David's Trade Journal

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David's Thursday Market Update: FEAR FACTOR

Fear Factor

8/4/2005

by David Yu

I wrote "Once is Not Enough" after the Dow dropped 55 points on 7/25/2005. In that article I mentioned that the fear factor would not come into play until there’s a larger down day or a few more down days like that strung together. One Sentiment Oscillator that I use may validate today being one of the larger down days that has finally brought fear into the market. But, before we get into that, I'd like to touch basis on our portfolio and in particular GSS.

The long positions in our portfolio were picked by me with low degree of correlation with the market, so they should continue to perform as they're supposed to, independent of the market. The only exception was Southwest Airlines (LUV). It's a little too "market sensitive" to be kept for now. Therefore, LUV position is now closed for a small profit.

GSS - the very intriguing technical observation about GSS (Golden Star Resources) is that it's once again at that $3.30 resistance. Remember I showed you the psychological barrier that's manifested on this chart (Chart 1)? When I posted this chart on 7/25/2005, I pointed out the big gap down (yellow highlight) that's accompanied by the largest negative volume bars (blue circle) in February was where the share holders really sold off. And, every time GSS gets up to this level, it has to deal with that psychological trauma over and over again.

Well, here we are once more. Since this is such a great barrier, GSS could get pushed aside for some consolidation sessions. That shouldn't come as a surprise. It would be a surprise (a pleasant one) if it holds steady during these consolidation trading sessions. The more steady GSS holds right here, the more strengths it's going to gather.

CHART 1


Next, let's look at FEAR.

Chart 2 is one of the my Sentiment Oscillators. It's similar to the one I've shown you before except that Wilshire 5000 is used as the index here, instead of S&P. Wilshire 5000 covers more than 6000 companies headquartered in the U.S.

This oscillator compares the market's performance to the option traders’ total Put (sell) to Call (buy) option ratio (Symbol: CPC). When the market's bullish and there's little fear, this oscillator is on the rise as the market outperforms the Sell-to-Buy ratio. And, in order for this oscillator to rise, the faster 9-day simple moving average (MA) must first pull ahead of the slower 21-day MA. However, when the 9-day MA (blue line) crosses below the slower 21-day MA (red line), it signals the imminent market decline. You can see each of the yellow highlighted spot, where the fast MA crossed below the slow MA, marked the short-term top of the Wilshire 5000 index in the lower pane of the chart.

And, after almost 2 weeks of uncertainty, today's action finally brought the 9-day MA convincingly below the 21-day MA. There's no question about the completion of this market top because the FEAR factor has finally returned. The only question is how extensive this decline is going to be.



In addition, ever since I posted this chart (Chart 3) on my Trade Journal, I've been keeping an eye on the gaps. These "round-trip" gaps occurred, of course, on 7/7, the day of the London Bombing. I thought the fact that these 2 gaps were never filled was most peculiar. Chart 3 was the chart I posted on Wednesday 7/27/2005. I'll write up more details on Sunday when I have more time. For now, you can look up today's VIX chart for yourself and see what happened.



Have a great Friday! We'll be watching the show with our long position intact.