Market At Inflection Point

• February 1, 2002
• Dave Floyd

In today’s
column, I will attempt to address where we stand currently in
the marketplace. Casting aside opinions, fundamental analysis and news-related
stories, let’s take a real hard look where we stand currently in the S&P 500
Index (cash not futures).  I truly believe that the market is at an
inflection point, I have my hunch as to the direction, but remember, I am
leaving that out for today’s piece.

One of my newer traders in the office, Todd Gordon, is pretty diligent about
going through charts each evening and spotting various items.  When we were
working yesterday after the close, I asked him to go back on the S&P cash
and see what he came up with.  His sniffing around turned up some
interesting information. I will share it with you below.

Before we get to that however, I want to touch on a few other items. As I
mentioned in yesterday’s piece, I suggested that you may want to consider
covering short positions which I highlighted in previous columns. Given the tone
of yesterday’s market, when 1119 was broken, it became clear that the downside
vacuum was over…for now.  The gains were excellent, and don’t fret, the
positions can always be re-established. Nothing, and I mean nothing, has changed
from a fundamental standpoint on some of these stocks. We now just need to wait
for the technical picture to offer us another entry point. I will keep you
posted.

Turning back to intraday trades, it was yet again a real treat. The
volatility was not nearly as robust as earlier in the week as "fear"
was replaced with "greed" or perhaps more accurately "economic
beer goggles." Stocks like IBM
(
IBM |
Quote |
Chart |
News |
PowerRating)
and Tyco
(
TYC |
Quote |
Chart |
News |
PowerRating) as well as some of the
large banks and brokers offered many intraday setups. Reading the price action /
tape reading is still the most effective way for trade entries, however, some of
the classic technical setups are starting to play out again, i.e., buying
pullbacks and shorting rallies. 

Looking ahead to the technical picture for the futures, I think we all know
by now the areas which will prove pivotal.  Nonetheless, let’s review them
briefly:

S&P’s:          
1136.5 and 1119

Nasdaq:       
1579 and 1484

Dow:             
9863

• At the beginning of November 2000 the S&Ps
  failed to break above their 200-day moving average. It is interesting to
  note that this was the first time going back all the way to 1998 and the
  Long Term Capital debacle where the S&Ps were approaching their 200-day
  moving average from below WHILE it was in a downtrend. This is very
  significant. You will notice that the S&Ps subsequently failed, never
  again touching their 200-day average again. A double bottom was made in late
  March of 2001.

• The 200-day average was yet again tested from below,
  this time however, the 200-day moving average
  (Point A) coincided with a 62% retracement
  off that double bottom (March / April 2001).  The failure at the
  200-day average could not be supported by the 50% and 40% retracement areas
  resulting in yet a lower low in September of 2001 (Point
  B).

• The move back up to the 200-day moving average which
  took place on January 7, 2002 (Point C)
  was coincidently EXACTLY a 62% retracement off the September 2001 low.

I thought that this was an astute observation simply
from the uncanny fact that each time the 200-day average is touched, it is
EXACTLY a 62% retracement of the previous high / low.  As a result, I feel
that the current levels of 1130.25,
1086.60 and 1059.83
will be critical in the days to come.

The 10 AM EST release of the NAPM may offer nimble
traders an excellent volatility spike, so keep an eye our when it is released.

        
 Key
Technical Numbers

As always, feel free to send me your
comments and questions. See you in TradersWire.
Have a great weekend.

Dave