Say Hello to Volatility
For the Trading Week Ending October 5, 2003

Say Hello to Volatility

The market would just slowly oscillate up and down between the upper and lower support and resistance areas. Needless to say these were terrible trading conditions, and in fact conditions such as these had been unseen in over five years of trading.

Now, in the last 11 trading days alone, the S&P had managed to trade from point to point on a 5 percent range in both directions! That's some awesome volatility for the S&P. The Nasdaq, of course, put in some big numbers as well. The first 5% decline that began on September 19th was the fastest decline in the S&P in over 6 months. What was more awesome however, was a monstrous rally beginning Tuesday, with a good measure of gapping, that brought the S&P right back to its origin in even LESS TIME, to the delight of some very happy bulls of course! What is there to do? Should we look for more upside? Or was the decline in September a warning of a tiring 7-month old uptrend? Let's take a look at the charts to develop a simple, yet effective short-term strategy:

• The 15-min Intraday S&P500 Futures Chart above illustrates the last 11 trading days of action and addresses the short-term

• Notice that there are approximately 50 handles from top to bottom of this range. That is a good dose of volatility for the S&P for this short time frame. To think that the market traveled both up and down across this range in that short-period is pretty impressive, if not scary, especially for beginner traders.

• The decline you see in the middle of the chart is the sharpest and fastest decline in the S&P in over 6 months. To keep us all confused, the market rebounded right back in even less time.

• As if this is not volatile enough, let's avoid any complex analysis of the situation and keep it incredibly simple. The Gap opening level on October 3rd is a very important pivot area. It represents a neutral area of liquidity, especially in light of its Up-to-Down behavior afterwards. We will utilize this area as a mark to establish short-term posture.

• 1032 was the approximate opening price on the S&P500 Future Contract on that day, while the SPY opened at 103.67 there. We will favor the short-side if the market is trading below those opening gap areas to play the potential for a 2x top. Let winners run.

• If the S&P is able to sustain trade above our pivot area, stay out of the way, as the market does have the power and momentum to go to new highs for the year, which are not very far away. In fact, a move there may open a pathway for a buying frenzy all the way to above the 1060 area. Go step by step when on the long side, and take small profits when given the opportunity.

Chart Notations:

• The 15-min line chart above compares the S&P500 (SPX) and the Nasdaq-100 (NDX) in percentage-terms over the last 11 trading days.

• At this point, the Nasdaq is lagging the S&P500 in relative perform-
  ance. At this point in time, the Nasdaq should have been closer if not beyond the 0% line.

• The Tech issues appear to be ill, particularly in BioTech and Semi-Conductors.

• So long as the market is trading within the parameters discussed in the S&P500 Futures chart above, look to target the tech issues for short-side plays.

These days are very critical and exciting points in time in the market. The cross-currents of some very large trends continue. The action over the last year has been awesome for the bulls and has played out, for the most part at least, as we had expected. Soon enough, and especially if the S&P500 proceeds to a new high, I will be ready to issue an Intermediate-Term Sell signal. Avoid being swayed by media pundits looking for the birth of a Bull Market. It is far too early in time to make such an assumption. At the same token, avoid being lulled by those who are looking for the end of western civilization or cataclysmic market events. We will continue to focus on the technical side of the action as these are presented to us, and maintain maximum objectivity and flexibility.

Until next week: Good Luck!