Option Investor
Market Wrap

Is It?

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      03-06-2002          High     Low     Volume Advance/Decline
DJIA    10574.29 +140.88 10601.51 10425.80 1.53 bln   2297/ 867
NASDAQ   1890.39 + 24.10  1891.83  1841.31 1.88 bln   2270/1279
S&P 100   590.21 +  8.26   591.73   581.90   Totals   4567/2146
S&P 500  1162.77 + 16.63  1165.29  1145.11             
RUS 2000  494.80 +  7.21   494.80   485.21
DJ TRANS 3014.53 + 33.93  3019.63  2980.21
VIX        22.06 +  0.25    22.21    21.43 
VXN        42.90 +  0.62    44.32    42.54
TRIN        0.61 
Put/Call    0.50

Is It?
Austin Passamonte

"Back to rally mode for Wall Street". A teaser I stole from CBNC this evening as they wrap up the hour steering bullish questions to yet another economist trying to guess where the economy is headed later this year. Heck, I'd settle for knowing where the market's going next week myself and let the future unfold from there!

Tuesday's pullback in the Dow was recovered today while Nasdaq eked out further gains. A morning dip was rallied, then the 2:00pm Beige/Tan (some color) book minutes were released and a bit of index futures volatility straightened out for a run to new session and recent index highs.

All is right with the equity world. Numerous fundamental signs suggest the recession is over, recovery underway so let's get on with 1999 revisited. Momentum buyers keep killing shorts trying to sell every pause only to capitulate quickly when markets fail to plunge. This could easily go on for awhile as momentum traders chase every dip and pop. Most traders don't mind missing out on a market plunge but they sure do despise missing any rallies. After all, this could be the BIG ONE... the new baby bull that never dips back down!

Or is it?

(Daily Charts: Dow)

Before we crown any indexes on their way to new market highs, let's see a few more things first. Right now the Dow is once more at a previous point of failure in this bearish expanding wedge. That's a somewhat long-term reverse consolidation where the index actually expended energy as opposed to coiling and storage of kinetic force. If it cannot crack and close above 10,600 several days in a row, the next stops are black line & moving averages below. Simple as that.

(Daily Charts: NDX)

The NDX has more room to run, but is wrestling with 50-DMA right now with 200-DMA poised to step on the bull's horns after that. Should it manage to peel past both the trifecta of trouble lies above there near 1650 or so. Divide all of these numbers by 40 for a close guess to equivalent QQQ measures as well.

(Daily Charts: OEX)

The OEX (and SPX) is actually more impressive as it has just broken an old wedge dating back to all-time highs in early 2000 and recent lows last fall. The 200-DMA capped this caper, but who knows what from there? 573 area is next measure of solid support and important pivot point to watch.

(Daily Charts: SOX)

We've traced the SOX within an ancient wedge dating back to 1999 Bubbleonia lows and historical highs in early 2000. Some traders would give anything to relive that period, but for me it is a distant second to one more shot at year 2000 instead! Regardless, the SOX epitomizes channeling symbols here from last fall until now. Long 500 and short 600 were money in the bank and may still be.

One thing we didn't point out is the degree of overbought extreme each daily chart stochastic value measures. We know that indexes (or any market for that matter) can remained pinned in extreme zones for periods of time while a trend rages on. What we need from there are additional tools to measure market posture with beyond oscillators. Hence, our search for trend lines and points of reference with meaning.

Sure Thing Setups
There aren't too many things involved with trading that are sure things, but one of them setting up right now is close as we can ever get from the speculative side!

(Weekly Charts: VIX and SPX)

Nothing like a 500+ index point rally in the Dow to break the backs of hopeful bears who silently walk away from the VIX. I recall back in the summer of 2000 for nearly two months harping on how the VIX at 20, 19, 18 and 17 called for a massive correction eventually. Matter of fact, I wrote the same thing so many times in Market Sentiment (archived for posterity) that more than a few readers emailed me with less than flattering opinions.

Most of those traders are gone now, retired from our profession forever. By the time VIX readings cycled back up from 20 to 30, those hapless bulls snorting flames were clawed to pieces. Those of us who scaled into distant-month OTM puts probably sold too soon but I'll tell you what, it made for one heckuva year-end bonus anyway!

Seeing is believing, so please tell me what you see? How many times in the past two years (or before) has a meaningful rally raced miles higher with the VIX at or below 22.00? Don't bother taking your shoes & socks off, or even looking down at your fingers. Neither will be necessary to keep count this time around.

So what does history tell us? Will this time break the streak and see indexes run far higher without looking back? Could be, but is that how YOU want to bet 'em? My plan is the same today as it was last week: scalp the upside for intraday longs each time short- term charts go oversold and the session's trend remains up. But each milestone of resistance higher and I'm scaling into March, April and eventually May index puts that are OTM with plenty of time value left.

If the Dow rallies another 500 points I'll short it all the way up with time value remaining. Doesn't mean I'm ignoring the upside... I'll happily scalp that every time. Bring on more upside moves just like today! But not for buy & hold call options right, that's for darn sure. I prefer to do that when the VIX hits 30 or higher instead, which will happen in the future and find me building the next distant-month OTM call scale of holdings then.

Batting $1,000s
I could ramble on & regurgitate today's market news but why bother? We've all heard that on TV or read it in the free news sites by now. The main thing I wish to impress upon you is caution. Yes we've seen monster moves in the indexes this week. Yes the entire media world is spouting full-bull ahead and wouldn't that be nice to believe? Yes we've seen overbought markets trudge higher and low VIX readings plunge well below this. I'm not calling a market top right here by any stretch but I am saying this: indexes will soon go much lower than current price levels tonight.

I do not know when, how much lower or what the catalyst to drive them there will be. No one does. I do know a tinderbox ready to explode when I see one and this has all the makings of such. I've seen this a few times before, we've played puts every time and won big. Only four other times in the past twenty-four months, just twice a year have we seen this bearish play setup. How many have lost money? Zero. How many have profited wildly given a bit of time? All of them.

"MOAPO" #5 is building steam and won't stay repressed forever... what are you going to do about it?

The trend is up, buying dips has worked and may very well continue to. I intend to go long each day when the session's trend permits but am flat all bullish plays when the closing bell rings. Expect INTC and SUNW to liven things up a bit for us on Friday, as if these large-range sessions aren't volatile enough. From there we tip-toe towards pre-warn season and for sure ORCL and McData (or whoever Tuesday night) are not the last to speak the words no one long their stock wants to hear.

Three other things I know for sure as well: 1. My nightly sector can turned up no fewer than 15 ripe short plays listed in Sector Share model (most have listed options) and at least ten more sectors will soon follow to short. Only tech issues still look to have upside room and everything else is toppy at best.

2. We rock & roll with winners in that Model with hardly any losses and some pleasing gains, including 8+% on Financial Services iShare long play right now. Next best thing to free money and far, far better than bilking retirement accounts like Enron scumbags did.

3. When a preponderance of similar listings are found to one extreme, it usually signals the next directional turn. Last week we posted 18 long plays and sifted out 12 others that would have worked as well or better. Now the down side is tipping this boat, so longs beware. We haven't been massively wrong yet when hitting the setups as they emerge and this may be the first big miss, but that's not how I'll bet 'em in there, either!

Guard any gains in your account with care, and consider looking into the distance with one eye on that VIX, one eye on chart resistance and the other eye on distant-month, OTM puts. Too many eyes? Sorry about that; keep watch as best you can and I'll try & do the same!

Best Trading Wishes,
Austin P

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