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OI Technical Staff : 8/31/2007 9:59:59 PM

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Keene Little : 8/31/2007 4:11:26 PM

OK, more than a little fear/profit taking. DOW futures have now given up about 100 points from the late afternoon high.

Keene Little : 8/31/2007 4:05:43 PM

They couldn't quite do it--too many wanted to take quick profits just before the close and the SPX, DOW and RUT finished in the red for the week. Not a bad recovery from Tuesday though. NDX outshined them all but the intramarket divergence in this regard is potentially bearish. We'll find out next week. I hope everyone has a great 3-day weekend.

Linda Piazza : 8/31/2007 3:46:10 PM

In case some subscribers are signing off early, have a great three-day weekend. Take a rest from the markets. Clear your heads.

Linda Piazza : 8/31/2007 3:44:12 PM

I keep searching for that one definitive thing that's going to show us where markets are going next week. I can't find it.

As I was searching, however, I did find that on the USD/yen's weekly chart, the 10-ema has made a bearish cross of the 30-ema. This occurred the week of 8/06. Such crossovers on the weekly chart are sometimes indicative of trend changes, although there can be false signals and even the true ones tend to come after a move has already begun. So, for now, it's only a confirmation of what we already knew: that the USD/yen currency pair took a big hit as the yen rose against the dollar. For now, a bearish signal has been given, one that was not given in the February/March decline of this year, FWIW. In fact, the last time such a signal was given was the week of May 1, 2006. That signal was short-lived but painful, as our recent correction has been.

Keene Little : 8/31/2007 3:31:51 PM

No surprise, volume has dropped off this afternoon but still respectable. Price is going nowhere but remains somewhat bullish, also not a surprise. They're just holding it up so as not to have a negative week if they can help it. Don't be surprised to see a last "goose" into the close to be sure the major indices are all green for the week.

Linda Piazza : 8/31/2007 3:11:34 PM

USD/yen at 115.80. I don't know . . . I'm having some difficulty believing fully in the rally with the USD/yen still stuck at or beneath resistance. If the inter-market relationship that's been existing between this currency pair and U.S. equities is changing, maybe it won't matter so much. My difficulty in believing fully in the rally doesn't mean that you should jump on the bearish side. Just protect bullish profits as I've been suggesting all day.

Keene Little : 8/31/2007 2:51:57 PM

To answer the last part of Greg's question about the DOW, the DOW as well as all other indices are always in some kind of EW pattern. The trick is in identifying which one ;-)

Keene Little : 8/31/2007 2:55:54 PM

Can you elaborate on the Elliot Wave theory? I know you like this tech indicator and would like to begin using it. What would be a good book to read or something to help me create the waves. Is the DOW currently in a EW pattern since the sell-off?

EW Theory is a study of repeating patterns and more a measure of how humans react to stimuli. The socioeconomic cycles that have repeated in human history can be measured by EW analysis. The stock market happens to be one of the best mirrors o social mood. It works right down to smaller timeframe charts (though not as reliably as the longer term patterns) and it shows we react to short term swings in bullish and bearish moods all the time. Bubbles are an example of euphoria and it's why they all end the same way.

The basic theory is that a trend is identified with a 5-wave move with 3 waves (1, 3 and 5) in the direction of the trend and 2 waves (2 and 4) that are counter to the trend. The 3rd wave is typically the strongest. The 2nd wave correction tends to be sharper than the 4th wave correction. The 1st and 5th waves tend to be equal in length. The 1st, 3rd and 5th waves themselves will be 5-wave moves.

After a 5-wave move completes it will be corrected. The basic correction is a 3-wave (a-b-c) move but there are several variations of corrective wave structures (and the part of EW analysis that takes the most time to learn). Within a 5-wave move the 2nd and 4th waves are 3-wave corrections or some variety of that. The best way to learn EW is to practice, practice and more practice. Label your own charts and don't trust the software programs that label charts for you.

You get a much better feel for the moves when you're forced to analyze the movements and determine the various possibilities in order to come up with a preferred count and alternates. Then you identify price levels that are key to your counts and use them to confirm or negate what you think the pattern is doing. It's a constantly evolving process, as is all technical analysis.

One of the better books is "Elliott Wave Prinicples" by Robert Prechter who is one of the more recognized names in the field. It provides very good explanations and examples and makes for an excellent reference as you start practicing on your own charts. EW analysis in real time (vs. analyzing what already happened) is where the rubber meets the road. A good web site that is loaded with free information, including a very good database of info related to the wave structure and relationships between waves, is at elliottician.com. Good luck and let me know if I can help along the way.

Linda Piazza : 8/31/2007 2:47:28 PM

USD/yen at that same old 115.81 level.

Keene Little : 8/31/2007 2:24:47 PM

SPX did a little retest of its broken uptrend line so that was the place to short it. If you did then keep your stop just above it--on a day like today don't risk anymore than you need. This is the kind of play that has to work right away or get out.

Tab Gilles : 8/31/2007 1:56:46 PM

$XEU:$XJY/SPX Link

Keene Little : 8/31/2007 1:53:25 PM

We've now got a firmer break of the uptrend line from yesterday afternoon for SPX. A retest up to about 1477 that fails would be a short signal.

Linda Piazza : 8/31/2007 1:52:21 PM

The USD/yen is at 115.84 as I type. I keep watching this currency pair try to break above important resistance and not be able to do it. It's got a potential double-top formation on its 30-minute chart and I'm just not seeing anything yet that inspires great confidence, but the goal in equities today will be to hold them up through the afternoon.

Tab Gilles : 8/31/2007 1:48:24 PM

Smith Microsoftware (SMSI) Added to S&P 600. Link

Tab Gilles : 8/31/2007 1:44:10 PM

HI-Lo chart is signaling BUY Link Link

Profunds: Link Link Link Link

Keene Little : 8/31/2007 1:36:15 PM

I agree with Linda about technical tools being suspect for the rest of the afternoon. It's too easy to push the pile around in a lighter volume session. For now I'd say one of the better methods is trend lines since they tend to do a good job in measuring the ebb and flow of buying and selling.

Currently it looks like SPX could be putting in a top via an ascending wedge. If so it could continue to chop its way higher into the end of the day. But watch for a break down, retest and then try a short. At least you can keep your stop tight that way. Same thing if we see an throw-over above the wedge and then a drop back down inside it--short it against the high. Link

The uptrend line just broke as I was typing this up but watch for a head fake break.

Tab Gilles : 8/31/2007 1:30:30 PM

$SPXWatch 1480/1485 level pivotal. Link Link Link

Linda Piazza : 8/31/2007 1:12:41 PM

The Keltner resistance displayed on the TRAN's chart on my 12:03:24 post held on the 30-minute close. The TRAN is currently at 4863.14, still testing that resistance up above now at about 4868. The TRIN is now at 0.37 and the USD/yen at 115.91, trying once again to break into and above that resistance zone that's been so tough for it.

The SPX is jammed right into that 72-ema on its daily chart, an average that I consider important S/R for some time for the SPX.

But you know what? From this point out, technical analysis probably matters very little. I'm actually worried about posting right now because I don't want to say anything that will encourage a bear or bull in a losing position to hang on.

Keene Little : 8/31/2007 12:58:09 PM

Because we're potentially inside a larger corrective wave pattern (in the bounce off the August 16th low) there are a number of possible scenarios that I'm considering. With the push higher from yesterday there are now some more bullish possibilities. One is that we're already into the c-wave of the larger A-B-C rally off the August 16th low. Two equal legs up in that case would take SPX up to 1533: Link

We might get a bigger sideways consolidation before another leg up (in pink). We might top out soon in a different kind of corrective bounce off Tuesday's low and head back down to at least retest the August low. There are unfortunately too many possibilities at the moment to have EW any more helpful than other technical tools. So it's one leg at a time and short term trades until the bigger picture clears up some.

Linda Piazza : 8/31/2007 12:49:14 PM

The TRIN now tests potential support near 0.32 on 15-minute closes, with the TRIN at 0.34 as I type. The TRAN has spiked to a new day's high with no bearish divergence showing up on its 30-minute chart when RSI level is compared to that seen on this morning's spike. The TRAN now tests 30-minute resistance at about 4867 on 30-minute closes, with the TRAN at 4870.94. The USD/yen managed a move back to 116.01, testing that resistance band again.

Bulls want to see TRIN remain low and not begin trending up again from a higher low and want to see the USD/yen climb, too, to feel most comfortable. The SPX is just cents above the Friday afternoon high, so this remains a level of potential resistance.

Linda Piazza : 8/31/2007 12:03:24 PM

A 30-minute chart of the TRAN, showing what I see on that chart. The TRAN sometimes leads other indices. The chart is somewhat scrunched. Hope you can read it. Link

Keene Little : 8/31/2007 12:02:11 PM

Market is pushing back up after a corrective pullback so expect higher (or more sideways before higher). Market internals are bullish and volume is respectable (on par with yesterday). I suspect volume will taper off rapidly this afternoon and with the lower volume it will probably be difficult for the bears to do much today. I'm thinking of just bagging it and picking it up again on Tuesday. I'll watch but it's got to be a sweet setup to get me interested in trying a short this afternoon. A few puts for over the weekend but that might be about it.

Linda Piazza : 8/31/2007 11:56:02 AM

The USD/yen is rising to test the supposed support that it fell through this morning, with the currency pair now at 155.75. The TRIN and VIX are dropping, with the TRIN approaching potential Keltner support at about 0.33 and the VIX approaching potential support near 23.05-23.24. Which is coming first today, the chicken or the egg? Are equities prompting responses in these other indicators and currency pairs or is it the other way around? Today, it feels as if equities are responding exuberantly to any slight improvement in bullish tenor and not much to any potential weakening of the bullish tenor. At least so far.

Linda Piazza : 8/31/2007 11:25:21 AM

USD/yen dropping to 115.54. TRIN rising to 0.73.

Jane Fox : 8/31/2007 11:20:22 AM

I just dropped in to post McMillan's weekly commnentary then I am on my way to the mountains for 4 days of camping.

Whatever this market holds in store, it will probably be known fairly shortly after Labor Day. Perhaps at the risk of over-simplification, this is how we see it: as long as $SPX continues to close below the 1480-1490 resistance level, there is a bearish bias and downside potential to this market. But if the upside breakout does occur ($SPX above 1505; $RUT above 804), then an intermediate- term bullish move should occur.

$SPX has had a very volatile week. Last Friday, it concluded a week of rallying by reaching 1480 before plummeting rapidly to 1430 this week. Those two numbers outline a very volatile trading range within which the index is temporarily confined. Both have some history. 1480 and 1490 were support areas during the bull market earlier this year and have now transformed into resistance areas over the past several weeks. Similarly, 1430 was a support area before the August 16th plunge and recovery.

We think an $SPX close above 1505 would signal an all-clear to the upside, although it may merely take a two day close above 1490 to accomplish the same thing.

But what if$SPX falls back below 1430? Then a bull-blown retest of the 1407 closing lows and or the 1370 intraday lows will likely be in store. And if they don't hold, then a true bear market will be underway.

The equity-only put-call ratios are turning more bullish than they've been in a long time. The standard ratio has already given a buy signal, and the weighted ratio is just about ready to confirm one as well. This, of course, is important from an intermediate-term viewpoint, and if the upside breakout does occur, these important indicators look to be ready to confirm it.

Market breadth has been all over the place. The massive oversold condition of mid-August was completely dissipated by the next week's rally. In a topic we'll cover more in depth in next week's Option Strategist newsletter, there were back to back "90% days" this week.

Volatility indices ($VIX and $VXO) remain very elevated, trading near 25 most of the time. In general, that's not bullish. In a true bullish scenario, $VIX would be declining, even on days when the market falls. Since that's not happening, we rate $VIX as a somewhat negative indicator, although it's important to watch the relationship between $VIX and the September futures.

In summary, there is a lot going on in this market. It is almost meaningless to make long-term projections because things can change quickly with volatility so high. But, in general, we remain skeptical (mildly bearish) unless an upside breakout occurs. If it does, only then would we be prepared to change to the bullish camp.

Linda Piazza : 8/31/2007 11:14:32 AM

The TRIN is now at 0.67, down a little from +0.70 levels. That's not a bearish (for equities) amount in and of itself, but the scenario I warned of early this morning--a TRIN rising after reaching excessively low levels and equities pulling back while it rises--is happening. The pullback is being confirmed by a downturn in the USD/yen, too. So far, the pullback is just a pullback and that may be all it is. On other days when TRIN has started out at an excessively low level, it's tended to rise through the morning while equities pulled back. As mentioned earlier, sometimes the morning high is breached in the afternoon and sometimes it's never reached again, but I wanted subscribers to consider the possible scenario that's coming to pass, to determine what they wanted to do with short-term positions.

Linda Piazza : 8/31/2007 11:09:51 AM

USD/yen now at 115.60.

Keene Little : 8/31/2007 11:05:53 AM

This morning's early highs are still holding and I'm still short against the high. I'm not going to try to manage this trade today--it will either work as a short into next week or I'll stay flat. I will try one more short if stopped out but I don't want to lower my stop until later today if given the opportunity.

Linda Piazza : 8/31/2007 11:04:20 AM

TRIN 0.62.

Linda Piazza : 8/31/2007 11:01:08 AM

USD/yen: 115.88, testing 115.80-115.90 potential support. Equity bulls would like to see this hold.

Linda Piazza : 8/31/2007 10:57:28 AM

USD/yen at 116.00 after punching down to test support at 115.94.

Linda Piazza : 8/31/2007 10:47:27 AM

The USD/yen is at 116.11 as I type. The low has been 116.00 since last night. There should be much potential support in the 115.80-115.90 zone, but equity bulls certainly want that to hold.

Linda Piazza : 8/31/2007 10:37:25 AM

Some of you who are bullish will have noticed the inverse or reverse H&S on the SPX's intraday charts, building over the course of this week. It's at the top of a climb, not a bottoming one, and so perhaps less trustworthy than is typical. It looks as if it has a declining neckline, and this morning's pop higher broke up through that declining neckline. You will also likely have noticed that the pullback over the last 30 minutes pulled back to that neckline and then the SPX has been attempting to bounce back.

Some of you who are bearish will have noticed that this morning's high approached Friday's high of 1479.40, and you're concentrating on the possibility of a double-top in the making.

Which interpretation is most likely the correct one? Daily charts tell us that the decision hasn't been made about whether bulls or bears will prevail over the short-term. The action of the USD/yen (pushing up into resistance but not breaking above it) tells me the decision hasn't been made yet, either. Stay as neutral and unbiased as you can and protect profits.

Keene Little : 8/31/2007 10:36:16 AM

At this point it's looking more like we're still in a little sideways consolidation which suggests we haven't seen the final high yet. So if you're short against this morning's high, keep your stop tight but be ready to short a new high.

Linda Piazza : 8/31/2007 10:17:55 AM

My SPX chart from last night's Wrap, with last night's annotations but including this morning's price action: Link

Linda Piazza : 8/31/2007 10:15:10 AM

TRIN 0.51. As I warned earlier today, short-term bulls should watch out for the possibility that the TRIN could be reversing from its excessively low levels near the open. On other mornings when it's done that, markets have trended down from early highs while the TRIN climbed. Sometimes an afternoon pop brought equities back to a new high and sometimes not. I imagine that the instructions to the juniors are to hold equities steady today, so I assume some effort will be made to do so, but be forewarned of the possibility of a TRIN climb and equity pullback through the morning.

Linda Piazza : 8/31/2007 10:09:01 AM

The TRIN punched all the way up to 0.57, but has pulled back to 0.42 now. The USD/yen punched all the way down to 116.02, but is back up at 116.30. So far, markets are holding up relatively well to what some will consider disappointment from the Fed chairman's speech, although I think he signalled fairly well his stance before this. I'm not sure markets have decided on final direction yet.

Keene Little : 8/31/2007 10:06:29 AM

That was quick and we might still be in a little sideways/down consolidation (I'm still looking at the 3-min chart of NDX/NQ) so we might not have seen the little 5th wave up yet. If this morning's gap gets closed then we've seen the high.

Linda Piazza : 8/31/2007 10:03:51 AM

The TRIN is rising, now at 0.40. The USD/yen is pulling back, but only slightly so far.

Keene Little : 8/31/2007 10:01:43 AM

We're getting the new high and this should be the last one so watch for a rollover and short against the high.

Linda Piazza : 8/31/2007 9:58:07 AM

Here we go in a few minutes: The text of Bernanke's speech will be released and examined. A couple of important economic numbers will be released.

Keene Little : 8/31/2007 9:56:05 AM

An interesting statistic out of markettells.com shows that when the Nasdaq to NYSE volume ratio is in excess of 1.5 to 1 it has typically marked at least a short term high in the market. The heavier buying in the techs has typically been a blow-off move rather than the start of something more bullish. Yesterday's volume ratio finished at 1.48.

That's one of the reasons I'm watching the NDX a little more carefully right now--a new high, as shown on my charts, could be a good setup for the short side. Countering that are some bullish things I see on the other charts so I urge caution today but I think it will be worth a try.

Linda Piazza : 8/31/2007 9:54:01 AM

The advance/decline line keeps climbing. It's at 2415 according to my source.

Keene Little : 8/31/2007 9:49:54 AM

On the NDX chart I showed last night (below) I pointed to 1985 as being a level where it could top out. This morning's high of 1988 was a little above that but it's certainly within the area that could mark a high for its rally--updated 30-min chart here: Link

The last leg up (wave-(v) on the chart) should be a small 5-wave move which I'm showing on this 3-min chart: Link It's risky using very small timeframe charts fro EW counts because it's not always reliable but ideally we'll see a small consolidation followed by one more push higher to give us the 5-wave move up from yesterday afternoon's low. That high should be accompanied by bearish divergences and if so then it will be a good time to short it. The 5-wave move up from Tuesday should at least be corrected and could be a good trade.

Linda Piazza : 8/31/2007 9:48:38 AM

The Fed has announced, through the Federal Reserve Bank of NY, a repo in the amount of $5.000 billion, maturing Wednesday, September 05. Unless I've missed something, this is a total add, as no repos mature today.

Linda Piazza : 8/31/2007 9:44:15 AM

A warning to short-term bulls: I show TRIN at 0.27, already below the level at which it typically is signalling that the move is excessive. For example, both 8/23 and 8/27, TRIN was in a similar zone and a similar Keltner setup near the open, and it climbed through the morning while equities backed off their early morning highs. Just remain aware of the possibility of something like that repeating. There's no guarantee that it will, but it's certainly a possibility.

Linda Piazza : 8/31/2007 9:39:10 AM

For those of you who might have missed her last post yesterday, Jane has taken a vacation day today.

Keene Little : 8/31/2007 9:35:30 AM

Keep in mind today that we could get a move this morning and that's it. It wouldn't surprise me to see the market go flat after the initial move up as traders exit early for their long weekend.

Linda Piazza : 8/31/2007 9:34:54 AM

The USD/yen rose overnight right into the resistance zone that I talked about multiple times yesterday. With the USD/yen at 116.24 as I type, it's bumped up to test a 38.2% retracement of its summer decline at about 116.35 and the 20-dma, at about 116.44. The bump higher occurred mostly as currency trades reopened last night, about the time Japan was getting a flood of economic releases, and the currency pair has mostly chopped around since then, while it admittedly has created a series of higher highs.

My conclusion? Equities have some catching up to do, as we're seeing with the equity move this morning, but then will they follow the currency pair in hesitating near highs until more information (via economic releases and Bernanke's talk) is gleaned?

Unfortunately, for the USD/yen, this is just a rise to test resistance again, and we really can't form firm opinions just yet. Keep an open mind to all possible scenarios.

Keene Little : 8/31/2007 9:25:50 AM

We've got the Chicago PMI at 9:45 and then Factory Orders and Michigan Sentiment at 10:00.

Keene Little : 8/31/2007 9:24:16 AM

There wasn't much of a reaction to this morning's first economic reports on Core PCE inflation, personal income and personal spending.

WASHINGTON (MarketWatch) - Inflation remained cool while household incomes and spending strengthened in July, before market turmoil in August shook Wall Street and Fed policymakers, according to Commerce Department figures released Friday. Inflation was milder than expected in July, with total inflation rising 0.1%, matching the 0.1% gain for core inflation excluding food and energy costs. In the past year, the Federal Reserve's preferred measure of core inflation has risen 1.9%, just within the Fed's unofficial target zone.

Nominal incomes increased 0.5%, the best since March after rising 0.4% in June. After adjusting for inflation and taking out taxes, real disposable incomes grew 0.5%, the best since February. Inflation-adjusted spending rose 0.3% in July after two tepid months of spending.

Keene Little : 8/31/2007 8:45:11 AM

This morning's gap up will also have SPX, DOW and the RUT jumping up over their downtrend lines from July (which held price down yesterday). After a corrective pullback yesterday that will look bullish. The only thing the bulls will need to do at that point is not let the market drop back down below those trend lines (and would be a good buying opportunity if price comes back down for a successful retest).

Keene Little : 8/31/2007 8:41:34 AM

It's looking like the bears are being punished for even thinking of taking the market down this week. After the strong decline into Tuesday's low it's looking like there are many who are determined not to let this week end up in the red. With the big gap up expected this morning, as long as it holds and can continue higher the buyers might have a chance of getting us back to at least even for the week. SPX ended last week at 1479.40 or about 20 points above yesterday's close. ES has been as high as +18 in overnight. If they can keep the rally going they'll have no problem getting us back into the green for the week.

Linda Piazza : 8/31/2007 8:35:18 AM

Here's a scenario on the SPX to contemplate this morning. I've been showing charts that comment on the 72-ema's importance in the SPX's support/resistance levels, at least in my opinion. Through many months, it served as support on daily closes, and then, on two pops higher in August, it served as resistance on daily closes. That 72-ema was at 1479.96 as of the close yesterday. If the futures continue higher into the cash open and the SPX spurts higher, prices could either get jammed up against or even pierce that moving average ahead of Fed Chairman Bernanke's talk. If you're in bullish positions, you need to decide before the open what you'll do if that happens. I don't know what Bernanke will say and whether he'll disappoint the markets. Although it's certainly a possibility that he'll signal that he's not willing to listen to the multiple calls for a rate cut, no one knows for sure how it will all play out.

If you have multiple contracts in bullish positions, will you step out of partial positions and lock in some profit, allowing you to participate in further gains with the remaining part of your position? Will you just ratchet your stops higher with each bounce, following the action and letting any downturn, if it comes, take you out at a profit? Just don't let any profitable bullish trades turn into losing ones.

Linda Piazza : 8/31/2007 8:15:49 AM

After checking all the way back to the beginning of July, I can find no Fed repos that mature today. That means that, unless I missed something, any Fed repo made today would be a net addition.

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