Option Investor
Market Wrap


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      02-20-2002           High     Low     Volume Advance/Decline
DJIA     9941.17 +196.03  9956.05  9734.21 1.42 bln   1893/1221
NASDAQ   1775.57 + 24.96  1777.18  1729.20 1.89 bln   1980/1532
S&P 100   557.49 +  8.37   557.87   544.82   Totals   3873/2753
S&P 500  1097.98 + 14.64  1098.32  1074.36             
RUS 2000  467.25 +  7.27   467.29   457.21
DJ TRANS 2697.13 + 24.73  2697.13  2652.98
VIX        24.26 -  2.11    27.00    24.09
VXN        46.68 -  0.55    47.92    46.30
TRIN        0.85 
PUT/CALL    0.66

Austin Passamonte

We knew downside pressure was building up in the market, no surprise there. But it sure release with impressive fashion!

Three down session behind us had the Dow off -300 points and SPX down -50 points at today's low. We even saw S&P and NASDAQ indexes press below recent lows that previously held two or three times this month. When selling didn't accelerate from there, shorts covered and buyers started snapping up selected Dow issues and that spilled over into techs.

Whenever large-range market moves as witnessed the past several sessions occur, three distinct camps are formed. Shorts who want to sell everything down to zero, longs who can't wait to buy the first bounce when stocks are so "cheap" and the third group safely in cash and destined to stay there for a long time. Eventually the battle comes to a halt and the other side now prevails. Such is the case with today. No monstrous up-volume on the rally or broad measure of stocks making new highs. Just a decline petered out via shorts covering in domino effect.

(Weekly/Daily Charts: OEX)

Our first stop for tonight is the OEX, a good market proxy for all major indexes. We immediately see oscillators are still in full- bear decline, which tells us underlying price strength is weak. Various measures of overhead resistance can noted in both time frame charts via Fib Retracements, moving averages and trend lines. My guess? Goes slightly higher or stalls right here before moving back down. A clean break to the upside of that blue trend line in the daily chart (right) would have me looking for continued upside to the next measures of resistance above.

(Weekly/Daily Charts: Dow)

Surprisingly, the Dow's weekly stochastic values are rising in bullish fashion. Well waddya know! Should we read much into this? I'd look at the NDX and S&Ps to gauge what may happen next myself. Meanwhile, looks like plenty of congestion near the 10,100 level if price action tests the upside further from present.

(Weekly/Daily Charts: QQQ)

NDX/QQQ is still riding its long-term descending channel in well- behaved fashion. Weekly stochastic values are oversold but daily charts show zero sign of price strength in the current move. If this index can reach 40 area in the QQQ, it will be met with two measures of resistance and eager selling there.

(60/30 Min Charts: SPX)

When we look at all these various index charts I hope you realize our study doesn't just apply to them alone. Every sector or stock that appears the same way will lead the indexes and every leadership stock in turn within noted sectors lead those up or down.

In this case the SPX 60 and 30-minute intraday charts are copied from my service just the way they appear for tomorrow's trading. I want to see how price action behaves near pivot points when stochastic values go extreme in unison, preferably in harmony with the trend. We already looked at OEX weekly/daily charts still bearish, right? If these intraday chart signals tip over tomorrow it's time to play the downside once again. Follow the trend!

I Truly Sympathize...
"Dear Austin, Jeff, and Eric:
I have been a subscriber on and off for a couple of years. I have had my successes in the market in part thanks to recommendations received from OI. However, this has not been very easy and it has required a lot of work on my part. The reason for my email is that you are (collectively) causing great frustration with your changes in state of mind from one day to the next or from one hour to the next. At times you provide suggestions or recommendations that do not make any sense if one is to profit from the investment results. Last week you guys alluded to the "Perfect Storm". What was all that about? We know the market tanked.

...My point is your credibility and that of OI has been suspect and irregular. Please think about the effect that your recommendations may have a serious effect on your subscriber's account if we take you for it. You have begun to sound like the guys and gals on the financial networks. Please clean up your act and start issuing some great stock recommendations one can really get excited in the subsequent research so that we may agree with you. [MG]"

MG's letter to me is not uncommon at all. I honestly sympathize and can only imagine how it sounds on the other side of this screen to you when I'm bullish one day and bearish the next. But then again, have you seen the markets lately? Today was nothing unusual over the past two years and we all better get used to it. Major indexes are going absolutely nowhere close to new highs this year but new recent lows are a distinct possibility. Along the way there will be plenty of sideways, volatile chop for us to navigate & endure.

Any trader with longer-term outlook in their personal holding period who want to get excited about making money might simply look to short every rally that stalls using stocks or long LEAP puts. Picking stocks that will go down far more than up this year is easy: reminds me of that TV commercial on CNBC where guys play pin the tail on a stock pick to go long. We can probably wait for each bear-market rally to stall, do that for any "big cap" getting smaller and do just fine.

But for shorter-term plays with more precise entries it gets tricky. Here's a prime example of how to play today:

(10/5 Min Charts: S&P 500)

Another template plucked right from my trading platform to your home tonight. This 10/5-minute chart setup also has a 1-minute tick and Time & Sales window open alongside too, but that's another story.

We have two different channels drawn in these windows. Note where the 1075 and then 1080 levels appear on both. See where price action reacted to each of them? When initial lows were hit this morning, 60/30 min chart signals showed no signs of sustained life. But scalpers could test the bounce from there using these short-term charts and in this case it worked. Once price action broke above the next measure of support and held, upside plays could be tested with greater conviction from there.

If we tried shorting those moves and got stopped out quickly, that's a clear sign we need to reassess the situation. What was clearly bearish in the morning became decidedly bullish in the afternoon. For how long? I have no idea and didn't hold long over the close to find out. Thursday may bring a return to sharp selling soon after the early noise settles out.

So where exist all the juicy stock picks a reader can get excited about? Unless it's a short-term play I wouldn't dare say. My best guess on enter & hold plays would be that short shares or long distant-month put options will pay off much bigger than bullish plays between now and Halloween if not beyond.

I'm fairly sure there exist some decent enter & hold plays on stocks somewhere in both directions. But we'll leave that to the other teammates for now. I myself would not play long-term bets on the indexes in either direction, especially to the upside right now. We can be sure a number of bear-market rallies will emerge this year for quick upside plays and terrific trend plays back down, but I'm content to be small, nimble and brief in my trades right now. The customary nightly scan of all indexes and sectors that trade options or shares show long-term chart signals all over the map. That's usually a strong sign that neither direction has an upper hand right now.

My personal advice is to trade a bit (or considerably) smaller than usual and for shorter duration than preferred. When profits accrue it is vital to harvest or defend them immediately, lest days like this whisk them from our accounts in the blink of a byte.

Don't Fall In Love With Either Market Direction,

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