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option trading, online trading
Begin Part 2 of 2
THE MARKET
We said to be patient, and then the indexes move up smartly. They bounced up off of the trendlines as they should, though not on outstanding volume. That is not really bad in the bigger scheme of this recent move as we want the indexes to move laterally a bit more, bringing the resistance closer before making a strong breakout move. The breakout move is the definitive one that we want, but that does not mean we won't take a good position when it is there.
VIX: 26.26; -1.49. Gave back a bit over half of Wednesday's gain on the move up today. The indicator is still in the middle of the 'normal' range of 20 to 30, but it has been lower over the past three weeks than during the initial stages of the rally. Not in bad shape, not in great shape for a powerful move. But, it is a secondary indicator, taking a backseat to price/volume action. For perspective as to where it is now, volatility ranged from 20 to 22 during the summer (very low, very complacent), and then spiked over 55 when the market re-opened after September 11. Since then it has ranged from 28.19 to 38 before this recent dip lower.
VXN: 48.91; -3.30. Strong drop on today's gain, easily taking back all of Wednesday's gain on that selling. As quick as a single session and it is back just above summer doldrums levels. As with the VIX, not the basis of a powerful move, but it has given us the flash of fear back at the bottom. As long as price/volume action remains good on the Nasdaq, that is the best signal. For perspective, in the summer it ranged from 43 to 47 on the lows. After the re-open it was up to 93 intraday, and after that ranged from 55 to 70. Another thing to consider; volatility levels back in January through March 2000 traded in a range from 55 to 60 before the Nasdaq's dive.
Put/Call Ratio (CBOE): 0.78; +0.03. The put/call ratio was not updated last night as the CBOE was experiencing problems. It rose 0.01 from Tuesday, not much for a day of pretty heavy selling based on the prices. Well, today more puts traded when the market rose. Usually they fall as the market rises as more option investors favor calls to downside puts. That makes today somewhat of an aberration, but one that we like. While the volatility indicators are edging closer to complacency levels, the put/call ratio indicates there is still enough anxiety in the market to get the put buyers active.
Nasdaq
A solid move up off of the up trendline with slightly higher volume as the Nasdaq led once again, this time to the upside. It was not the volume explosion you would want, but if it can continue to build the pattern with higher volume on up days and lower volume on down days, an upside breakout is still very much in the cards, particularly with the SOX backing the move up.
Stats: +45.29 points (+2.4%) to close at 1933.26.
Volume: 1.956 billion shares (+2.7%). Rising above average volume on a move higher is good, but overall volume was not huge. It did not top Tuesday's higher volume churn, but throwing that day out it was the highest volume in 9 sessions. Good and bad, but overall more positive. Up volume led 1.449 billion to 492 million downside shares.
A/D and Hi/Lo: Advancing issues took back over at 1.62 to 1 after decliners led 1.83 to 1 Wednesday. Not bad, not great. New highs rose to 77 (+15) as new lows rose to 45 (+23); that is not the kind of action you would expect on a gain in the index.
The Chart: http://www.investmenthouse.com/cd/$compq.html
As noted, the Nasdaq is forming an ascending wedge over the past 2 to 3 weeks with a top at roughly at resistance at 1940. Intraday it did test the 200 day MVA when it was higher three sessions ago at 1965, but 1940 has held the index on the close for three sessions recently. A strong breakout over that level on high volume would be the first step, but there is the 200 day MVA just above at 1957.40. That is some serious resistance, and the last real resistance before the March down trendline at 2110. On any selling on the NVLS news, we would want to see the index hold on the close above today's low at 1890.
Dow/NYSE
Bounced up off of the up trendline (9700) today on above average volume. Did what it had to do after two sessions of selling.
Stats: +117.56 points (+1.2%) to close at 9829.42.
NYSE Volume: 1.368 billion shares (-3.8%). Above average volume, but lower than Wednesday's selling volume. Higher volume would show there are more buyers than sellers in the overall market. The Dow has not been able to put together strong price/volume action of late as it follows the Nasdaq. 772 million upside shares versus 583 million downside. A good turn from Wednesday, but not powerful.
A/D and Hi/Lo: Advancers pulled back into the lead 1.71 to 1 (decliners led 1.93 to 1 Wednesday). A solid recovery as the overall A/D line remains in good shape. New highs rose to 57 (+2) while new lows fell to 38 (-4).
The Chart: http://www.investmenthouse.com/cd/$indu.html
The up trendline held and the Dow moved right back up, tapping at the trendline on its low (9691.39) before making the jump. Volume was solid but lower than the selling, so it was a good but not really good session. It has plenty of upside room to ramble with resistance at 9992 and the 200 day MVA at 10,162.06 and the upper channel at 10,175.
S&P 500: The big caps also jumped up off of the down trendline, tapping that support on its low (1125.51; also a level of prior price consolidations) and moving up for a solid gain. the blemish was the NYSE volume that was down on the session. It was still above average, however, and better than volume in the prior 9 sessions excluding Wednesday. As with the Dow, the S&P has room to rally with the down trendline at 1162 and the 200 day MVA at 1179.83. Not a bad move at all today, and with the Nasdaq trying to build a wedge to breakout, the S&P can tag along.
Stats: +11.68 points (+1.0%) to close at 1140.20.
Volume: NYSE volume was again above average, but lower than Tuesday's selling volume (1.368 billion shares; -3.8%).
The Chart: http://www.investmenthouse.com/cd/$spx.html
TOMORROW
Another Friday and a few more economic reports including preliminary Q3 GDP and the Chicago PMI. The Chicago report is more important to most of the bond market and big money as it indicates whether the manufacturing sector is pulling up out of the dumpster. The report does not come out until half an hour into the session. It could be important, but not necessarily a major mover unless it is a real upside surprise.
We would like to see tomorrow as another building day; not a huge breakout and no major selling, just a move up the trendline a bit, making more of a lateral move in preparation for a bigger breakout above resistance. The NVLS news may start things down a bit in the morning; all the better. We do not think it will keep the market down for long.
It is still a time of patience, letting the market and stocks set up their patterns. Some more sideways action will definitely make an upside breakout attempt stronger. Still we see good moves as we saw today with QLGC, FMKT, KRON, JAKK, AMHC as stocks continue to break resistance on strong volume surges. When the opportunity presents itself, take it. When the big breakouts come in the indexes as well, jump all over it. Thus far the indexes have fought off each attempt at selling on higher volume; now they are trying to prepare for the next major move higher.
Support and Resistance
Nasdaq: Closed at 1933.26.
Resistance: 1930 to 1940. 1940 is the breakout of the ascending wedge. The 200 day MVA is at 1957.40. The March 2000 down trendline is at 2110.
Support: The up trendline is 1892. 1875 is still the bottom of the recent trading range. The 18 day MVA is right there at 1870.95. Below that is 1800 and the 50 day MVA at 1805.41.
S&P 500: Closed at 1140.20.
Resistance: 1150. The March 2000 down trendline is at 1160. The 200 day MVA is at 1179.83 and the upper channel is right at 1187.
Support: The up trendline is at 1125 (also a point of prior price consolidations). Below that is the 50 day MVA at 1116.12. Then 1103, the old closing low in the double bottom from March and April.
Dow: Closed at 9829.42.
Resistance: 9992 (former top and bottom). The 200 day MVA is at 10,162.06 and the upper channel is just above that at 10,175. Other resistance at 10,200.
Support: The up trendline is at 9700. The 50 day MVA is 9614.15. 9500 also acts as support independently.
Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.
11-27-01
Consumer Confidence, November (10:00): 82.2 acutal versus 86.5 expected and 85.3 prior (revised from 85.5).
Existing Home Sales, October (10:00): +5.5% or 5.17M annual units versus 5.00M expected and 4.90 prior (revised from 4.89M).
11-28-01
Fed's Beige Book (14:00)
11-29-01
Durable Orders, October (8:30): +12.8% actual versus 1.8% expected and -8.5% prior.
Initial Claims, 11/24 (8:30): 488K actual versus 430K expected and 434K prior (revised from 427K).
Help-Wanted Index, October (10:00): 49 actual versus 52 expected and 52 prior.
New Home Sales, October (10:00): 880K actual versus 850K expected and 878K prior (revised from 864K).
11-30-01
Chain Deflator-Prel., Q3 (8:30): 2.1% versus 2.1% prior.
GDP-Prel., Q3 (8:30): -0.8% versus -0.4% prior.
Chicago PMI, November (10:00): 45.5 versus 46.2 prior.
SUBSCRIBER QUESTIONS
Q: As a primary investor in mutual funds I am not sure how to interpret the following:
1. put/call ratio
2. vix
3. vxn
4. support/resistance for exchange, i.e., Nasdaq support, resistance, channels, etc.
Extremely interested in wanting to know how to understand your e-mail and use above data.
A: The first three are what we call sentiment indicators. They are measures of how excited, complacent, bearish and bullish, scared or elated investors are about the market. As measures of investor emotion, they are best at flagging potential changes in market direction when they get to extremes. And they work inversely to the sentiment. For example, if investors are scared to the point of panic and are getting out of stocks, that is a signal that the market could be ready to turn back up. If investors are giddy with excitement about the market's prospects, that is a topping sign. Too far one way or the other, whether greed or fear, can indicate a change coming.
The put/call ratio measures the number of puts to calls traded in a session. It is best measured at the close. If it closes at 1.0, that means as many puts as calls traded. 0.50 indicates that for every 10 calls traded, 5 puts were traded. Why follow this? Because the majority of option traders, unlike our subscribers, are speculators, trying to buy cheap options and hit the long ball. When they get feeling too good or too scared as a whole, that can signal a change in market direction.
If they feel the market can only go up, that is an indicator that the market could be ready to drop. That usually occurs with a reading below 0.4. 0.4 indicates complacency; lower than that indicates an almost unaimous opinion among the speculators that the market can only go up. That is extreme. On the other hand, a reading greater than 1.0 on the close historically indicates that option players are scared, thinking the market is going down. They start loading up on puts, speculating on a further fall. It may take 2 or more closes above 1.0 to give a solid indication, but it has been very reliable at bottoms. The week the market reopened in September, 4 of the 5 sessions showed a put/call ratio greater than 1.0 on the close (1.21 at one point). That was massive downside speculation and fear, and the market found its bottom and turned.
Of late it has traded a lot in the 0.7 range. That is still an indication of a lot of nervousness, and we have seen it fall lower just to spike right back up on the first hint of selling. There are a lot of option players thinking the market has to fall. That is good as the market likes to climb that wall of worry.
As with all sentiment indicators, it is secondary to price and volume action. Price/volume shows us the actual buying or selling that is occurring. It is the 'horses mouth.' The sentiment indicators give us a heads up to a potential change in direction and we then have to watch the primary indicators closely. They are very useful, but we do not want to elevate them beyond their capabilities.
This weekend we will cover the other indicators in detail as well.
For a review of frequently asked questions, please use the link below:
http://www.investmenthouse.com/1questions.htm
Investment House subscribers are offered a special from eSignal for those interested in a realtime service. Contact:
Ray Fitzgerald
Account Executive
800-322-0940
Office hours 6:30-3:30 PST
rfitzgerald@esignal.com
Good Investing!
Jon L. Johnson and the Technical Traders Team
All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.
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