 2001 span clustered at 10,125 zone. Stochastic values are bullish, and all seems well for continuation higher for now. Nothing bearish about these charts we've reviewed at all.

(Weekly/Daily Charts: SOX)

The SOX continues to power higher as well. This is one of tech addict's favorite romper rooms and makes for a lovely sector to trade because of that. These momentum players knee-jerk to every analyst call that comes down the pike, injecting plenty of volatility and directional movement for us to game. Looking full- bull ahead for now and the upper line of its weekly channel (blue) may be the next upside target ahead.

I Know, I Know... The VIX Is Low
Plenty of reader's email flowed in today asking if we've seen the VIX and other volatility levels behavior today. Yes, we all know the VIX, VXN and QQV are falling back down to recent lows but that in itself is not a reason to get short today. Trust me, they can all fall much lower than here and don't be surprised if the VIX touches 20.00 or lower before the next market top is in place.

That won't be far off and should arrive below recent highs in early January. The last two selloffs when VIX broke below 22.00 were not long-term bottom events by any means. This is a very weak market on fundamental and technical basis due for a relief rally in bear market fashion for now. If it sticks & stays for months on end, great! We'll trade the upside with glee and buy every dip. But the volatility levels have not blown off to enough extent after continually returning to low readings in the historical range.

As we've repeated in this section since last summer and fall, the past two March/April periods have produced significant market declines right after February rallies where market pundits assured us it was straight up higher from there. That period is a mere three to four weeks away right now and no one can tell if history will repeat or not. But we can bet there are plenty of others looking at the same charts noting that pattern as well.

Emperor's Naked For Years Now
Since the late 1980s we've seen "relaxed" accounting methods to measure company performance. Salary incentives to corporate officers based on stock prices meant well, as that should have equated to strong company growth. But with all things that concern money, the human mind pushed by greed finds a shortcut to reach the payoff regardless its cost to others.

What does that mean in English? It means we have been told the sky is red for well over a decade and everyone put on rose-colored glasses to agree. Stock valuations are based on some synthetic set of values apart from traditional basis. The sky is red. Eventually the masses must admit the sky is not red, it's blue. Once that realization comes about, it changes the entire spectrum of color, now doesn't it?

Once the companies who've survived and even grown since inception using "red sky" fuzzy math are forced to report their valuation in blue it could cause quite an asset reallocation for the real basis. Would you agree? Stock players all lie to themselves about PE valuations because that's what keeps the IRAs and 401Ks afloat. By any means necessary keep those plates in the air. Say, do or think whatever it takes to keep stock prices going up or at the very worst not going down. Right or right?

Know anyone who lies awake at night with a decimated retirement portfolio praying to their Maker that stock prices will "come back"? Think they can bear to face the possibility that a reshuffling of accounting practices could reshuffle the major indexes and big cap stocks that push the pile in a serious way? Nope... most market players right now cling to every word of economic recovery equals higher stock markets like a drowning man grasps for the shore. And that is where this dirty little reality shall remain, hidden away via fear & pain for now but not forever.

Do I think the market will return to new recent highs or crash thru September lows straight ahead? I honestly don't know, and anyone else who assures you either way doesn't know either. I do hope & pray you prepare yourself for any scenario possible, as that is the only way to survive and prosper in the treacherous profession we love.

Weekly/daily charts tell me price action wants to go higher from here. Up to where and for how long remains to be seen, but I see no reason to short anything more than intraday scalps and short term plays such as this via the indexes. Individual stocks are another matter, as some are always rising & falling in unison. I will keep buying any dips so long as these chart signals and patterns remain bullish above all us. History and personal experience long ago pounded that discipline in me at a costly price. Time to buy the dips when offered as chart signals continue higher and play the path of least resistance until our next fork in that road is reached. Bullish For Now,

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