Larry McMillan's weekly commentary, 7/13/01...
optionstrategist.com ...original link courtesy of dave_s.
For myself only, rather hear opinions of highly experienced and established gurus like John Bollinger, John Murphy, Lawrence McMillan, Paul Cherney, Richard Arms, and Don Hayes.
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>>> For Friday, July 13th, 2001
Stock Market
Support was broken in many indices and stocks last Friday. That break led to a free-fall decline of sorts this week. Actually, it was price -- not the sentiment indicators themselves -- that was the controlling factor in determining strategy during this last bearish phase. That is, as soon as the market broke down below support, the bulls capitulated and sold. What was left behind was and is significant overhead resistance.
The averages -- and many major stocks, too -- collapsed to the breakout levels of early April. That is, the decline wiped out the entire rally since the positive breakouts at that time. Bulls are hoping that these areas provide some support, and with Thursday's strong rally, it appears that they have.
The charts of IBM and $OEX are actually good examples of all of these points. IBM had broken out over 100 in mid April. Eventually, it went into a trading range between about 111 and 120. Traders had become accustomed to buying IBM near 111 and generating at least a small profit. However, when IBM fell below 111 last Friday, the dam broke and traders scrambled to abandon the stock. Thus what was "old support" is now resistance. Also, the breakout level of mid April (near 100) is now viewed as the "next support" level.
The major indices have similar charts, with "next support" at the following levels: $OEX: 606, $SPX: 1180; and $DJX: 100 (or 10,000 on the Dow, if you prefer).
As for the indicators, the equity-only put-call ratios are all rising strongly and thus remain on sell signals. Eventually, they will roll over to form buy signals -- an action that seemed possible near the end of June, but never actually happened.
The decline has produced oversold conditions, which can lead to sharp, short-term bounces. Some technical indicators registered very oversold readings. For example, on Tuesday, the equity-only put-call ratio climbed to 104, a very high number. Interestingly, though, when we went back to see what happened the last time we had such a high reading, we found that a high reading by itself does not guarantee that a tradeable rally will follow.
One other very oversold reading is evident from the NYSE put- call ratio, which has reached all-time highs. It is certainly interesting to note that traders have such a bearish attitude about NYSE stocks. Still, we can't get bullish on them until the put-call ratio stops rising, which it hasn't done yet.
I want to expand on the $OEX chart a little, because there is another important point that can be made. There is now clear support and resistance on the $OEX chart. The whole bottom area that was formed from mid-March through mid-April now represents support. Meanwhile, the neckline of the head-and-shoulders formation is certainly resistance now.
I am concerned that with these massive support and resistance areas (evident on both the IBM and $OEX charts, as well as many others), we might be stuck in a trading range for a while. If so, what strategy would work best? Try credit spreads or calendar spreads, using strikes that surround the expected trading range.<<< |
