WELCOME TO THE OPTION STRATEGIST WEEKLY COMMENTARY VIA E-MAIL from Lawrence G.
McMillan's web site OptionStrategist.com, home for serious options traders and
students.
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Expiration
Expiration will be a non-event as far as influencing the stock market. Open interest
of in-the-money options is so small that no further commentary will be given.
Stock Market
This market trades at everybody's price. That is, it goes back and forth far
enough to bail out both the longs and the shorts on a day-to- day basis. The
more we see this action, the more we think that the possibility of a trading
range market is becoming a reality. As you know, we've been using $OEX as a
means of defining the trading range, because it's so visible on that chart.
In terms of $OEX, there's strong support near or just above 600, and strong resistance
at 640 to 645. In fact, recently, the range has been even narrower than that
(605 to 630). Similar ranges exist for $SPX and the Dow.
There is another perspective from which this market can be viewed, though, and
it is a more bearish one. The equity-only put-call ratio chart continues to
trend higher. That is a bearish scenario. At the same time, $OEX is in a downtrend
of its own. As long as these trends persist, a bearish perspective can be justified.
These down trend lines present a longer-term viewpoint than does the trading
range in which we seem to find ourselves now, so perhaps the longer trend is
still down, but short-term we'll bounce back and forth for a while longer.
When looking at individual stock charts, many of them are breaking down to levels
not seen in quite some time. That, too, is bearish. While it's true that earnings
announcements may have spurred some of these breakdowns, they are nevertheless
bearish. Stocks that fit in this category include Allergan (AGN), America Online
(AOL), BEA Systems (BEAS), Interwoven (IWOV), Plug Power (PLUG), Qlogic (QLGC),
Siebel Systems (SEBL) and Veritas (VRTS). These are the ones that have broken
down in just the past couple of days. If we are at the inception of a great
new bull market, as the media (especially CNBC) would have you believe, then
why are so many stocks breaking down instead of breaking out on the upside?
Of course, there are positive stocks as well. Some of the most notable in
terms of being accompanied by strong option volume are Harley-Davidson (HDI),
Johnson & Johnson (JNJ), Procter & Gamble (PG), and Taro Pharmaceuticals (TARO).
Volatility is another factor that we often observe for clues about which way
the market might head. Not surprisingly, it also has gone into a trading range.
Using the CBOE's Volatility Index ($VIX) as a guide, it is ranging between 20
and 28. A breakout above 28 would most likely indicate a bearish market development.
In fact, if the market were to decline sharply, that alone would probably be
enough to force $VIX above 28.
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