Option Investor
Market Wrap

Resistance Broken?

HAVING TROUBLE PRINTING?
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        WE 5-17          WE 5-10           WE 5-3          WE 4-26 
DOW    10353.08 +413.16  9939.92 - 66.68 10006.60 + 95.88  -346.39 
Nasdaq  1741.39 +140.54  1600.85 - 12.15  1613.00 - 50.89  -132.94 
S&P-100  553.30 + 30.06   523.24 -  7.28   530.52 -  1.85  - 27.42 
S&P-500 1106.59 + 51.60  1054.99 - 18.44  1073.43 -  2.89  - 48.85 
W5000  10474.18 +456.71 10017.47 -184.57 10202.04 -  5.42  -426.79 
RUT      508.94 + 16.21   492.73 - 19.59   512.32 + 10.82  - 15.90 
TRAN    2798.36 +155.26  2643.10 -100.46  2743.56 + 20.93  - 74.24 
VIX       20.28 -  4.75    25.03 +  1.80    23.23 -  1.41  +  4.34 
VXN       42.94 -  7.79    50.73 +  4.47    46.26 +  4.02  +  2.89 
TRIN       0.78             2.56             1.71             1.82 
TICK       +651             +364             +910             +367 
Put/Call    .72              .83              .91              .87   

Who would have thought after the Dow closed under 10,000 on last Friday that we would have been celebrating a +413 gain this week? The +4.1% gain in the Dow was dwarfed by the +140 point, +8.8% gain in the Nasdaq. It is amazing how a few well-placed upgrades, earnings and economic reports can change the landscape. Intel upgraded, AMAT upgraded, AMAT earnings, Dell earnings, Book-to-Bill numbers, consumer sentiment, etc. Suddenly we have a real rally on our hands and the bears are still in denial.

The biggest news came for the week came from the chip sector, which had been beaten bloody for weeks. Chips had not seen a positive week since hitting 608 on the SOX on April-17th. Suddenly Cisco's comments spiked them +75 points in one day only to see it all disappear before the week was out. It was as though the chip analysts saw the spark potential and decided to create a real rally with back to back upgrades of INTC and AMAT. Of course the stunning book-to-bill numbers did not hurt. What a rally they created!

The Dow posted the best weekly gain since March-1st and closed at a four week high. The Nasdaq posted the best week in a year and stretched its streak to five days. Resistance levels were failing left and right at the close. Don't forget this was an option expiration week. The market makers and hedge funds tried really hard on Friday to hold the markets down to levels that would make the maximum number of options expire worthless. Those levels were 10200 on the Dow, 1100 for the S&P, 1725 on the Nasdaq and $32 on the QQQ. They attempted to hold GE at $32.50 until noon before finally giving up. The Monday after option expiration is normally bullish as positions are squared after receiving exercise notices in trading accounts. Those writing naked calls must buy stock if they failed to close the positions on Friday. Many writing covered calls will buy new stock to satisfy the calls rather than tender the stock they own at a lower basis. (This does not work for a tax audit but nobody volunteers the information)

The jump in Consumer Sentiment to 96 when analysts expected a decline and the biggest jump in semiconductor orders in over a year has investors thinking the bottom is behind us. The explosive jumps in the market over the last couple weeks has awakened many investors to the fact that the markets are alive and well. There is an estimated $2.5 trillion in cash sitting idle in brokerage accounts and money market accounts. Many mutual funds are sitting with more than 20% of their assets in cash waiting for the summer slump to buy. All of these factors add up to a powder keg of volatility and explosive potential. This should be scaring the hell out of anybody still short. Monday should be the day of reckoning for many.

The market overcame more news that Enron may have helped engineer the energy crisis in California for a profit. It ignored Carter in Cuba, assassination rumors, attacks in Israel, rumors of troops in Iraq and news that Bush may have been warned about Al-Queda and airline hijacking possibilities before 9/11. Finally it started listening to positive news instead of negative news. The proof of an economic recovery, while not robust, is strong and growing. The reawakening of the retail investor may be in progress. Those that decided to venture back into the market could feast on toasted bear next week.

I think it is possible we are setting up for the perfect storm. Only this storm is going to rain on the bear's parade. This is just a possible scenario but follow along. Think back to the bursting tech bubble in 2000. For two years dip buyers had been prospering wildly and new highs were a weekly occurrence. When the crash began those dip buyers continued to buy the dip for quite some time. It was denial that the trend had changed and they had made a wrong decision. They bought and rode stocks down until their pain threshold was reached and finally surpassed before they sold. The next bounce brought them back in thinking they had just sold too soon and then it happened to them again and again. Those who stuck their head in the sand simply let the stocks slide and consoled themselves that they would come back. As their wealth slipped away their incentive to sell the losers fell also.

They watched those losers shrink and slipped even more into denial. Am I reaching anybody? Let's turn the tables. Bears have been shorting every rally for a year or more. Every bounce, every good news event, every earnings surprise. Profits soared and the system became ingrained into their consciousness. Suddenly two weeks ago the system changed. The Dow hit the 9800 level several times and skidded but did not break. The first hit was in the last week of April, the second in early May. A surprise rally on Cisco earnings was written off as a one day wonder and bears still bloody from covering their shorts in a panic jumped on board again for the ride back down. Convinced that the panic covering was a mistake and had they only waited another day they would have won. Then came the surprise Intel upgrade. No problem it will pass. Then the AMAT upgrade and earnings produced some covering but the majority thought it would pass. Surely the IBM analyst meeting will tank the techs! Let's short the bounce! What? No bad news? That's ok Dell reports on Thursday and they will guide analysts lower. That will knock the stuffing out of these bulls. Besides, the book-to-bill will show the inventory replenishment cycle is over and we will be hitting new lows by the week end. Suddenly all the pivot points the bears were counting on have passed. That is ok, there is huge resistance at 10300 and 1100 on the S&P. They bulls will never break that. Their party is over.

Suddenly it is 4:05 Friday afternoon and the bears are in stunned disbelief. How did they do that? It should have cratered. Where is the profit taking that always appears? I can't believe they closed over resistance. I can't believe I did not cover! The shorts will think about the shoulda, woulda, coulda things they did not do as each decision point was passed and hopes were pinned on the next one. (Remember, the bulls did this on the way down. They (XXX stock) will beat earnings and it will recover. They will announce a stock split and we will be singing again. Surely the Fed will not raise rates again. All the while the bulls held in denial.)

Now the bears are faced with the same thing in reverse. When bulls finally bite the bullet and bail out of stocks in desperation it is called capitulation. There is a huge dip and everybody long loses money. Don't look now but the same thing happens in a bear capitulation only it is a spike, not a dip. Now, I am not claiming that this scenario has any basis in fact. We do know that many of these points have been felt, painfully probably, by most of us at some time in the past. We may or may not see another massive short covering rally on Monday. What are the odds? Maybe I am smoking too many of those funny cigarettes you roll yourself. Maybe I overdosed on sugar donuts during the intraday boredom in the markets on Friday. Those of you that know me realize that neither of those possibilities exist.

What we do know is that the markets defied gravity, bears and market makers last week and it culminated in a surprisingly strong close on Friday. Will that carry over into Monday? I hope so. Will the remaining bears become road kill? I hope so. Not just for you guys, I am long the DJX/OEX/SPX in the Pivot Trade section of the market monitor. After being stopped out of shorts at the open twice this week I would love for the gap to go in our direction for once! No, that is not why I am waxing bullish in the commentary this weekend.

I really believe that this scenario is possible for Monday. If it does it may only be another one day wonder. While the markets closed above all recent resistance the monster of all resistance levels still lays ahead. For the S&P it is the 1120-1126 level. The 200 DMA is at 1121. The 150 DMA is 121. The 120 DMA is 1125. The 90 DMA is 118. Who uses ALL those averages? Nobody I know but when ALL the averages converge you can bet that there are several thousand computer programs out there that notice. Now, would your next door neighbor impact the markets if he noticed it? I doubt it. Let the 6000 active hedge fund manager/traders, managing over $600 billion in assets, see it coming and it is a high odds bet that a short or two gets triggered.

The Dow has resistance at 10400-10430 and then a free ride to 10600 where all the skeletons come out of the closet. All those traders who have been kicking themselves for months for not selling at 10600 in March will get another chance. The Nasdaq has resistance at 1765, 1790 and finally 1820. The Nasdaq stopped right on the down trend line from March at 1741. A break above 1741 would be a strong bullish signal.

Don't get me wrong. There are still valuation problems in the market. We will still see some dips before fall and the summer doldrums are still ahead of us. However, I think there is a good chance of a bounce on Monday that will push the VIX below 20 again. That will set us up for several days of profit taking and start the cycle all over again. Hey, if investing was easy it would not be so much fun!

Enter Very Passively, Exit Aggressively!

Jim Brown
Editor

Editors Note: We are having a spring-cleaning sale at OIN. We have rounded up the last remaining video sets of the last seminar consisting of 10 four hour VHS cassettes and workbooks. I think we now have four or five left. These are the next best thing to being there. This seminar had over a dozen speakers including Austin, Jeff, Eric, Jim, Tom DeMark, Jon Najarian (Dr J on the CBOE), Tim Taylor, Dick Arms, Lindsay Glass, Buzz Lynn, Jeff Wright, Jim Crimins, Rance Mashek, Harry Browne, Mark Skousen. Over 40 hours of option teaching.

https://secure.sungrp.com/video/video.asp

Also we have a couple dozen of the year end special CD/Workbooks available. This is the five special reports with several hundred pages of indepth teaching. Jim, Austin, Jeff, Steve and Eric. We have delivered several thousand of these to rave reviews and only have a couple dozen left. Don't miss out!

https://secure.sungrp.com/cd_clearence/02renewal.asp

Act fast because there are no more. When they are gone they are GONE!

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