<font color=red>2001 Feb 22 Market Analysis:
Market Analysis and Commentary for February 22, 2001
“Touchdown!”
While most market participants would not characterize yesterday’s trading as a touchdown, those who are students of price and volume saw the price targets indicated by the rising wedge seen on the daily charts of the NDX and SPX (first identified here on January 17, 2001) fulfilled to the downside. The “IF > THEN” scenarios constructed from our observations allowed us to be profitable traders during this time.
In yesterday’s trading, the January 3 low for the NASDAQ 100 index was tested and marginally broken:
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The December 2000 low for the S&P 500 index was tested and marginally broken:
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Over the past few days, investors finally snapped and began selling as the market accelerated its losses. VIX, the CBOE Market Volatility Index, finally shot up, but not truly to panic levels seen in the past. We had noted in earlier commentary that VIX was at the low for the year, even as prices came out of the rising wedge pattern, indicating extreme complacency, but of course, typically the public does not panic until an old low is violated. So far, the absolute level of VIX is not as high as in previous market bottoms, and one interpretation would be that the selling isn’t quite over yet:
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The other interpretation, one which I am leaning toward, is that the public is not panicking at this point because they have simply resigned themselves to their fate, holding the bag on all their investments. Lately, on Silicon Investor, the thread on Writing Covered Calls has been busy, so perhaps many are praying that the losing strategy of writing covered calls will eventually lower the average cost of their stock to “free”. Now, that’s a lot of calls to be written! In any event, there comes a point where the call writers have to bite the bullet and take their losses, and much of the market’s fate will hang on the decisions made over the next few days.
Now that we have achieved the initial target, what do we do? First of all, we smile and say “well done” and then move on to the business of making more money. Let’s construct some more IF > THEN scenarios.
First, we need to take a look at the weekly charts and see what is happening in the big picture. For months, we have been monitoring the weekly chart of the S&P 500 index, and surmised that this could be a head and shoulders top of epic proportions. With the test of the December 2000 low here, we are now sitting right on the neckline again. Edwards and Magee had a measurement formula for this pattern, and we are sorry to report that it is some 290 S&P 500 points tall, meaning if this is truly a giant top here, breaking the neckline would produce the ultimate target of about 960 on the SPX. Gak!
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On the Dow Industrials, which has been attracting attention of late due to its move down, we can see that it’s been in a trading range for almost two years. To me, this is an indication of churning, distribution action, and for months, we have labelled this pattern an old-fashioned circular top. A break from these levels targets the area where the Dow Industrials initially broke to the upside before it entered the pattern, somewhere just above the 9,000 level.
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As for the Nasdaq 100 Index, what can we say that the chart doesn’t already? If were are looking for ultimate targets, I still say that using the Japan 1990 scenario, where it went from 39,000 to 14,000 is perhaps the closest analogy, a 65% decline from the parabolic top. This produces an ultimate target in the 1650 range for the NDX.
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Well, before we all freak out, let’s not forget that this is a potential 2B test of low the weekly SPX and NDX charts. A lot will depend on what happens between now and next week. The only thing we will want to know here is if the move down continues or if it can bounce from here. If it does bounce from here, we want to know if this is a true reversal or if it will simply be a failing bounce, where it goes up for a few days before making new lows again. If this is indeed some sort of bottoming process, there is no need to rush in a pick the bottom. We would like to see solid evidence that it has indeed been formed.
I will keep you updated.
Teresa |
