Most of our indicators are still bearish, and we think this market has more to go on the downside. Even though the market hasn't dropped very far in points this week, it has looked terrible -- especially among small-cap and NASDAQ stocks. One telltale sign has been the fact that there were a few times this week when rallies got underway, buoyed by buy programs. However, the largest programs -- detectable by the large TICK readings they generate -- were met with heavy selling and actually marked the highs of the day on both Wednesday and Thursday. This is negative action and generally leads to sell programs in short order.
Let's start by discussing the price action of the major indices. They broke down a week ago and haven't been able to mount much of a rally since. The former breakdown areas now represent heavy resistance, should the market even get that far back. Meanwhile, the major indices broke near-term support this week and appear to be headed for the May lows once again. Consider the chart of $OEX (Figure 1). The stock broke below 540 today, and this sets up a test of the 530 area -- the May lows. However, if the technical picture doesn't improve by the time that test of support occurs, the index could well break on down through that level, too.
Equity-only put-call ratios remain bearish, as they continue to rise (Figures 2 and 3). However, they are getting fairly high on their charts, which indicates to me that they are getting "oversold." Of course, that doesn't mean they're necessarily near a buy signal, so we'll continue to view them in a negative light until they roll over and begin to head downward (which would be the buy signal).
Market breadth is split. NYSE breadth is stronger than NASDAQ breadth.
Volatility is staying very low. As we've said many times in the past, decreasing volatility is bullish -- or at least, not bearish. So this indicator remains bullish or neutral. However, $VIX just made another 8-year closing low, and that's beginning to get worrisome. Nearly everyone thinks the market is going nowhere -- that it will remain stagnant until at least Labor Day. That is a fundamentalist argument that I don't buy at all, especially since it is a consensus opinion. Many traders who feel that way have been selling index options, which is what keeps $VIX so low. But we know, from past experience, that the market is prone to explode after very low readings. Therefore, option sellers should beware.
In summary, then, we expect lower prices ahead and give the market a fair chance of breaking below the May lows.
Lawrence G. McMillan
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Lawrence G. McMillan is the author of Options As a Strategic Investment, the best-selling work on stock and index options strategies, which has sold over 200,000 copies. The fourth edition of this work was just released in March 2002. In addition, his other book, McMillan On Options, was published in October, 1996. He currently authors a unique daily fax service -- Daily Volume Alerts -- which selects short-term stock trades by looking for unusual increases in equity option volume. He also edits and publishes "The Option Strategist", a derivative products newsletter covering equity, index, and futures options, as well as "The Daily Strategist", covering much the same strategies but on a daily basis. In these capacities, he is the President of McMillan Analysis Corporation, which he founded in 1991. He has spoken on option strategies at many seminars and colloquiums in the United States, Canada, and Europe. In addition, he trades his own account actively and manages accounts for others in the option markets.
Lawrence G. McMillan has spoken on option strategies at many seminars and colloquiums in the United States, Canada, and Europe. He is a guest speaker on Bloomberg TV, CNBC and Bloomberg Radio. He also writes regularly for "The Exchange", a publication of Data Broacasting Corp., and authors a weekly columns for WorldlyInvestor.com, and MarketMavens.com. In addition, he trades his own account actively and manages accounts for others in the option markets.
From 1982 to 1989, he was in charge of the Equity Arbitrage Department at Thomson McKinnon Securities, Inc. and then was in charge of the Proprietary Option Trading Department at Prudential-Bache Securities in 1989-90. Before holding those positions, he was the retail option strategist at Thomson McKinnon from 1976 to 1980, and then traded the firm's proprietary account beginning in 1980.
Mr. McMillan holds a B.S. degree in mathematics from Purdue University (1968) and an M.S. in applied mathematics and computer science from the University of Colorado (1972).
McMillan Analysis Corporation, headed by best-selling author Lawrence G. McMillan, has been providing options oriented advice and learning tools since 1990. Mr. McMillan, with over 26 years of option trading experience, is the editor behind all advisories and services published by McMillan Analysis. We offer a wide array of learning and analysis tools for serious traders and option students. We believe an informed and educated trader makes a better client. We strive to make an important difference for our viewers. We think you'll agree, as do many of our clients, that we offer superior options products and services.
