Melting Back Into The Bush
We are looking at a mixed bag
this morning with futures straddling the unchanged level. This is not
the strong follow through that I was expecting, but the market has quite a bit
to digest, including Ken Lay coming to Capitol Hill to take the Fifth, and an
article in Barron’s questioning the valuation of almost everything tech.
So here we are entering another expiration week. The
February options cycle is not a big one, but it is still important to pay
attention to any large blocks of open interest in stocks that you trade.
In addition to option expirations week, we have a rare
market holiday on Monday, and many participants are eager to take a mid-winter
break with their families. It could be slow next week, and if there ever were a
time frame when implied volatilities could get beaten back to their lows, it
would be next week. If this occurs, get ready to back the truck in for April/May
We are still quite skeptical about the markets overall,
particularly stocks in the "trust me" sectors of tech and biotech. But
trading is Guerilla warfare, and we have to melt back into the bush for the time
being until this rally passes.
The Technical Picture
The DJI has been the tower of power on this sell-off
(relatively speaking) and had an interesting day Friday as the Honeywell
whipsaw enabled it to perform an outside day key reversal higher, taking out the
previous day’s low and then closing above the previous day’s high — just by a
The DJI has been chopping back and forth across the 50%
retracement level of the May to September ’01 sell-off, which comes in at 9704.
Friday it closed above this level on a strong reversal day, and barring any
unforeseen events, should be able to carry this momentum into next week.
The S&P cash, which had been holding up relatively
well (higher lows and higher highs the last couple of trading days), also closed
on its high Friday. The SPX has been playing peek-a-boo with a key support zone,
the 1080 – 1088 area which marks two converging Fibonacci areas. The 38.2%
retracement of the September to January rally is 1088.26, and 1086 is the 38.2%
retracement of the May to September ’01 sell-off.
The Comp made a new low for the move Friday, but also
recovered to close on the highs. The Comp is now just below the 1826.9 area,
which is a 38.2% retracement of the September to January rally, and just above
the 1742 – 1746 area, which is a confluence of both the 50% retracement of the
September to January rally (1742.9) and the 38.2% retracement level of the May
to September ’01 sell-off.
PowerRating)s (NDX/40) have been the weakest link and
actually hit their 50% retracement level of the September to December (in their
case) rally — 35.22 on Friday. They also made a new low for the move at 34.97,
so the 34.97 – 35.22 zone can now be considered support.
Up above there are a couple of resistance levels to keep
an eye on, 36.54 — the 38.2% retracement level of the May to September ’01
sell-off, and 37.11, the 38.2% retracement level of the September to December
The Volatility Picture
The VIX trended lower Friday, closing almost on its lows
at about 25.5, down 2.21.
The VXN, which had been higher most of the day, imploded
during the late rally, closing at 49.28, down 1.83 for the day.
The QQV, which had also been higher most of the day,
suffered a sharp reversal during the late rally, dropping 2.41 to close at
The above mentioned volatility indices reversing from
recent highs is a bullish signal and obviously generated several late buy
signals from volatility triggered systems.
PowerRating) — Friday we bought the April 40/50 call
spread at $3.00 (25%) and at $2.50 (25%). We have halted any further buying of
this spread until the "accounting" smoke clears.
PowerRating) — Disney had some nice follow through to the
upside Friday and is now up against some key resistance, $23.60, the high for
the year. For investors long the April 22.5 /25 reverse collar, you are
currently sitting with a $1.00 profit. Investors may want to take partial
profits until that resistance level is breached — although it may happen on
*We will stand back and observe the strength of the
markets on Monday/Tuesday before considering the reinstitution of our buy QQQ puts on
Recap of open trades
DIS — April 25/22.5 reverse collar (long the April 25
calls, short the April 22.5 puts) at $1.15 credit (75%), settled at $.25 credit.
BA Jan. ’03 40/May 45 call calendar @ $2.75 (100%),
settled at $4.90.
PowerRating) — Long the GILD Feb. 70 straddle at $8.00
(50%), settled at $4.40, but we have milked over $8.00 in gamma scalping.
Essentially, we own the straddle for free now!
Call Spread Positions
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*Supporting documentation for claims,
comparisons, recommendations, statistics or other technical data will be
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