AI
Thursday, June 23, 2005 11:40:11 PM
After the Bell 6/23/05: The Not-So-Obvious Observation
Crude oil hit all-time settlement price, potential trade war with China, FedEx earnings miss, etc. were all said to be the reasons for today's market plunge. But, for us, true students of the market (by definition), we know better. We know the recent market action is simply a manifestation of the socioeconomic plight. The market action today shouldn't come as a surprise. In fact, today's decline was relatively minor. While it may be a very profitable day for us Bears, it's only a small step towards the inevitable. Traders' overall sentiment continues to be quite bullish nonetheless.
Since NASDAQ Composite intraday minute chart doesn't provide volume data, I'm using QQQQ, the NASDAQ ETF, for better visual illustration. This 15-min 8-day intraday chart shows why today's tumble shouldn't come as a surprise. It's just a small part of the sequence of events.
First thing worth noting is that after Q gaped up above 37.65 on 6/15, it had made 8 attempts to move past the 38 resistance to no avail. The more times it tried and failed, the weaker it became. And, every failed attempt brought in additional resistance to reinforce that threshold. This can be best illustrated by the increased frequency of its retreat to the breakout level, which is now the support.
Not even once had Q dropped back to the 37.65 breakout level in the first two days after the breakout. That was a show of force fueled by the momentum from the gap-up. And, at the time, as I wrote last Thursday, Q was in the process of forming a bullish Cup and Handle pattern. That strength started waning when it briefly violated the 37.65 support level on the third day, 6/20. Today was the second day in a row that support was challenged. As a result, the 37.65 support is now annihilated. There is one equally significant technical development occurred today.
The past intraday lows were marked by yellow highlights. If you'd look closely, you'd see that today was the first time in a while Q closed lower than the intraday low. This further confirms market's weakness. Buyers or the Plunge Protection Team didn't come in to save the day like it used to. But, having repeated pattern of that happening in the recent past may help explain why the option traders sentiment continues to be quite bullish. Traders who anticipate market to recover quickly may deem this as an excellent bottom fishing opportunity. The total Put/Call option ratio actually declined to 0.77 from yesterday's 0.88. Equity Put/Call ratio also declined to 0.47 from 0.52.
Most people thought these option ratios serve as an important precursor to market movement because option traders are smart traders. The fact remains that option traders are not necessarily any smarter. They're just faster. The leverage in option trading makes it exponentially riskier than equity trading. They have to be fast. We'll see how fast they are tomorrow.
“Don't try to buy at the bottom and sell at the top. It can't be done except by liars.” -- Bernard M. Baruch
Crude oil hit all-time settlement price, potential trade war with China, FedEx earnings miss, etc. were all said to be the reasons for today's market plunge. But, for us, true students of the market (by definition), we know better. We know the recent market action is simply a manifestation of the socioeconomic plight. The market action today shouldn't come as a surprise. In fact, today's decline was relatively minor. While it may be a very profitable day for us Bears, it's only a small step towards the inevitable. Traders' overall sentiment continues to be quite bullish nonetheless.
Since NASDAQ Composite intraday minute chart doesn't provide volume data, I'm using QQQQ, the NASDAQ ETF, for better visual illustration. This 15-min 8-day intraday chart shows why today's tumble shouldn't come as a surprise. It's just a small part of the sequence of events.
First thing worth noting is that after Q gaped up above 37.65 on 6/15, it had made 8 attempts to move past the 38 resistance to no avail. The more times it tried and failed, the weaker it became. And, every failed attempt brought in additional resistance to reinforce that threshold. This can be best illustrated by the increased frequency of its retreat to the breakout level, which is now the support.
Not even once had Q dropped back to the 37.65 breakout level in the first two days after the breakout. That was a show of force fueled by the momentum from the gap-up. And, at the time, as I wrote last Thursday, Q was in the process of forming a bullish Cup and Handle pattern. That strength started waning when it briefly violated the 37.65 support level on the third day, 6/20. Today was the second day in a row that support was challenged. As a result, the 37.65 support is now annihilated. There is one equally significant technical development occurred today.
The past intraday lows were marked by yellow highlights. If you'd look closely, you'd see that today was the first time in a while Q closed lower than the intraday low. This further confirms market's weakness. Buyers or the Plunge Protection Team didn't come in to save the day like it used to. But, having repeated pattern of that happening in the recent past may help explain why the option traders sentiment continues to be quite bullish. Traders who anticipate market to recover quickly may deem this as an excellent bottom fishing opportunity. The total Put/Call option ratio actually declined to 0.77 from yesterday's 0.88. Equity Put/Call ratio also declined to 0.47 from 0.52.
Most people thought these option ratios serve as an important precursor to market movement because option traders are smart traders. The fact remains that option traders are not necessarily any smarter. They're just faster. The leverage in option trading makes it exponentially riskier than equity trading. They have to be fast. We'll see how fast they are tomorrow.
“Don't try to buy at the bottom and sell at the top. It can't be done except by liars.” -- Bernard M. Baruch
David
#board-3693
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