We Now Have Directional Action Potential

Wednesday was another
typical end-month session where indexes remained propped from the open to close.

Big funds and institutions refused to let big caps relax yesterday, even though
techs and small caps lagged behind. With the final month of 2006 set to open
tomorrow, we’re entering a period with potential for directional action.

S&P 500 futures bounced from lower support and
erased the one-day loss in two days. With futures currently green ahead of the
8:30am econ news, a return to test recent highs is probable.

Intraday action in the ES has been pure program
surges upward interspersed with sideways congestion to deep pull backs before
the next program blasts. Typical upside action we’ve seen more and more of all
year: program surges higher out of congestive patterns is what this rally was
built upon.

Russell 2000 futures also tacked on +20pts in two
days, including the open gap. Another +12pts to go before recent highs are
tested… well within range today if not tomorrow.

Nasdaq 100 futures painted a similar chart as ER,
without the bounce. Techs have not recovered more than half of Monday’s
correction, lagging the Dow and S&P as usual lately.

Dow Industrial futures dipped a tad lower in the
recent swing than other indexes did. Still a bit more upside work to go before
topping Monday’s high, first step on its way to posting more record highs for
the year.


As I’ve opined too many times already, what we
see in the markets right now is probable to continue for at least another month.
Anything can happen at any time, but barring unseen catalysts to shock buyers
sharply, price action will go higher. The market has built quite the bullish
froth and dipsters do not discourage easily. Also, a fundamental upside bias
into any year-end period will be accentuated this year.

I’ve been at this game on a daily basis for seven
years exactly now. One of many human behavior patterns to repeat is frustration
with a trend. When price action sells off for extended periods of time, a clamor
grows for upside reversal. Many traders whine and lament over continual selling,
day after day with seemingly no end. They persist in calling bottoms, predicting
the end, trying to guess turns, etc.

You know what? The exact same process takes place
in extended uptrends. Many traders are now guessing at tops, shorting every lift
higher with hopes of catching “the top”, lamenting about how irrational the
rally is, etc.

This behavior pattern is probably rooted in our
emotional thought process of “fair value”. We resist paying prices perceived to
be too high, and resist selling at prices perceived too low. Add in the
perception that markets are mostly sideways and always revert to the mean keeps
many traders sidelined past the early stage of any extended trend.

When price action finally does correct from this
persistent program-slam rally, it will likely do so in equally dramatic fashion.
But that might be awhile… perhaps into 2007 before it happens. Short-term
traders must remain focused on the short term horizon. If the trend is up on our
short-term charts, just keep buying. That reverse-psychology mantra has served
experienced traders really well for the past few months and counting.

Trade To

Austin P


Austin Passamonte is a full-time professional trader who specializes in E-mini stock index futures, equity
options and commodity markets. Mr. Passamonte’s trading approach uses proprietary chart patterns found on an
intraday basis. Austin trades privately in the Finger Lakes region of New York.