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Thursday, June 27, 2002  8:01 PM EST

Today surely didn't do much to cause doubt about yesterday's low, as it was a positive day all the way around, and on good volume to boot.

The next few days should prove to be a good test for this possible bottom.  With much more of a rally, we will have equaled the last rally attempt that began on the 14th.  We will also be running into overbought short-term sentiment, which is closing in fast.  The STEM.MR model closed just above sell territory.  You can see on the VIX.MR chart on the site that the last four times this indicator has reached the current level of 51% in the past month, it marked the exact end of any rally attempt.  In fact, two of the occurrences in early June didn't even get as low as 50%, and it still coincided with a short-term top.  A marked difference is that this time the VIX is dropping from a much higher level than the past failures.

Coinciding with the drop in the VIX are the overbought intraday cumulative TICK indicators for the S&P and Nasdaq.  Both are close to or exceeding levels last seen at the minor tops over the past month.

The OEX put/call ratio that I mentioned yesterday made a dramatic and welcome drop to .70, which is certainly a positive initial sign.  On the day of the June 14th "bottom", the OEX p/c ratio was high at 1.69, and it continued to be high over the next couple of days.  That little rally of course failed.  The closest past occurrence I can find to the current one is the early February low, where there was fairly heavy OEX put buying into the decline, but that abruptly changed on the days the low was made.  The market spent three days churning around the low, and the OEX p/c ratio on those days was .62, .76 and .77 (while the total p/c ratio was somewhat elevated on those days).  The S&P then went on a 50-point sprint before coming back down to retest.  We can't make much out of one day, but it's still a good sign.

Over the past couple of weeks I've been touching on the NYSE TICK daily range, and that how we're seeing the highest average range in three years.  High TICK ranges are a sign of volatility, which usually increases near market bottoms.  In the past two weeks, we've seen three daily readings over 2,000 and we've come very close to seeing six (three other days had ranges over 1,950).  This is notable because we've only seen a range over 2,000 three other times in the past 3 1/2 years:  1/13/99, 7/22/99 and 3/22/01.  The Jan '99 and March '01 occurrences preceded rallies, but the July '99 reading preceded a vicious 100 point S&P decline.  It could be that some market dynamic has changed and we will begin to see a wider trading range for the TICK indicator.  I don't think that's very probable - I think it's simply a matter of increased volatility over the past two weeks.  That may seem obvious, but it's worth making note.

What we're seeing now is a fairly typical oversold rally pattern.  Both the S&P and NDX of course have tremendous overhead resistance, and will for a long time to come.  How they react to those resistance levels will tell us whether this is just one more bump in the road or is actually something we can build on.  The S&P could rally another 20 points and the NDX another 100 or so and we would still be in the same situation we have been over the past few months, firmly in a  downtrend.  In order to get the technicians excited about this bottom, we have to begin breaking some of these downtrend lines.  If we cannot, there's a good chance yesterday will not hold.

Wednesday, June 26, 2002  9:52 PM EST

I said last evening that if we got three or fewer of the indicator extremes outlined then, I would be less inclined to buy the opening aggressively (although I would still buy).  It turns out that we got four of the extremes at some point during the day, but only three during the opening 1/2 hour or so.  Although it didn't seem to matter today, I don't think it bodes well for the immediate future.

As has been pointed out regularly today, this was not the "capitulation" day so many were hoping for.  The sentiment extremes were just not what we've seen in the past.  Of course, the argument is that if so many are looking for them, then we're less likely to actually get them.  That's an interesting catch-22, and I don't know what the resolution will be.  I always assume that history repeats itself - until it doesn't.  I'm just not smart enough to KNOW - for certain - if this time will be different than all the others.  I have to assume it is not.  And if it is not, then today was most likely not the bottom I was looking for.  I hate being so wishy-washy as to continually say "most likely" and "probably", but we got enough of the extremes to make me believe this could be a good short- to intermediate-term bottoming day.  This is what I was looking for and what we got:

It may seem like I'm being picky, but it just didn't "feel" panicky enough this morning.

Another thing that troubled me today is that the OEX put/call ratio exceeded 2.0 today.  I mentioned this ratio a few days ago in the context of the spread between it and the total put/call ratio, which is what I have posted to the site.  At that time, I said that (in general) the OEX p/c ratio is the "big" money while the total p/c ratio includes the "small" money.  Many times at market bottoms, the moving averages of the OEX ratio will be low while the total p/c ratio will be high, suggesting that the big money is betting on the upside while the small money is betting on further downside.  An OEX p/c ratio over 2.0 is fairly rare and usually bearish, as the big money is buying a large number of puts in relation to calls.  There have been instances where this ratio was high at bottoms or in the middle of a trend, but it's not nearly as common as at tops.  There's not enough of a pattern to give us an edge, but it is troubling.

The NYSE 52-week new high ratio (new highs / (new highs + new lows) hit a low 22% today.  That's the lowest since a 12% reading on September 27th of last year.  Although this is not very extreme in a historical sense (it's only in the bottom 20% since 1965), we've seen this type of reading only sporadically in the past couple of years (I'm talking about unique occurrences, not consecutive readings).  For comparison, the September low saw an extreme of 2% (18 new highs compared to 784 new lows) and the 1998 low saw a reading of 1% (15 new highs compared to 1183 new lows).  Today we had 78 new highs and 279 new lows.  Although you could stretch and say that's a sign of relative strength, I would rather see the washout numbers of the past.

The last two times we rallied from similar conditions in the past two weeks, the rallies quickly failed and took us to new lows.  If we can sustain some upside here, there may be a chance that we've seen the lowest prices for a few weeks.  I think we would have to exceed the most recent swing highs (about 1006 on the S&P and 1076 on the NDX)  to get any confidence back.  But there will be a boatload of short-sellers looking to continue their pattern, and another boatload of grateful longs waiting to dump their inventory given enough of a chance.  That's why bottoms are so rarely V-shaped - once the market rallies off of the lows, there are enough sellers around to push it back down to retest.

I'm a bit torn tonight.  Although I said yesterday that the odds were high for an explosive rally after the opening gap down, and that's what happened, I'm less inclined to think that was THE low than I was yesterday.  But it could be.  I know that's not saying much, but to be perfectly honest I just don't know.  The odds have been suggesting a good rally for some time now, and they still are, but this just didn't feel like a good bottom to me.  We will have to wait and see what the next leg down brings.

Tuesday, June 25, 2002  9:41 PM EST

As I write this tonight, the S&P futures are down 20 from the 4:15 close while the Nasdaq futures are down 30.  If the situation stays as is, the S&P will open close to the September lows while the Nasdaq should trade somewhere near the 1998 lows.  I was postponing the commentary tonight since I had a couple of research items I was working on, but frankly those are now somewhat pointless.

Similar to the 1998 market drop, it appears as though the market has been discounting the news before it's released.  If you haven't heard at this point, it was revealed after the close that WorldCom (WCOM) engaged in a "massive" fraud campaign that overstated earnings by some $3.6 Billion.  That's all I'm going to say about it, since you can and will get better information elsewhere.

So what to do now?  Well, obviously, sentiment was stretched to a negative extreme before this point and the market has been hanging by a thread.  The last two recent situations where we had short-term pessimism stretched to an extreme to go along with the longer-term conditions have produced impressive point gains (June 14th and June 24th).  Both rally attempts quickly stalled as we made new lows.  It's almost inconceivable that we won't reach another short-term extreme tomorrow morning, but this one has a truly great chance to be "different".

This is the kind of stuff that often happens at major market bottoms (as I'm sure will be pointed out regularly tomorrow) - the decline has been brutal when seemingly out of nowhere a news item comes along that makes sense of everything.  But the only news that will be reported is extremely negative.  The same exact thing happened at the 1998 and September 2001 lows.  You remember September of course, when all the reports were saying that the economy would not be able to recover from an attack on home soil, that we would become another Isreal, etc.  Tomorrow we will get reports that corporate America cannot be trusted (none of it), that foreigners will increase their liquidation of U.S. holdings, that the dollar doesn't have a chance, that the Nasdaq may break a head and shoulders pattern (which, by the way, is one of the most unreliable patterns in existence), etc., etc., etc.  It will be bad, it will be continuous and it will be scary.  And I will be buying at the instant I see a possible turn.  Yes, I will be trying to pick a bottom and yes, I may get stopped out, but I will also be taking one or a series of extremely low risk/high reward trades.  Many or most of you may disagree, but from the survey responses I've received it was clear that you wanted to know what I was doing - how I was using sentiment in my personal trading - so I have been trying to give you more of those details.  This trading style is not for everyone, or even most - heck, even I don't particularly like it.  But when I see an opportunity, I attack.

I don't say that to be cavalier.  I have absolutely no desire to be any kind of a hero in the market - I want to make money, pure and simple.  It's the only reason I come to work every day.  History suggests that we are on the cusp of one of those opportunities that come around only once or twice each DECADE.  I don't know if tomorrow will mark THE bottom, but I do believe it will mark some type of an intermediate-term bottom.  The odds will be high for an explosive rally.  I admit to feeling like the boy who cried wolf, as I've been getting progressively more bullish for the past two weeks and my models gave horribly, horribly early signals.  That doesn't happen often and I don't like it one bit.  However, until this point I've never stated that I believed one day in particular would serve as a bottom.  I believe this week will serve as that point, most likely tomorrow.

Tomorrow morning, I will be watching for the following:

1.  A NYSE TRIN reading close to or over 4.0 (after the opening fluctuations in the first few minutes) and a Nasdaq TRIN reading over 6.0.

2.  A VIX reading (no matter how short) above 35 and a VXN reading above 65.

3.  CBOE put/call readings above 1.2 (you can check these yourself for free at www.cboe.com, under "Market Data" then "Intra-Day Volume" - they're updated every 1/2 hour).

4.  A NYSE advance/decline ratio close to -2000.

5.  A NYSE up volume ratio of under .20.

6.  NYSE TICK readings under -1000 and/or Nasdaq TICK readings under -1500.

If we are truly at the bottom I think we could be at, we should see all six of the above.  In fact, I'll be keeping something of a mental checklist to see how many we get.  If we get all of them, there's almost no doubt I will be a buyer at some point.  If we get 4 or 5, it's likely we've seen the lows for some time to come.  If we get 3 or less, I will still be looking long, but only for a quick trade and not very aggressively.

Good luck and please keep your wits about you - selling into a panic is not a good idea.

Monday, June 24, 2002  6:03 PM EST

Another breakdown, another big rally, another extremely good day for those able to take advantage of such situations.  I realize that many of you are not daytraders and couldn't care less about the day-to-day fluctuations, but for those of you who are by choice or by the force of recent market action, these days can make an entire month (or year sometimes), if you're prepared.  I've mentioned several times since Thursday evening that I would not be taking any more short positions because I thought the risk of an upside reversal is too great, and would instead be looking to take long positions with maximum leverage.  Today (and last Friday and Monday) is the reason I sit at my desk day after day, waiting for low risk/high probability trades and taking ultimate advantage - these days don't come along very often, and you must be prepared when they do.

Unlike last week's rally, today's reversal was enough to push a couple of our shortest-term indicators into overbought territory, but not enough to get a sell signal in the STEM.MR model as of yet.  I've been notified that several of you did not get the email notifying you of the neutral stance of that model, and I apologize for any confusion that may cause (my web host's email server was on the blink for a short time when I sent the email).  With much more upside continuation, this model will most likely give a sell signal.

The CBOE open interest ratio made a large leap from a very bullish .70 on Friday to a neutral 1.08 today.  My guess is that there were traders selling calls (which would drive the ratio down), and they simply have not reopened the positions yet.  We saw the exact same thing at the April 2001 bottom, where the open interest ratio was .66 going into that month's expiration and the day after it was 1.09.  Within a few days, the ratio was back under .90.  The put/call ratio itself was a modest .79 today, and we're still not seeing traders pile into call options, even after such a large reversal - in fact, the ratio stayed rather steady all day.  That's a positive sign going forward.

Other than that, there's not a whole lot to touch on tonight.  We've had the rally from extremely oversold conditions that many were suspecting may happen.  However, I have not read comments from one analyst that expects this rally to have any legs whatsoever (I have CNBC on mute, so I'm not sure who they trotted out today).  I believe that we have seen sentiment extremes seen only rarely, and each time they have been excellent buy signals in the intermediate term.  I don't know if today saw the lowest prices we'll see for a few weeks or months, but I do know that I'm concentrating on the long side until I see a confluence of indicators suggesting we're overbought.

 - Jason Goepfert