Option Investor
Market Wrap

Can't Get the Lead Out

HAVING TROUBLE PRINTING?
Printer friendly version
      03-11-2002          High     Low     Volume Advance/Decline
DJIA    10611.24 + 38.75 10647.09 10526.00  1.20 bln   1612/1535
NASDAQ   1929.49 -  0.18  1946.23  1905.93  1.80 bln   1920/1683
S&P 100   591.73 +  1.89   594.37   587.69   Totals    3532/3218
S&P 500  1168.26 +  3.95  1159.58  1159.58             
RUS 2000  500.75 +  0.90   502.06   496.17
DJ TRANS 3017.06 +  6.82  3033.07  2970.48
VIX        22.37 +  0.76    23.13    21.90
VXN        42.05 +  0.43    43.70    41.67
TRIN        0.64 
PUT/CALL    0.55

Can't Get the Lead Out
By Buzz Lynn
Click here to email Buzz

The markets in general were packing some serious dead weight today. Just why is anyone's' guess, but the press playing up the six-month anniversary of the Attack on America may have had some psychological affect on traders. In fact, some were absent in the early going as they attended commemorations of the September 11 events. "Rarely forgive, never forget", said Mayor Ed Koch many years ago, though he never could have foretold the events that would bring down icons of the U.S. Skyline.

Personally, I'm glad attention is paid to the seriousness of the event though I could live without having to dredge up the awful feelings and memories of that day once every six months. Seems that many Americans have forgotten or at least put behind them those tragic events. Conspicuously absent are the American flags that once flew in our neighbors' front yards and the smaller ones that adorned our cars. I no longer see many of either, but I still fly mine. It has become a habit that I plan to carry on through the rest of my life.

Anyway, that seemed to keep the mood on the Street a bit demure today. No clear conviction either way for bulls or bears. Fortunately, I was able to shake it off when a joke arrived from a friend in San Diego. Internet and e-mail old-timers will recognize this format, and maybe even the joke, but you have to read it all the way to the end for the updated punch line. . .

Subject: How to Teach Math

Teaching Math in 1950:
A logger sells a truckload of lumber for $100.
His cost of production is 4/5 of the price.
What is his profit?

Teaching Math in 1960:
A logger sells a truckload of lumber for $100.
His cost of production is 4/5 of the price, or $80.
What is his profit?

Teaching Math in 1970:
A logger exchanges a set "L" of lumber for a set "M" of money.
The cardinality of set "M" is 100.
Each element is worth one dollar.
Make 100 dots representing the elements of the set "M."
The set "C", production costs, contain 20 fewer points than set "M."
Represent the set "C" as a subset of set "M" and answer the following
question: What is the cardinality of the set "P" of profits?

Teaching Math in 1980:
A logger sells a truckload of lumber for $100.
His cost of production is $80 and his profit is $20.
Your assignment: Underline the number 20.

Teaching Math in 1990:
By cutting down beautiful forest trees, the logger makes $20.
What do you think of this way of making a living?
Topic for class participation after answering the question:
How did the forest birds and squirrels feel as the logger cut
down the trees?
There are no wrong answers.

Teaching Math in 2000:
A logger sells a truckload of lumber for $100.
His cost of production is $120.
How does Arthur Andersen determine that his profit margin is $60?

Laugh it off! That's the spirit! The last line might also help explain why that in today's news, Arthur Anderson is offering itself for sale to Deloitte and Touch. Fundamentals Guy take: Buy the customers; leave the name out of it. Clients will migrate away from AA anyway. AA is a tough brand to market. Deloitte is not. A barrel of sewage with a teaspoon of wine is sewage. A barrel of wine with a teaspoon of sewage is still sewage.

What else? Oh yes, a re-arranging of the deck chairs took place over this morning on the U.S.S K-Mart. That is to say, Charles Conaway, the former CEO "resigned" since he had apparently lost the confidence of the investment community (you don't say?). James Adamson, a long-time board member and recent appointee as Chairman, replaced him. While Adamson has an enviable track record of helping turn around Denny's and Revco drug stores, making K-mart competitive again with Target (TGT) and Wal- Mart (WMT) will likely be as difficult as raising the Titanic. I wish him well.

In economic news, inventories fell again for the eighth month in a row while sales were up. All this suggests that fundamentally there is an argument for a lift in production. However, producers are likely to exercise caution in increasing output. They have fallen prey to that before only to see demand remain flat. Add this to the many little signs of economic improvement, but don't be your prized and pointy horns on a return of 1999 action. In fact, technicals suggest the may be in for some wilting shortly. Why? In a word, "technicals", which is really all that matters to us as traders.

Shall we take a peek starting with the Dow first?

Dow Industrials chart - INDU (weekly/daily/60)

For the Dow, a new recent closing high. But that should not inspire confidence. Stochastic values are topping out, resistance is at 10,650, and there is a bear flag forming at the upper Bollinger band, which also happens to be the 78% retracement off last May's highs to September's lows. All this makes a tough barrier of resistance to higher moves. The weekly chart is perhaps topping out too. The 60-min chart is similar with the formation of a bear flag at same said resistance.

NASDAQ Composite - COMPX (weekly/daily/60)

NASDAQ too is butting up against resistance on the daily chart, which looks stochastically poised to fall. Bollinger band also suggests that downside is in store in the not so distant future. However, the weekly chart stochastic is in bull mode. If the index is to fall a bit, there could be some support at the 200- dma, 1900 roughly. The 50-dma isn't far below that at 1895. Careful. It may not last. One negative day could roll the daily stochastic downward and a negative week would reverse the course of the weekly stochastic too. I'm surprised to be writing this, but pullbacks to support as the stochastic cycle to overbought could produce a bullish entry.

S&P 500 - SPX (weekly/daily

SPX is also topping out on both the daily and weekly charts. I would not be a call buyer here! In fact, the SPX has all the signs of a rollover in store for us - resistance at 1172-1174, butting up against the Bollinger band, and hitting the 68% retracement bracket from May's highs to September's lows.

Plus, are those formations on the 60-min chart bearish wedges or bull flags? We don't know. The first and the third looked like bearish wedges but acted like bull flags. The middle one did what it was supposed to do. Still, the topped out stochastics spell possible downward action ahead, though trading for scalps could still be productive.

VIX at 22.37 means little now though it is at the lower side of "normal" and that too suggests back month OTM put-buying may pay off sooner or later. But don't read much into it or make your trading decisions based on it.

So what for tomorrow? Very tough to tell by today's actions. My greatest attention always gets back to risk and reward. In short, upside reward is far less than downside risk at these levels since the oscillators are now, for the most part, overbought and ready to roll at consistent points of resistance. With the exception of the COMPX where I would be a call buyer on a full roll of the daily stochastics to oversold, I am leaning toward puts at this point in the technical cycle. I would buy puts on any strength and set my stops just on the high side of resistance in case I'm wrong.

All that said, the triple witching week ought to show us more volume than we saw today and will likely produce a day or two of super volatility for us intraday traders. No telling if it's up or down. Just trust your instruments

See you at the bell!

Market Wrap Archives