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To: MulhollandDrive who wrote (1992)	7/19/2002 11:59:23 AM
From: Didi	Read Replies (2) \| Respond to of 2505

"McMillan Market Commentary", 7/18/02... optionstrategist.com "Smart Money Index / Indicator": ...http://www.haysmarketfocus.com/html/SMI.htm ...http://www.trendmacro.com/a/guest/goodman/200207/20020719goodman.asp ...scroll down ======================================== >>>McMillan Market Commentary Thursday, July 18, 2002 optionstrategist.com <---accompanying charts Stock Market This market has quickly become the most ferocious of bear markets. Rallies during bear markets are always sharp, short-lived affairs. But they are becoming shorter and shorter. On July 5th, in a half day of trading, the market jumped 320 points. Last Monday afternoon, it rallied nearly 400 points in an hour and a half. But in both bases, the bear came out stronger than ever -- slamming the market to new lows. All potentially bullish setups have been undone. There had been a chance that the September lows might hold, and the bullish 'W' formation could occur. That is no longer a possibility as the market has smashed through on the downside. This means that a whole new bottoming process will have to eventually be constructed. Our four main technical indicators are price, market breadth, volatility, and put-call ratios. They have served well to keep one from buying into this market. The first three have warned that, while the market is oversold, it is not ready to be bought. Only the put-call ratios have issued (false) buy signals, but we have correctly cautioned against using only one of the indicators as a reason to buy. Let's review their status now. Price action has been terrible. Each potential support area has been violated and quickly becomes a resistance area. $OEX (Figure 1) now has resistance in the 470-480 area. One cannot even consider buying the market for more than a day trade until $OEX can break out above these levels. Market breadth has been poor, as well. About the only positive thing about market breadth readings is that they aren't as bad as they were last September. So, neither price nor market breadth has even come close to generating a buy signal. Market sentiment, however, hasn't been as clearly bearish, as option traders have tried (incorrectly) to jump in too early on the long side. Implied volatility continues to rise, and that, too, is bearish. As long as volatility trends higher, it is bad news for stock prices. The CBOE's Volatility index ($VIX) has moved sporadically higher, but hasn't really approached the levels of last year. In addition to watching $VIX, we also keep our eyes on a composite volatility index constructed by combining the implied volatilities of the individual stocks that make up the $OEX Index. This chart is shown in Figure 2. It is clearly moving strongly higher. It won't give a buy signal until it peaks and begins to fall. One facet of this chart is potentially more bullish than the $VIX Index: it has nearly reached the levels of last September. If it should exceed those levels, which seems likely, that would at least show that option traders have reached levels of panic greater than last September. Finally, there are the equity-only put-call ratios (Figures 3 and 4). These gave buy signals a couple of weeks ago, and those buy signals remain in force. Clearly, such buy signals have been premature and incorrect. That's why we require price confirmation of any signal received from a sentiment indicator -- because sentiment can sometimes be misleading. Perhaps these equity-only buy signals will yet prove to be correct -- just premature. In summary, the same advice that we've been espousing for several weeks continues to hold: while the market is deeply oversold (and thus subject to spawning sharp, short-lived rallies), there won't be any intermediate-term bullish signal until $OEX (and other major indices) can close above resistance. For $OEX, that would be a rise above the 470-480 level. At the current time, that seems like a formidable task. In fact, even when the buy signal eventually does occur, there will have to a retest. I say that because of the severity of the oversold condition at the current time. Thus, we won't be in any rush to pile in on the long side. Rather, we'll continue to tighten stops and take partial profits on shorts. One last comment. Today is expiration day. Expect arbitrage selling because there are a large number of in-the-money puts (in terms of open interest) and virtually no in-the-money calls.<<<