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McMillan Market Commentary 10/29/4


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#1 TTHQ Staff

TTHQ Staff

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Posted 29 October 2004 - 08:34 AM

Stock Market

As you may know, the end of October is the most seasonally bullish period of the year. Thus, we would expect a rally into early November regardless of the state of the technical indicators. After that, we will assess the indicators and take positions accordingly. At the present time, those indicators are mixed -- after the recent strong rally in the broad market.

Stock prices of the major indices recently collapsed below September's lows. But they have since climbed back above that level. That recovery was positive, but there is still a lot of overhead resistance on the charts of the major averages. Those resistance levels are at all of the various tops from failed rallies earlier this year. The first levels of resistance are 1140 for $SPX and 547 for $OEX. QQQ has resistance in the 37-38 area.

The equity-only put-call ratios have turned positive, and thus are the most bullish indicator we have right now. First the standard ratio, and then the weighted ratio rolled over and formed buy signals (Figures 2 & 3). While the "rollover" may not look complete to the naked eye, suffice it to say that our computer projections indicate that these averages are indeed likely to continue downward, and thus the computer confirms these as buy signals. The standard ratio's buy signal is arriving with the index at new highs; that is usually a sign of a good signal, since the ratio is considered to be more oversold at extremes. The buy signal from the weighted ratio, however (Figure 2) is more in the middle of the chart. That doesn't necessarily mean it will be a weak buy signal, but they are usually more powerful when they come at extremes on the chart.

Market breadth has expanded into positive territory. It should be noted that breadth never got oversold enough to generate true buy signals during the recent decline.

Finally, volatility indices have remained relatively high surprisingly. Usually, when the market rallies as strongly as it did earlier this week, $VIX would collapse. But that has not been the case. It seems as if index option traders are expecting the market to be volatile heading into the election. Therefore, they are keeping index option prices elevated to a certain extent. I suppose that's logical, but it is a distinct departure from what we've seen $VIX do during past rallies.



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