Friday, October 27, 2006

A Momentary Dose of Reason

Keee-Rist. It's about flippin' time. The Dow fell 73 points today, after going up for the past 1,342 days in a row. Earlier in the day it looked like another "drop and pop" session where we'd have another new high. Not this time. Some people with triple-digit IQs are actually getting a tiny bit of press and a few people are paying attention. Of course, any fall in the market which doesn't last for months on end will simply be labeled profit-taking.

If the market does ever get around to being sensible and falling for a while, one juicy thing for us put-owners is that the intrinsic value and the volatility premium will go up. The $VIX is at nearly the lowest level in human history. Just look at how much higher it was in June (ahhhhh, now those were good times).

We're just going to look at some indexes today. You guys have seen enough stock charts.

The NASDAQ hasn't been as lusty as the big caps lately. Here's the NASDAQ Composite. It's not in any clear technical formation per se. But at least any short position would be stopped out promptly, since we're so near multi-year highs. In other words, the "I must be wrong for now" levels are not far away, so the risk is pretty low.

The Morgan Stanley Tech Index (which I affectionally call "mush" based on its $MSH symbol) has thinly-traded puts. Indeed, I am the open interest on the options strike that I own. Considering the massive amount of overhead resistance, this could be a fantastic triple top.

Here's a somewhat long view on the S&P 500. Those diagonal lines you see are Fib Fans. Back in mid-July, when I said we had bottomed out, I wish I had the foresight to look ahead to just how far we would have climbed. I'm afraid the bearish goggles I was wearing didn't let me do that. But I haven't changed any of these studies. They clearly permitted the index to push its way this high. But it makes sense that it's reversing at this point. There's a ton of reasons for it to turn now.

The Transports have not been confirming the Dow Industrial highs. This shows a clean progression of lower highs. Not good for the bulls out there.

The Gold & Silver index ($XAU) could go either way. I bought puts on this today, but I've got a really tight stop at about the $141 level. This isn't a head and shoulders anymore. But it could still blow through that lower resistance level to the next line down.

Check out the ungodly high RSI on the $XMI. Total nosebleed territory.

I really hope next week brings us more of today (and less of the prior four days). The economy is weakening. That's not speculation - that's a known fact. The housing bubble is shrinking. I think a comment I saw on this blog Wednesday represents the bullish mentality: "Forget about nuclear weapons and all the other turmoil for now and just enjoy the ride upward." That's crazy. My view is that the market is going to get crushed, and I want to make a fortune in the process of watching everybody else lose theirs.


ctkwtk said...

Bullish percent index on telecom now at 100%. ETFs are tth, iyz, vox. On 10/24/06, Jason Browne of DAL investment, recommended a buy on vox. Any takers?

Sanjay Sola said...

this is a dangerous market. you can see stocks getting slammed on earnings reports or downgrades and many stocks reversing after they broke out. even when the market is going up, it is not easy to make money going long. for every stock that goes up, there's one falling.

we have a lot of stocks below their 50 day moving averages now, including some key sectors like the transports and semis, which have been lagging for a while. also the leaders, are mostly Dow stocks.

the market has been ignoring bad news for a while, but after a while it will catch up. we have a few more end of the month days and the election ahead of us,

the last 6 months in the market have been weird from low volume summer robo trader days to a market that keeps going up and up. very odd.

zstock said...

Hi Tim,
I've been reading your blog for about three weeks, now. I think it's great.
I concur with your call on IYT...It seems poor old FDX (10.9% weighting) just can't seem to break through 115 /116..
Not enough forward eps...and Opec's clammoring at the FDX door again...not so good for jet fuel prices, and packages don't get any lighter...

Thanks for pointing out adbe and agn...i'm glad i acted on those two....i get to keep doing them day after day after day,'s great...


Leisa said...

ctkwtk--those telecoms have had a terrific run. The holdings of VOX are weighted highly with four holdings (T, , VZ, BLS and S) comprising 43% of the holdings. You may wish to look at those individual charts too given the weightings.

Des said...

I'm a strict Knightian - I hate to go long - but the current talk of telecoms here forces me to reveal that only yesterday I slipped and bought calls on AMX. Tim, I'm loaded on puts on CCL, CERN, UNP, PNRA, LEH, TROW, etc., all suggestions of yours, so please forgive me.

PC said...


When you see a set up that suggests that a stock or index is likely to retrace and your analysis (fibs, etc) suggests that retracement has a target of 10-15% below it's current level, and due to seasonality and/or historical performace, like tech going down from Jan-Aug and up from Aug-Jan, what's your strategy as it relates to your decision to choose how far out you go on expiration and strike? Predominately one or two strikes in the money or out of the money? I'm assuming with the sheer number of positions you take that you probably have a strong position on the subject. I have found that one or two strikes ITM four expirations out in a situation matching the criteria above is a good high probability trade versus even one stike OTM.

I appreciate and look forward to your daily entries. Congratulations on all your success.


Stuart said...

tim , I was wondering if you could do some TA on Amgen (AMGN) for me please. Thanks a lot

costas1966 said...

The triple top in the Morgan Stanley Tech Index can easily be a cup and handle bullish formation, and the S&P 500 can easily move to the 2000 highs and render those resistance lines meaningless. One day sell off is not conlcusive evidence to run around and announce triple tops and celebrate the end of the of the bull market especially after considering the fact that in both the Nasdaq and the S&P 500 the declines came in on light volume. Volume and price action remains bullish, overbought rsi's can stay overbought for months in bull markets and the Vix has never been usefull in predicting tops so we might as well throw it out of the window. Lets face it, bears, including me, have been wrong and I suggest we all keep those bearish goggles off untill we see some real bearish action. That will be a sell off on big volume and retracement on lighter volume that fails to make a higher high and then a further sell off on heavy volume with a lower low. I haven't seen anything like that yet. Also short interest on the NYSe remains at multi months high and I think until we see type of action I described above they will keep skining the bears alive.

Lets not forget also the weakness in the tech sector is very much related to the defferals of purchases until the Vista comes out in January, then sales should ramp up accross the board in software and hardware. So if there is any weakness in the tech area, (and it is not conlussive that there will be one anyway) it should be only temporary and things could get very robust as we getting near January.

Leisa said...

Not sure that Vista is the be all end all in tech sector woes. Semis coupled with cell phone weakness are big contributors, IMV.

" TAIPEI, Oct 26 (Reuters) - TSMC 2330.TW, the world's top contract chip maker, said on Thursday it expects sales and margins to drop in the fourth quarter from the third, amid an ongoing industry inventory correction."

costas1966 said...

Leisa, Vista will be a sales driver
in whatever is pc related and there will be an upgrade cycle on many corporations when that New OS hits the stores. You cannot ignore that fact and keep shorting the techs hoping that you are right this time around.

My bearishness has kept me from making a lot of money and I am not planning to keep repeating the same mistakes especially when I see no break down in the technicals. I know the market went down 73 points Friday but that means nothing. You can only hope at this point that the trend will change.

All I know is that Hurricane 5 has put us all to shame and I don't like that picture one bit.

Andrew755 said...

There is a negative divergence on the nasdaq, not that technicals mean anything in this fabricated market anyways.

I've developed a list of long/short plays for the week....and i'm hoping that we get a down open tomorrow....

google said...

I don't think people would rush into a brand new operating system, especially one from Micro$oft.

Sanjay Sola said...

it's time for the market to get some liposuction and remove those unsighly September and October gains.

people are talking Fed rate cuts way too early also.

Andrew755 said...

Good morning all,

Looks like a lower open... I'm buying into this weakness. i have a hard time believing that the bulls are giving up so easily...perhaps we will see a rally this afternoon.

I bought some esrx calls... and am looking for a reflex rally... short term oversold. However HUM is putting some pressure on health care today...which is kinda nice

Leisa said... point was not to predict any bearishness (and I'm not short any tech stocks, I've limited my misery to the indexes!), but rather, there seems to be a trumpet call that corps will automatically upgrade with the new system. I'm doubting that will happen to the extent hoped for. Corps have been burned so many times in the past through MS's buggy releases. And certainly any release that calls for greater investment in PC infrastructure on top of the new operating system (most well run IT depts have a rolling refresh)will be double whammied. But I have no special knowledge other than past experience. We'll see how it unfolds.

arswenson said...

what do you think of the chart for LMNX as a short?

AT said...


I agree with your outlook - until we see sell-off on volume, we can't say the trend has turned. Today's weak opening managed to move higher despite WMT. There is still strength left in the bulls. Hope no bears were trapped.

I'm not expecting any reversal till after the elections. But it was nice to see the CNBC cheerleaders talk about the market topping.

OTOH, I don't think Windows Vista will start a cycle of upgrades, unless there is a compelling advantage in the new OS or some must-have application. Computer demand is pretty much saturated in the West, and there is a glut of chips, processors and motherboards. I expect more web-centric applications with thin clients.