Opening Higher, Volatility Sellers Licking Their Chops

July 29, 2002
Joe Corona

Kevin Haggerty is on vacation for two weeks. During this time, we’ve asked
Joe Corona, Senior Trader for Tony Saliba, to write the lead morning piece.
Kevin will return on August 12.

The market looks set to open
substantially higher this morning in what has become a rare
occurrence in this market: follow through to the upside. Markets around the
globe are all quite a bit better at the moment. In Europe (still open) the FTSE
is up 96.00 points or 2.39%, the DAX is up 123.00 or 3.46%, and the CAC 40 up
96.57 or 3.04%.

In Asia, the Nikkei picked up 75.64 points or .79%, and the Hang
Seng rose 202.87 or 2.08%. The dollar is once again higher against the majors,
and the bond futures are about a half point lower. Gold and crude are lower at
the moment as well. The dollar is setting up for an important attack on
resistance levels both in currencies (EUR 97.00 – 98.00, CHF 147.50 â€”150.00) and
in gold $300.00.

What do we do with this thing?Â A contra trend move is a very difficult
proposition because you have to divide your mind and your time frames in half.
In your long-term mind, you know that this is still a bear market that could
resurface at any time, but in your
short-term mind, you have to pretend (and trade) like it is a bull market.

The solution to this problem is to have an itchy trigger finger on long
positions, be ready to dump at the first sign of weakness. Avoid being greedy by
scaling out of longs in increments as resistance levels / target zones are hit,
and most of all, make sure you play where there is liquidity, hang with the ETFs
and indexes, because when the music finally stops, the exit from the burning
disco can get pretty crowded!

For those who have the wherewithal, selling volatility is the way to go. Last
week in the VIX we had a monstrous spike up
to almost the September highs, followed by a mind-blowing reversal. The
volatilities in the Nasdaq and techs are
still hanging up there, thanks to the weakness in the semiconductor sector.

Any
combination of selling options that suits your market view can be utilized. If
you are bullish, buy-writes and naked put selling can be used, if you are
bearish, calls can be launched, if neutral, short straddles, short strangles and
for the risk averse, long butterfly and condor spreads can be used. I am not
recommending these for everyone, because most of them have unlimited or
near-unlimited risk that has to be managed ruthlessly.

Sector of Interest:

The
(
BBH |
Quote |
Chart |
News |
PowerRating) had a
nice rejection low Wednesday followed by two days of consolidation buying and a
strong close Friday. The market profile of Fridayâ€™s action shows buying in all
time frames. The bar chart shows a possible â€œWâ€ bottom forming. Monitor the BBH
for a breakout of the Thursday / Friday consolidation range of 73.80 â€” 78.15
(probably upside based on the market profile) and then get with the action. A
shot at 82.00 â€” 85.00 could be in the cards.