Big Trends 17-12-2002
Enviado: 18/12/2002 10:33MARKET TIMING:
STOCKS: NEUTRAL (as of 08/30/02 close)
BONDS: BEARISH (as of 01/03/01 close)
GOLD: BULLISH (as of 12/20/99 close)
MARKET OUTLOOK:
Price Headley's Daily TrendWatch
Open Interest Patterns
December 17, 2002
10:00 AM
McDonald's (MCD) warned today that they are forecasting their first fourth quarter loss ever, as restructuring charges will bring losses to 5 or 6 cents per share. The Consumer Price Index rose 0.1 percent in November, under economist expectations of a 0.2 percent rise. Housing starts rose 2.4 percent in November, helping offset last
months drop. Best Buy (BBY) lowered their fourth quarter outlook to a net loss after forecasting flat sales over the next several weeks.
This Friday marks the December options expiration, as we noted in our article yesterday on triple witching expirations. Today we look at the open interest configuration for the Nasdaq 100 Trust (QQQ - 25.93), the most actively traded stock or index available. Open interest is the number of options contracts open at each strike price. My theory in years of looking at the open interest patterns is that the market tends to frustrate the majority of players, so if a move is widely expected in one direction it is not likely to occur in the timeframe expected.
Looking at the December open interest table, with calls on the left and puts on the right, you notice that the largest number of call bets exist just over the current market price, at the 26 and 27 strike prices. These options will expire worthless if the QQQ does not close over 26 at Friday's close. In comparison on the put side, the
biggest bets have been placed at the 25 and 24 strike prices. These bets will expire worthless if the QQQ does not close under 25 at the end of the trading day Friday. Have any idea why the QQQ manage to test 25 late Friday and hold this area as
important support? The theory suggests that too many players would stand to profit if the market broke under 25. Similarly, at the current time there are too many bullish bets that could turn profitable if the QQQ's started to move significantly above the 26 level. The odds favor a trading range market between 25 and 26 into
this Friday's close, so expect the pressure today to be on the downside, or at least not see much more potential to head higher.
This theory is invalidated if the QQQ closes more than ½ point above the 26 level or similarly below the 25 mark, as this would start to suggest a market that was breaking away from these key boundaries.
For options traders, while the temptation is to buy "cheap" options on the final week of expiration, it is generally the options sellers who make the more regular profits in these range-bound conditions.
QQQ OPEN INTEREST
The Nasdaq Composite tried to break above the major support/resistance level at 1400, with a surge after the open, but by the end of the session was back near the lows and near the open to plot a minor bearish tail reversal.
The short-term 10dayEMA (red), responsible for the recent bearish short-term trend, continues to keep the bulls at bay. Meanwhile, the intermediate-term 50dayEMA (blue) supports the bulls in their efforts.
As a result, given no catalyst to break the market out of her box and with a declining average direction (ADX) suggesting a neutral tone, the OTC continues to paint itself into a corner out of which an impressive move is likely to occur.
This break will occur with a surge above 1420, or below 1370 from this point so we?ll be neutral until that happens.
Neither of the markets (OEX or OTC) proved able to capitalize on Monday?s bullishness. However, neither market negated the setup either with both falling back into their respective neutral zones.
We expected a couple days of consolidation before another surge higher would be seen, or possibly a fall lower. Either way, we?ll be looking for the aforementioned levels in the Nasdaq to be breached, or 455-460 in the OEX.
However, we?re still in the oversold reading of the stochastic indicator, which continues to support the bearish short-term daily trend until we see a cross above 20 by %D (red).
Additionally, the trend of the market, or lack thereof has been choppy due to the recent descent of the average directional indicator (gray) trending lower, which suggests a neutral bias remains prudent until we see a few higher closes in the ADX.
Meanwhile, the head and shoulders setup continues to embolden the bears to sell any strength early in anticipation of breaking down the key 1370-level in the OTC.
Daily Chart of OTC showing neutral environment below 10dayEMA (red) and above 50dayEMA (blue) yet plotting a potentially bearish head and shoulder formation
Economic Overview
Indicators:
The RYDEX (Nova + OTC)/Ursa Ratio is estimated to have come in at 1.27 Tuesday following the 1.34 reading Monday following the 1.22 reading Friday. The ratio continues to drift lower after along the key lower band of extreme pessimism, but has yet to violate the indicator. As a result, we remain neutral until we see a consistent up trend develop with several higher closes, or a spike in fear down below the key lower band followed by a turn back above. Till then we remain neutral. The lower band stands at 1..06, while the upper band is at 2.63.
Daily Chart of the Rydex (Nova+OTC)/Ursa Ratio
The CBOE Volatility Index (VIX) held the line at the key bull/bear fulcrum of 30 with Tuesday?s reversal from below the reclaim by the close. As a result, although we remain bullish below Monday?s high of 32.73, we?re tempering our bullishness until we see follow through below 30 once more, which we mentioned would confirm the recent
bullishness. Meanwhile, momentum continues to diverge to the upside suggesting a higher VIX forthcoming.
Daily Chart of the Volatility Index (VIX)
The CBOE equity put/call ratio (EPCR) was 59% Tuesday following the 96% Monday reading following the 67% Friday reading. The indicator is now back below the key upper band with Tuesday?s action and therefore has presented an official buy signal. However, as fear declined in such a rapid manner in concert with a decline in the market, we?re electing to hold off on an official bullish setup and instead go with
an unconfirmed bullishness based on the indicator. Also considering this is triple witch week where you can get some strong cross currents. The lower band is at 0.39, while the upper band is at 0.89.
Daily Chart of the CBOE Equity Put/Call Ratio
Bottom Line:
The bears put in a retracement of the strong up move seen in the market Monday. The retracement proved to be a bearish tail reversal to close back in the neutral zones of 1380-1400-OTC and 455-460-OEX. Therefore, we remain neutral within these zones. We expected a couple days of narrow session consolidation from an historical pattern
perspective, which is what we?re seeing. As long as the markets remain above the bottoms of the aforementioned bands, the potential exists for a surge higher. We should know by Thursday. Meanwhile, we?ll continue to watch the key zones for signs of a break, as with this much time spent in the zone, the break is likely to be imminent and impressive.
Indication Summation
SUPPORT RESISTANCE
Nasdaq Composite 1380 1420
S&P 500 895 925
Dow Industrials 8530 8725
STOCKS: NEUTRAL (as of 08/30/02 close)
BONDS: BEARISH (as of 01/03/01 close)
GOLD: BULLISH (as of 12/20/99 close)
MARKET OUTLOOK:
Price Headley's Daily TrendWatch
Open Interest Patterns
December 17, 2002
10:00 AM
McDonald's (MCD) warned today that they are forecasting their first fourth quarter loss ever, as restructuring charges will bring losses to 5 or 6 cents per share. The Consumer Price Index rose 0.1 percent in November, under economist expectations of a 0.2 percent rise. Housing starts rose 2.4 percent in November, helping offset last
months drop. Best Buy (BBY) lowered their fourth quarter outlook to a net loss after forecasting flat sales over the next several weeks.
This Friday marks the December options expiration, as we noted in our article yesterday on triple witching expirations. Today we look at the open interest configuration for the Nasdaq 100 Trust (QQQ - 25.93), the most actively traded stock or index available. Open interest is the number of options contracts open at each strike price. My theory in years of looking at the open interest patterns is that the market tends to frustrate the majority of players, so if a move is widely expected in one direction it is not likely to occur in the timeframe expected.
Looking at the December open interest table, with calls on the left and puts on the right, you notice that the largest number of call bets exist just over the current market price, at the 26 and 27 strike prices. These options will expire worthless if the QQQ does not close over 26 at Friday's close. In comparison on the put side, the
biggest bets have been placed at the 25 and 24 strike prices. These bets will expire worthless if the QQQ does not close under 25 at the end of the trading day Friday. Have any idea why the QQQ manage to test 25 late Friday and hold this area as
important support? The theory suggests that too many players would stand to profit if the market broke under 25. Similarly, at the current time there are too many bullish bets that could turn profitable if the QQQ's started to move significantly above the 26 level. The odds favor a trading range market between 25 and 26 into
this Friday's close, so expect the pressure today to be on the downside, or at least not see much more potential to head higher.
This theory is invalidated if the QQQ closes more than ½ point above the 26 level or similarly below the 25 mark, as this would start to suggest a market that was breaking away from these key boundaries.
For options traders, while the temptation is to buy "cheap" options on the final week of expiration, it is generally the options sellers who make the more regular profits in these range-bound conditions.
QQQ OPEN INTEREST
The Nasdaq Composite tried to break above the major support/resistance level at 1400, with a surge after the open, but by the end of the session was back near the lows and near the open to plot a minor bearish tail reversal.
The short-term 10dayEMA (red), responsible for the recent bearish short-term trend, continues to keep the bulls at bay. Meanwhile, the intermediate-term 50dayEMA (blue) supports the bulls in their efforts.
As a result, given no catalyst to break the market out of her box and with a declining average direction (ADX) suggesting a neutral tone, the OTC continues to paint itself into a corner out of which an impressive move is likely to occur.
This break will occur with a surge above 1420, or below 1370 from this point so we?ll be neutral until that happens.
Neither of the markets (OEX or OTC) proved able to capitalize on Monday?s bullishness. However, neither market negated the setup either with both falling back into their respective neutral zones.
We expected a couple days of consolidation before another surge higher would be seen, or possibly a fall lower. Either way, we?ll be looking for the aforementioned levels in the Nasdaq to be breached, or 455-460 in the OEX.
However, we?re still in the oversold reading of the stochastic indicator, which continues to support the bearish short-term daily trend until we see a cross above 20 by %D (red).
Additionally, the trend of the market, or lack thereof has been choppy due to the recent descent of the average directional indicator (gray) trending lower, which suggests a neutral bias remains prudent until we see a few higher closes in the ADX.
Meanwhile, the head and shoulders setup continues to embolden the bears to sell any strength early in anticipation of breaking down the key 1370-level in the OTC.
Daily Chart of OTC showing neutral environment below 10dayEMA (red) and above 50dayEMA (blue) yet plotting a potentially bearish head and shoulder formation
Economic Overview
Indicators:
The RYDEX (Nova + OTC)/Ursa Ratio is estimated to have come in at 1.27 Tuesday following the 1.34 reading Monday following the 1.22 reading Friday. The ratio continues to drift lower after along the key lower band of extreme pessimism, but has yet to violate the indicator. As a result, we remain neutral until we see a consistent up trend develop with several higher closes, or a spike in fear down below the key lower band followed by a turn back above. Till then we remain neutral. The lower band stands at 1..06, while the upper band is at 2.63.
Daily Chart of the Rydex (Nova+OTC)/Ursa Ratio
The CBOE Volatility Index (VIX) held the line at the key bull/bear fulcrum of 30 with Tuesday?s reversal from below the reclaim by the close. As a result, although we remain bullish below Monday?s high of 32.73, we?re tempering our bullishness until we see follow through below 30 once more, which we mentioned would confirm the recent
bullishness. Meanwhile, momentum continues to diverge to the upside suggesting a higher VIX forthcoming.
Daily Chart of the Volatility Index (VIX)
The CBOE equity put/call ratio (EPCR) was 59% Tuesday following the 96% Monday reading following the 67% Friday reading. The indicator is now back below the key upper band with Tuesday?s action and therefore has presented an official buy signal. However, as fear declined in such a rapid manner in concert with a decline in the market, we?re electing to hold off on an official bullish setup and instead go with
an unconfirmed bullishness based on the indicator. Also considering this is triple witch week where you can get some strong cross currents. The lower band is at 0.39, while the upper band is at 0.89.
Daily Chart of the CBOE Equity Put/Call Ratio
Bottom Line:
The bears put in a retracement of the strong up move seen in the market Monday. The retracement proved to be a bearish tail reversal to close back in the neutral zones of 1380-1400-OTC and 455-460-OEX. Therefore, we remain neutral within these zones. We expected a couple days of narrow session consolidation from an historical pattern
perspective, which is what we?re seeing. As long as the markets remain above the bottoms of the aforementioned bands, the potential exists for a surge higher. We should know by Thursday. Meanwhile, we?ll continue to watch the key zones for signs of a break, as with this much time spent in the zone, the break is likely to be imminent and impressive.
Indication Summation
SUPPORT RESISTANCE
Nasdaq Composite 1380 1420
S&P 500 895 925
Dow Industrials 8530 8725