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McMillan Market Commentary 7/30/4


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#1 TTHQ Staff

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Posted 30 July 2004 - 08:51 AM

Stock Market

The bulls are trying to make a stand here, near the May lows. So far, their endeavor has been successful, although not all the technical indicators agree with their bullishness. Still, the remaining indicators could turn bullish if the market does not continue its downward thrust soon. Let's examine the individual indicators.

First is the price action of the major indices. Their charts are still in severe downtrends (Figure 1) and we would not consider them anything but bearish unless they climb above their 20-day moving averages, at a minimum. $OEX and $DJX (the Dow) are near that level. $SPX and QQQ still have a little ways to go to climb above the 20-day moving average. If those averages are exceeded, that would be a signal to close out our bearish positions. As for taking long positions, that is a matter that requires confirmation from some of the other indicators.

The equity-only put-call ratios remain on sell signals, although it should be pointed out that the standard ratio is at new yearly highs, and is thus oversold. These put-call indicators are 21-day moving averages, so they can't turn around on a dime. If a more lasting rally develops, they will confirm it. We see nothing wrong with waiting for confirmation from these two important sentiment indicators.

Market breadth has improved this week, and we now have buy signals from both the NYSE-based and the "stocks only" oscillators. These are complete buy signals as both oscillators dipped down into oversold territory and have now risen out of it, as breadth has improved.

Finally, there are the volatility indices ($VIX and $VXO). This is the one area that never got oversold. Frankly, it never even came close to getting oversold. We have been watching the 17 level as a bare minimum level, above which it would indicate that these volatility indices could then rise and get themselves into position for a buy signal. As it turned out, they closed above 17 for just one day and then retreated again. This vast level of complacency in the face of a downtrending market -- one that could easily have broken to new lows is not usually rewarded. However, we cannot stubbornly remain bearish just because one indicator did not align itself properly. So, for now, we will cautiously grade volatility as back in the bullish column being mindful that any sharp increase will still send it into the bearish category.

In summary, things have improved. It seems almost too coincidental for the market to register buy signals at the same levels as the May lows (far too many people, it seems to me, were banking on the May lows acting as support), but so far that's what is happening. If the lows of this week should be violated on the downside, we would immediately resume a bearish stance. But as long as they hold, then we will look for buy signals from the put-call ratios as a trigger to actually do some bullish buying of index options.











Lawrence G. McMillan
email us at: info@optionstrategist.com
website link: www.OptionStrategist.com


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.