OCT 13 INDEX UPDATE
--------------------------
Short-term technical readings:
DOW - overbought region, HANGING MAN
SPX - overbought region, HANGING MAN
OEX - overbought region, HANGING MAN
NAZ - CLASS 1 SELL, HANGING MAN
NDX - CLASS 1 SELL, HANGING MAN
VIX - midrange
NAZ NEW NEW HIGHs-LOWs = NEGATIVE 12
HANGING MAN is a moderately reliable candlestic reversal pattern. Although a HANGING MAN is only moderately reliable, all five of the major indices got the same pattern which may add something to the reliability.
The NAZ/NDX had firm CLASS 1 SELL signals so the window is until MON's highs. During a good portion of the decline, all the way from 5000, I had more buy signals than sell signals which is indicative of a strong decline. The opposite occurs in a strong uptrend, where I get more sell signals than buy signals. So when I get CLASS 1 SELL signals in a strong downtrending market, it is logical to conclude that such could be a bullish hint. Of course, the same applies to the other indices.
As mentioned in the recent updates, I feel that a mid-term bottom(30 days) has been set. In light of the recent bullish developments Im suspecting that the fortcoming short-term rally should not be that strong, weak to normal.
Previously, I had mentioned that there were RISING FLAGs in the TRAN and the NWX. Some could argue that the RISING FLAG pattern in the NWX may still be intact, which is a bearish hint; however it did just complete a 3-WHITE SOLDIER which is quite bullish. Since the NWX has had a strong rally and I also got a CLASS 1 SELL on it, I feel that there should be some sort of a pullback soon, although small, then the buying should resume and possibly intensify.
The Rising FLAG in the TRAN is still intact. If that breaks to the norm(downside), that could limit further upside in the DOW. Taking it one step further, an upside limit in the DOW could possibly lead to some sort of sector rotation into the NAZ. Im not talking about the EXTREME SECTOR ROTATION where the DOW moves down and the NAZ moves up for extended periods of time, which I would again consider as an anomoly which will eventually get corrected. Im talking about the more normal type of sector rotation which lasts a few days, where its more like a catching-up phase.
This THUR I hedged my QQQ JAN 04 LEAPS, which are now up about 50%, by selling the OCT 32 calls for 2.35. I still have a very small short position in my mutual fund account(about 4% of my total portfolio) which is down. I kept that short position since I was partially hedging those JAN 04 LEAPS which was a significantly larger position. Hopefully, I can buy back those OCT 32 calls for less than 2.35 sometime next week(expiration week).
The MAX-PAIN levels in the OEX and QQQ moved up some on FRI, so some unwinding of the options already took place, which is normal. The MAX-PAIN is now at 540 on the OEX and 31 on the QQQ. The OEX closed at 560.78(difference of 20.78 points), and the QQQ closed at 34.55(difference of 3.45 points). As mentioned in the past, I dont use the MAX-PAIN as a concrete number, but prefer to use it with a buffer(+/-20 OEX points, +/-3or4 points QQQ points). So the FRI closing prices on the OEX/QQQ are at the upper region of their buffers; therefore there should be some more downward pressure before/into next FRI(expiration). Some have asked me to explain the MAX-PAIN and its effect during expiration week, so let me give it a shot. Basicly, the MAX-PAIN is the point where the PUTs and CALLs best offsets each other, I guess we could call it a point/region of equilibrium. For the large sellers of PUTs and CALLs, which are the mutual funds/institutions, this would be the point where they can basicly retain most of the premiums from the options(both puts and calls) which they sold. Therefore it benefits these large sellers of options if the price of the instrument/index moves closer to the MAX-PAIN level, as expiration day nears. Since the mutual funds/institutions are the largest holders of stocks, they have the means to move the market to benefit themselves in accordance with the MAX-PAIN, that could be interpreted as manipulation - HOW COULD THAT BE?? gggggg One factor that will also effect the MAX-PAIN is the OI(open interest). If the OI is small there may not be that much of a need to move the market closer to the MAX-PAIN. As for the current situation, I do not follow the OI as closely as I should, so if anyone can comment on this OCT's OI, please do.
A significant bullish issue is the ISLAND REVERSAL on the NAZ/NDX. Im no expert on ISLAND REVERSAL, especially large multi-day ones like the one we just got. Was advised by a friend who read up on it that it is common for the index to move back into the UP-GAP(2nd gap), before resuming the up-move. Such ties into the common belief of "filling the gap". The gaps on the NDX/QQQ started around 1277/32.5. Those gap levels are close to the 38% FIBONACCI retracement levels calculated from the SEPT LOWs upto last week's highs, assuming that the NDX/QQQ doesnt go alot higher before reversing. Although I am not one to set firm targets, I would say that those levels may be a fair/good entry point for longs playing the next upswing. Of course it could go lower. Assuming that the current rally is nearing/at a short-term peak, I will start legging in on the long side at those levels - I didn't say the whole wad. It also depends on where my short-term technicals are at that time - the lower my short-term readings are the larger the amount for that initial leg-in.
As up-beat as I may sound, I did hear on CNBC that both AMG and TRIMTABs both reported some sort of out-flow for the week ending THUR - thats the period when the market was rallying. It could just be hinting of a short-term peak, or something more ominous. Would appreciate it, if anyone can make further comments on that since I did not hear the whole thing. |
