Option Investor
Market Wrap

Backing Off

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      03-13-2002          High     Low     Volume Advance/Decline
DJIA    10501.85 -130.50 10620.17 10474.17 1.35 bln   1398/1767
NASDAQ   1862.03 - 35.09  1886.27  1858.45 1.65 bln   1503/2013
S&P 100   589.84 -  1.25   591.09   582.75   Totals   2901/3780
S&P 500  1164.31 -  1.27  1165.58  1151.01             
RUS 2000  495.45 -  3.45   498.90   494.40
DJ TRANS 2949.84 - 44.97  2995.93  2948.67
VIX        21.97 +  0.66    22.58    21.55 
VXN        43.26 +  0.25    44.17    42.55
TRIN        1.55 
Put/Call    0.67

Backing Off
Austin Passamonte

First & foremost let me extend a warm welcome to Leigh Stevens, our newest market technician at OI. Hope you find this role as much fun as I have these past two years this month! Plenty of good people on both sides of this screen make it all worthwhile.

This week I find myself surrounded with average people who exist at arm's length of the markets. It's always a refreshing change to renew my vision thru their eyes instead of market addicts like myself who are intertwined with each daily gasp & exhalation of the tape.

Joe & Jane upper-middle class and upper class do not seem nearly as enamored with stocks this year as one might expect. Matter of fact, right when the experts on TV tell us a market bottom is in with nothing but green pastures ahead it is met with indifference to outright disbelief. I've seen stacks of unopened envelops with mutual fund statements inside and more than a few redemption checks as well. This is as unscientific a casual study as one could ever conduct, but interesting to me nonetheless.

Turning back to my fellow tape addicts in the trenches, we endured another gap-down open this session on the latest knee jerk reaction to realistic economic news. Never ceases to amaze me how today's "investor" or trader is more emotional and short- sighted than ever, but I suppose the speed of fiber has much to do with this. Our task is to anticipate the illogical and try to understand emotional reaction before it occurs. I've learned a few new tricks the past couple months that are almost free money before the cash market opening bell ever rings, but that's another story. Suffice it to say we remain entrenched in a volatile market right now where creeping rallies and trends are merely distant memories.

(Weekly/Daily Charts: Dow)

Pea porridge hot, pea porridge cold... Dow looks coldest of the indexes right now as it met stiff rejection at resistance and both oscillators are poised for bearish reversals. Where doth thou support lie below? Just keep and eye on these various Fib retracement levels; especially 10,130 level below. The 20 DMA is rising to meet it and should offer magnetism next.

(Weekly/Daily Charts: OEX)

S&P 100 also sits on significant support right now and a break lower could easily revisit 560 areas noted above.

(Weekly/Daily Charts: QQQ)

Nazz 100 has recently climbed (clumb?) from 33 to 39 areas. I'd not be at all surprised if it doesn't at least retrace half that measure to 36, and quite probably in the next two sessions!

(Weekly/Daily Charts: SOX)

SOX rocks lately, but hot money flies in & out of there on every has-been upgrade and downgrade that crosses news wires several times each week. Great place for wild speculation, but "Semi- Conductor Investing" is a HUGE oxymoron since early spring 2000.

Tough To Squeeze
Last week witnessed a significant shift in the COT report for the first time in months. Much like other sentiment indicators this is not a short-term trade filter: it is designed to give us a feel for what big and small money are doing. I'm interested to see just what if any changes are made this week in the flailing action as well.

Small speculators are easiest to squeeze and for that reason usually wrong. These are traders who merely go long or short index futures contracts and bite the bullet from there. This would be people like you & I who hold futures contracts just like options over time and take their chances from there.

Commercial traders are very difficult to shake out of their positions on a squeeze. That's because they use index futures to hedge portfolios of stocks, naked options or both. They also use cash index options to hedge their futures with in somewhat complex delta-neutral deals only big money paying zilch for commissions can do. They do not simply sell a few thousand naked calls or puts and walk away without having intricate hedging systems in place to reduce or totally eliminate adverse risk. Nope... the big boys (and girls) play stocks, index futures and especially short options in an entirely different manner than speculators.

This is why monitoring the COT reports each week is important. Commercial traders are seldom wrong and when they are, it's just a matter of quietly unwinding their positions that doesn't really move the markets much. On the other hand, small speculators are easily squeezed and when they reach a recent extreme high and start to sell at any "ask" the long-squeeze shoots broad market price action down in a hurry.

As of last week we had commercials getting net short in a significant way with small specs getting net long with equal aplomb. Guess which group is hedged while the other twists in the breeze of market whims? Guess what might happen if the weak group is pressured a bit in the near future? Toss in a VIX stubbornly clinging to 22 range or lower and we've got the fixin's for a good ol' fashioned long-squeeze sell off ahead!

Summation
Expiration week, particularly a Triple-Witch even can be tumultuous and rife with noisy moves pushed by index futures contract rollouts and jostling. We'll have a much clearer picture of reality next Monday and the next two sessions are likely to be rocky, choppy and suitable for veteran scalpers only. My own money is still playing the downside more than not based upon the chart signals depicted above. There may not be signs nor catalyst of any major market plunge but I sure can't see budding evidence for any sustained rally to new recent highs right from here, either.

The downside rules slightly for now, but believe anything you see for the next two days resembling weather patterns: each 15 minutes could bring rain or shine!

Best Trading Wishes,
Austin P



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