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McMillan Market Commentary 8/27/4


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#1 TTHQ Staff

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Posted 27 August 2004 - 09:04 AM

Stock Market


The strength of the rally off the August lows was so persistent that it reversed our indicators from oversold directly to "buy." Usually, there is a back-and-forth type of action that allows one to see buy signals forming. Such was not the case this time. Thus, we are expecting themajor averages to at least advance to the upper end of thedowntrending channels in which they are confined (see $OEX chart,Figure 1). The fact that the major averages have all risen above their20-day moving averages and have all overcome resistance levels at the July lows makes their chart patterns bullish. From a longer-term point of view, a bottom that is formed in this manner doesn't quite seem complete, and so we are not expecting this to be a long-term or intermediate-term bottom, but we will stay bullish as long as our ndicators do.

One good example of the strength of the reversal is market breadth. The ratio of advancing to declining issues was extremely strong on 3 of the early days of the rally. Currently, brea th is overbought, but that is to be expected in the early stages of a rally and therefore isn't worrisome or bearish.

The equity-only put-call ratios are shown in Figures 2 and 3. On the first day that they stopped going up, our computer projections indicated that buy signals were forthcoming. As you can see, they have indeed worked lower, and that confirms buy signals. However, the standard ratio (Figure 1) has not exactly plummeted. It is hangingaround near its highs. The same thing occurred in the breakdown of that data into its NYSE and NASD components. Thus all these buy signals are marked as "?" because it wouldn't take a whole lot to push them back to new highs, which would cancel out any buy signals. The weighted ratio, however, is more clearly on a buy signal.

Finally, there is the matter of the volatility indices ($VIX and $VXO). They have literally collapsed since the rally started and are now trading below 15 again (Figure 4). Once they fell below 17, that was the buy signal, d they will remain on that buy signal until they once again begin to rise. That doesn't seem likely in the near term.

In summary, we had no buy signals when we last published two weeks ago. The rally that sprang up right after that was so strong that it literally pushed all of the indicators to buy signals within a matter of days. We expect the market to continue to rise until it at least encounters resistance at the declining trendline from this year's tops. Perhaps it will be able to break on through there, but that is something that we'll be better able to judge when the market gets there.

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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.