Option Investor
Market Wrap

One Green Cheese Lane

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     12-15-2003            High     Low     Volume Advance/Decline
DJIA    10022.82 - 19.34 10139.63 10021.64 1.76 bln   1035/1808
NASDAQ   1918.26 - 30.74  1979.78  1918.26 1.78 bln    902/2196
S&P 100   530.47 -  1.31   536.53   530.42   Totals   1937/4004
S&P 500  1068.04 -  6.10  1082.79  1068.02
RUS 2000  535.25 - 12.34   553.38   535.25
DJ TRANS 2950.77 - 32.64  3010.74  2950.64
VIX        17.23 +  0.82    17.42    15.79
VXO        16.91 +  0.96    17.25    16.26
VXN        27.07 +  1.21    27.23    25.96
Total Volume 3,949M
Total UpVol  1,102M
Total DnVol  2,783M
52wk Highs     847
52wk Lows       36
TRIN          1.14
PUT/CALL      0.70

One Green Cheese Lane
By Jane Fox

If your address is One Green Cheese Lane, The Moon then you may not know that US Military forces captured Saddam Hussein over the weekend. This of course made for a gap up this morning but not anywhere near the kind of gap I thought it would be.

The SPX opened at 1077 a 3-point gap from Friday's close, immediately rushed to make a daily high of 1082 by 9:35ET and took the rest of the day off. By 3:00 ET the SPX had closed the gap and everyone expected a small reprieve from the selling. Unfortunately it didn't happen and SPX just continued to fall making a daily low of 1068 at the 4:00 close, a 14-point range. This is what some call a gap and crap.

Using some of Jeff Bailey's retracement techniques, I have anchored a retracement on the 60-minute chart from the November 21st lows at 1031 and fitted the 19.1% retracement, to the December 3rd and December 12th levels. Using this retracement, a normal 38.2% retracement would take the index back to 1064 and a 50% retracement, still within the range of a normal retracement, would take the index back to 1057. So although today looked bearish the SPX is not in any danger of entering bearish territory but a trade below the last swing low and the 61.2% retracement level (yellow line) would change my mind.

When the DOW opened it also raced to make its daily highs of 10139 by 9:35 ET. It was sort of like these indexes wanted to get the daily highs out of the way early so they could get down to some serious selling. The DOW closed on its lows at 4:00ET at 10021 a 118 point range.

I have also anchored a fitted retracement on the DOW November 21st lows and fit the 19.1% retracement to the December 9th swing high which fits nicely with the 10000 level. As long as the DOW stays above the 38.2% retracement level and does not make a lower low I think the bulls are in control.

For the OEX wrap I solicited Linda Piazza's help for there is no one the OIN staff that knows the OEX better than Linda. Here is her commentary.

Late last week, the OEX began moving up from the midline of its rising regression channel, suggesting that it might rise toward the top of that channel, currently near 540. Monday's trading pattern questioned that assumption. Although the 535-536 resistance zone does not appear as strong as the 527-529 and 531- 533 zones on the monthly chart, it proved strong enough to turn back further OEX advances today. Monday's trading pattern produced an inverted umbrella sitting high above the previous candles on the daily chart, with such a candle sometimes serving as a reversal signal. With one notable exception on October 9, such candles on the OEX are almost universally followed by a decline. Prices pierced through the 533 resistance and the upper Bollinger band, but could not maintain that level and fell back, with the body forming below both. That shows market participants that bullish fervor wasn't strong enough to hold onto those levels.

Such potential reversal signals must be confirmed, however. Tomorrow, traders will watch first for an open below that candle and then for a move down from there to confirm the reversal signal. Even then, they might be nervously aware that October 10 presented just such an opening, but that day's trading produced a spinning top that was followed by a climb rather than the expected decline.

Daily oscillators do not offer convincing evidence of either a drop or a climb. MACD lines slant up, RSI tried to hook over, and 21(3)3 stochastics trend in territory indicating overbought conditions. MACD attempts to erase the bearish divergence that has troubled many technicians, with MACD lines moving higher than their position during the early November price highs. However, MACD has not yet eclipsed the MACD high achieved in September although prices have surmounted the September high, so it's possible to point out conflicting evidence.

Thirty-minute and 60-minute oscillators hint that there's plenty more downside to go, and if daily oscillators turn down, too, the downside promised by that potential reversal signal may be realized. With inconclusive oscillators, October 9/10's example before us, and the known bullishness of the Santa rally season, we may not be able to count on that reversal signal being confirmed.

Thank you Linda for a great analysis.

One of the reasons I have been bearish lately is the weakening of the small cap stocks in comparison to the large caps. Last week I posted a chart in the Market Monitor of the $RUT.X (Russell 2000 small cap index), the $SPX.X and an indicator that measures the spread between the two. I would now like to spend some time discussing why my bearish outlook may have been wrong. The spread is a very simple formula (RUT + SPX) / SPX but a very good visual for how well the small caps are doing in relation to the large caps.

The top panel is the $RUT.X, middle panel $SPX.X and the bottom panel the spread. Within the red box I drew, the spread is flatlining demonstrating both indexes are falling or rising in tandem. But come March the spread moved above its 50MA and continued to rise, which indicates the small caps were outperforming. Then I noticed the possible H&S forming in the $RUT.X while the SPX was making new 52-week highs which caused the spread to take a plunge below its 50MA. All this lead me to believe it was bearish for market overall but that thinking may have been wrong and another scenario may be taking place.

The Russell 2000 tracks US companies with a market capitalization of $1.2 billion or less and therefore more sensitive to an economic deceleration that higher interest rates could bring. Wall Street expects to see a quarter point interest rate hike by early next summer and although this is not a huge hike, it could mean the cyclical small caps that are more sensitive to interest rate hikes will no longer outperform the large caps. This is not bearish for the market as a whole but just a cyclical reshuffling that happens all the time. In other news Oracle (ORCL) topped Wall Street expectations by posting a 15% increase in net income on strong software-licensing revenue. It reported net income for its fiscal second quarter of $617 million, or 12 cents a share, compared with $535 million, or 10 cents a share, a year earlier. ORCL's results are closely watched for clues about the future of corporate information-technology spending. Wal-Mart Stores Inc. (WMT) weighed on the Dow as the nations largest retailer gave a not so rosy outlook for December sales as more people delayed holiday shopping or bought gift cards that do not immediately count toward revenue. WMT shares fell $1.76, or 3%, to $50.74. There were not a lot of sector winners today but the airline ($XAU.X) and utility ($UTIL) indexes were able to squeak out a 1.12% and 0.04% rise respectively.

Sector losers were lead by the disk drive index ($DDX.X), the Semicondutor index ($SOX.X) and the Russell 2000 ($RUT.X) with 3.96%, 2.79% and 2.25% loses respectively.

Moving onto market internals we saw the bears in control with declining issues outnumbering advancers by a 20 to 12 margin on the NYSE and by a 22 to 9 score on the Nasdaq exchange. The volume of stocks moving lower was 928 million shares on the Big Board and 1400 million shares on the Nasdaq, vs. higher volume of 515 million shares and 397 million shares, respectively. New highs to new lows painted a much healthier picture with NYSE new highs clocking in at 435 to new lows of 10 and on the NAZ new highs were 121 to 5 new lows.

remember plan your trade and trade your plan.

Jane Fox (with a little help from her friend Linda)

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