Jump to content



Photo

McMillan Market Commentary 8/13/4


  • Please log in to reply
No replies to this topic

#1 TTHQ Staff

TTHQ Staff

    www.TTHQ.com

  • Admin
  • 8,597 posts

Posted 13 August 2004 - 10:35 AM

Stock Market

In the last issue of The Option Strategist, we titled the feature article "BIG TROUBLE AHEAD." That trouble has begun to occur, and we feel there is more to come on the downside. We'll detail the reasons why we feel that way, but we also need to be mindful that many of the indicators are oversold, which means that sharp, short-lived rallies are possible. In a larger sense, all of this means that volatility should increase in the coming weeks and months.

Let's begin by discussing the index price charts. $OEX, $SPX, the Dow ($DJX), and QQQ all broke down to yearly closing lows. This is bearish. They tried to rally this week, but failed right at resistance -- which is the "old" support. They are in downtrends, and while an oversold rally might take them back up to their declining 20-day moving averages (which is what happened in the rally a couple of weeks ago -- see $OEX chart in Figure 1) -- we would expect the declining moving average line to contain any rallies. When would we change our mind? If the averages closed above resistance (530 for $OEX, 1082 for $SPX) and closed above their declining 20-day moving averages.

Some of the other technical indicators are more optimistic, although few have actually generated buy signals. For example, the equity-only put-call ratios (Figures 2 & 3) are very high on their charts, which indicates they are oversold. However, they have not given buy signals yet and will do so only if they roll over and begin to decline. For a moment last week, it looked like the standard ratio (Figure 2) was going to roll over, but our computer projections said "no, it isn't," and they were right.

Market breadth has been of interest as breadth has been poor and that is a negative sign as well. Eventually a buy signal will be registered, but not until we see some real improvement in breadth from common stocks.

Finally, the primary volatility indices ($VIX and $VXO) moved above 17, which initiated a belated sell signal on their part. Then they raced to 20 and fell back (Figure 4). Our general rule of thumb is that a 3-point reversal in $VIX is significant. So if $VIX closes below 17 (there's that same level again), we would consider that to be bullish.

Let's conclude with some general comments on recent action. The big rally on Tuesday, surrounding the Fed's interest rate boost, was hailed by the bulls as "the bottom." In fact, so many media commentators and analysts held the same view, that one should have been leery of it because of their unanimity, if for no other reason. Since then, the market has mostly declined. We don't intend to be stubbornly bearish, but we don't intend to buy any index options unless we get buy signals from our technical indicators and we see the major indices begin to poke above their declining moving averages.


Posted Image

Posted Image

Posted Image

Posted Image



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.