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VIX update after the close on October 8, 1997:

Both the MVIs and the AMOSS gave adeqate warning to take defensive measures in the last few days. The MVIs are nearing 1st level support which is about halfway to a good oversold level. AMOSS 90 and 20 day components are still extremely overbought while the 5 day is nearing dead center neutral. VIX Z score has pivoted upward from its sell zone. The P/C ratio is just below the buy level. The TICK Vol X and TDAC were saying something like today was in our future. Now they are hinting that we might see some bounce tomorrow. It is not adviseable to chase it on the upside. CODI is oscillating in the indeterminate region. Our breadth indicators deteriorated as might be expected. The divergence on the McOsc chart and the rolling over of the issue oscillator gave advance warning also. TICK Vol X says the issue oscillator should bounce off of zero tomorrow, but this is the third time the zero line has been tagged from above since August and occurs when overhead resistance on the OEX has held. Big Cap valuations argue for a deeper penetration of the issue oscillator into negative levels this time. Golds held up well as bonds went on sale and big caps accompanied them. Look at the stochastic for gold. The hold out here is the NDX index which represents the faster growth companies. The disparity in the selloff today between big caps and small caps is that big cap growth is expected to slow down in coming months. This disparity appeared to be caused by a relative growth rate investment allocation decision. It is doubtful that small caps would hold up in a full scale retreat of big caps, say on the order of 300 or more points in a day. Panic has a way of taking everything down together. Our interest in the NDX was not for trading purposes per-se, but for a market timing indicator for the big caps. Here is one layout that might be interesting to tape readers. Several things are of interest here. One is the race between the advances and declines to the 1200 level each morning in the first fifteen to thirty minutes of trading. The winner of the first heat that surpasses the 1200 level quite often sets the tone for the day. The second important point(s) is(are) the trend(s) of the advances and declines after the first heat of the race is over. Are they flat, rising, declining, parallel, divergent, convergent? Do they stay above or below 1200. Does one overtake the other. The third point is the day to day relationship. Are the stair steps leading up or down? Fourth point is the slope of the TS advance decline line and its relationship to the NYA plot. Different time frame should show divergence better. Fifth point is the trendline (channel) on the NYA top plot. Has the NYA taken on new character by working the otherside of the trendline? Looking at this price-breadth relationship can help gain perspective and facilitate decision making when deciding whether to place a trade. The expectation was that breadth indicators for the NDX would issue sell signals before the big caps did. With three sell consecutive daily sell signals it appears to have had some validity, even though the NDX itself has not collapsed, yet. Today's NDX reading has backed off the sell threshold. Perhaps the previously mentioned allocation preference has produced this effect.

Cycle comments:

Resistance was found precisely at8170, as discussed Tuesday p.m.Next level would be 8259 if 8170 was to be exceeded.In truth,last Friday's Bradley turn date spike high was very close to the price turn this week at the high.So we called the short term turn early in time but not too much in price.Other markets show short term turns in this midweek time period,including the yen.Silver may show a short term reversal mid month.

VIX update after the close on October 9, 1997:

There are several significant indications on Thursday's close today. One is the McOsc of issues closing below the zero line. It is still in the neutral region, but trending down. NYA chart shows why this is so with more declines than advances. The NYA chart has a significant trend break, and that is that the NYA is now below the short term trendline dating back to 9/26,which is the beginning of the trendline. What we are seeing is a loss in price and breadth momentum with these indicators and with the RSI and SMI. (Gold stocks on this chart have NOT given a long term up signal yet.) CODI is now on a Sell Alert as it is below the alert line. A rising TRIN on a closing basis would turn this into a sell signal. The problem with getting a sell signal on 10/10 close is we are facing a pre-expiration week closing bias which pros often use to buy the close Friday (tomorrow) and sell on the first profitable day during expiration week (early next week). Another historical cliche has expiration week up (next week) if the pre-expiration week is down (the present week). Sorry to confuse the issue, but that is the way cycles intermix with technicals. To finish the technicals, the MVIs are flirting with first level of support. TICK and TDAC ran out of steam on the rebound today. AMOSS is grossly overbought on the 90 day, just overbought on the 20 day and neutral on the five day. VIX Z score is still on a sell. NDX wedge continues to narrow as its stochastic momentum and tick diff indicators peak. So, this leaves us waiting for the PPI results tomorrow and an expiration week ahead, which can be summarized as, "roll the dice". No signals for a long entry at low risk are presently in place .

Cycle comments:If Mideast tensions accelerate near term,political risk may cause cycle and technical disruptions which may be difficult to trade.Conceivably, XAU might be the short term benificiary.XAU has not yet broken out to the upside which would happen if oil was threatened.Lets keep an eye on the oil and XAU index near term,and one ear on the radio.Silver may make a short term reversal midmonth from the trend in place prior to the midmonth point.

VIX update for Monday, October 13, 1997 open:


McOsc issue and volume are making a controlled descent into the neutral region while price consolidates its recent gains. The lower side of the neutral region has been known to provide temporary support. On the price side of things the OEX is expected to test for support on the regression line A which had been resistance in mid-september. Also on the breadth front the TICK and TDAC are forecasting a price rally next week. Advances and declines on the NYA chart suggest that we have seen a momentum peak in this current selloff and price is putting in a temporary low. Another down day or intradownday is justified technically. CODI is dropping deeper into the Sell Alert area. We are getting a strange event here with CODI and PRICE dropping. Since CODI is a combination of breadth and volume this convergence is possible. The question is, "What does it mean." If a price rally does occur next week CODI will most likely drop further. The CODI sell signal we will be looking for is a day or days when CODI turns up and the stock indices are flat to up. Weekend analysts affect the selling(or buying) on Monday's open, so if the above breadth analysis is correct a very short term long entry could be made sometime in the first half hour to hour whenever the weakness subsides.


MVIs are very near a statistical support level. At the current rate of decent it appears that the -1.618 level will hold. If it doesn't, then look for support at -2. There is always the possibility they won't hold and the MVIs could enter a downtrend. We will just have to wait and see if Greenspan rattles the market this weekend and early next week when he is speaking in public. Our best guess is that Tuesday intraday will see some down side volatility because Greenspan is attempting to "jaw bone" down the market. The P/C volume ratio on the AMOSS chart moved into the buy Calls or Go Long the market on Monday open. This signal is good for a few days, but don't do any buying blindly as this is an optimized signal and the market does not recognize optimization. Optimization is something to provide psychological satisfaction. The idea here is to look for an entry, preferably on weakness or stability and improving breadth. 90 day AMOSS component is still extremely overbought, but it can stay that way for a very long time in bull markets. The 20 day has dropped back to the upper border of the neutral region and the 5 day is on the lower side of neutral(bounes occur at the boundaries). This reduces some of the overbought pressure and is conducive to an expiration week rally. VIX Z score is still working on the sell from 10/08, but does not appear to be very convincing.

RSI and Stochastic Momentum:

Gold stocks are putting in a confidence building performance, at least they are not falling out of bed. Yields are rising which is a generally a big negative for overvalued stock indices. This question of overvaluedness does not lend itself to precise timing indicators as overvaluedness can exist for years. Earnings can change, investors patience is a factor. Even more important next week, stocks can move for reasons totally unrelated to valuations and interest rates. Open interest on stock options and stock indices play a bigger role than small interest rate gyrations during expiration week. Open Interest can also play havoc with standard technical indicators during this week.

Of Special Interest:

We would be remiss if the breadth chart of the OEX was not shared with the readers. There is some conjecture about the validity of this technique using artificial intelligence, so we are presenting it for interest's sake to see how it plays out. Again breadth measures are not precise timing devices as it takes investor/trader consensus to bring price to its feet. Price/breadth divergences can go on for days, weeks or months before price yields. This is similar to the current net short position of the commercial hedgers listed in Barron's every 2 weeks{ currently they are net short the S&P and T bonds}which is a longer term cautionary signal. The other chart we are only looking at and not trading options or futures on is the NDX. The recent wedge has been reluctantly broken to the down side, rather sideways. We had breadth sell signals on 10/03,6,7 using the same technique as on the OEX. The expectation was that the NDX would fail before the OEX. Without expiration week we could see the technical indicators develop smoothly. Unfortunately next week is more likely to be choppy. This will confuse the technical picture.

Expiration(E) week is complicated enough without Greenspan. Due to the vested interests in options the tendancy for individual stocks is a migration towards one side or the other of specific strike prices. This translates into strike price range shifts of five or ten points in equity indices in one day. Movement is often reversed intraday or the next day leaving a holder of the current month's options watching the premium evaporate. End of day traders should avoid trading the current month's options as trends start and abort the same day. Intraday traders with a live feed can trade it but need to be cautious during the first and last fifteen minutes or half hour due to premium stripping when option pricing catches up with the index. If end of day traders want to speculate during E week then it might be adviseable to trade the next month out. It is very possible for weekend analysts to have sell orders sitting at their internet broker on the open Monday morning which will result in weakness during the first half hour or so. This view is based on the bearish perception they may arrive at from last week. As of Friday the P/C ratio is on a buy level which could very well lead to an upward reversal of any weakness on Monday. During E week each day has to be taken one day at a time more so than at other time during the month. P/C ratios govern price action during E week more so than any other factor.The option premium ratio has given multiple readings in the .94 area.We would prefer to see more readings in the .83 to .85 area before getting more bearish.

Cycle comments:

To quote from the cycle comments from the close of October 8:

"Resistance was found precisely at 8170, as discussed Tuesday p.m.Next level would be 8259 if 8170 was to be exceeded. In truth, last Friday's Bradley turn date spike high was very close to the price turn this week at the high. So we called the short term turn early in time but not too much in price. Other markets show short term turns in this midweek time period, including the yen. Silver may show a short term reversal mid month. "

Indeed, the yen did reverse from its down trend with a move from .82 to .8419, precisely in the time frame outlined on these comments.

VIX update after the close, October 13, 1997:


Most significant longer term indicator here is CODI. It has turned up generating an official sell signal. Because of the rather low holiday volume{and pre Greenspan !} it might be wise to give this one another day of data. McOsc of issues clung to the lower side of the neutral band. NYA advances marginally exceeded declines. Declines increased steadily all day after the early morning pop. TDAC was flat and gave no clues for tomorrow. Tick Vol X does have higher lows which is a positive. It is looking like today's advance was used to sell into. This is not a good sign if it continues all week.Remember , we did predict an up day for Monday!


MVIs are pausing at the -1 and -1.5 std dev lines. They haven't really generated buy signals yet. As for the AMOSS, VIX Z score is still on a weak sell. The OEX P/C ratio has switched to the sell side after one day on the buy side.

RSI and SMI:

Gold stocks appear to be holding up better than bonds and stocks for the last few days. T bonds were on holiday today. SPX stochastic momentum is rolling over faster than SMI for the XAU. In fact note the straight slope on the XAU SMI whereas the SPX SMI has a rollover. This might be prelude to something significant at the end of the week.

Of Special Interest:

On an intraday basis the NDX is oversold and appears to be headed up again from within the congestion band. The OEX breadth reading remains on the last consolidation/sell signal from Friday. The Friday update had two strategies. One was the Pre Expiration Week "buy the close" and sell the first profitable day in E week. The Pre E Week trade entered at $10 in the last hour on Friday and exited Monday morning at $13 for a 33% gain. This was a discretionary trade based on intraday technicals. The other was the P/C ratio buy the open of the next day and hold for two days. This is an optimized trade with rigid rules. Since option prices are not quoted until the market makers have a handle on pricing{ it could be for at least ten minutes when the mkt is gapping up} it is adviseable to skip a trade if the momentum is strong. Rather, it is better to buy in quiet periods and sell into demand periods. However, if someone did take this trade, they most likely got filled when the Pre E week trade was exiting at $13. Since another day remains on this strategy we will update it after the close tomorrow.

VIX update after the close on October 14, 1997:


MVIs are holding support at -1 and -1.5 std dev. They are not giving a strong indication one way or the other. All that can be said is that they are in a minor oversold zone and their channels have downward curvature. This is positive short term(say 3 to 5 days) and negative intermediate term. The AMOSS has the 5 and 20 day components in neutral and the 90 in extremely overbought. These support the notion of short term rally and longer term consolidation or correction. VIX Z score pivoted down in the lower zones and this is a weak buy factor. P/C ratio has now moved from below the sell level to just above the sell level, thus it is neutral for Wednesday. P/C ratios are used in a contrary fashion. On Tuesday there were twice as many calls traded as on Monday and there were almost three times as many puts on Tuesday as on Monday. Probability expectations here are for an upward bias on Wednesday.Remember, on the weekend commentary, we gave high probability to an up Monday and some downward volatilty during Tuesday.This ,indeed, was exactly what happened.


McOsc of issue and volume are holding steady in the neutral zone. This is not a particularly encouraging development except for the commonly accepted notion that a change of 4 points or less predicts a 66% chance of a large index move in the direction of the change, up in this case. OEX found support right on our upper regression line today. Declines and advances on the NYA chart are in a real tug of war setting up the intraday price reversals. A/D line has a flat to slightly upward bias the last two days. TICK and TDAC are both hinting at an upward resolution on Wednesday. CODI is the holdout signalling a sell. Last week we were concerned about CODI giving a sell signal and price not dropping. The explanation was that for at least part of options expiration week expiration bias would override the technicals. If this divergence was extended in time then a more significant sell might actually occur after expiration. A continuation of these trends means possibly moderately higher prices over the next three days and potentially lower prices beyond that.Longer term position traders, and those who are not able to quickly scale out of long positions should be unusually careful when CODI is in the vicinity of the sell alert line!Note that Monday's AND Tuesday's option premium ratio were both .85 where long risk increases.


Gold stocks are still in consolidation, maybe support is building at 105 on the XAU and 50% level on the RSI. SMI picture between XAU, yields, and SPX has not changed from previous days. Yields are gaining momentum and stocks are losing it and gold stocks continuing their consolidation.

Of Special Interest:

Monday and Tuesday were excellent examples of how trends in expiration week differ from other weeks of the month, particularly the first week when money flows are strong. It was stated here last week that E week has a choppy price pattern and that end of day traders should look to November options rather than those expiring this week. Two reasons for this are evident in theta and gamma. Theta represents the time decay factor in option pricing. With only one week left it is possible to lose 1/5 or more per day of the premium if the index remained flat. The relationship is exponential, not linear, so more is lost as each day progresses. If you are wrong on the analysis then there is not enough time left to regain lost premium. Gamma is the rate of change of delta, and delta is rate of change of the option with respect to changes in the index. E week is synonimous with Gamma as options trade like futures contracts this week. In essence Gamma is the acceleration of delta and delta is velocity of the premium. The OEWJF(October 930 call) and OEWKF(Nov 930 call) illustrate what is being discussed here and show why the Novembers were recommended for end of day traders in preference to Octobers on the P/C trade. Artificial intelligence breadth readings remain bearish for the NDX and OEX until another signal is given. Remember, this a slower, more long term measure of risk and reward.

Cycle comments:In this middle part of the month, high probability exists for a short term reversal of prevailing trend in silver and crude oil.

VIX update after the close of trading on October 15,1997:


Extra volume of the last two days compared to Monday is showing the true character of this market. It is pushing the MVIs deeper into negative statistical territory. In normal times they are nearing rally levels. In 1987 terms they would just be starting an accelerated decline into some kind of panic. The trick here is to determine which is the case. The AMOSS 90 day is still extremely overbought, but the 5 and 20 days are both almost dead center neutral. VIX Z score is still on a sell signal since it is trending upwards, but it also is now dead center neutral. P/C ratio has slipped into the sell area.


CODI sell signal has also been influenced by the additional volume of Tuesday and Wednesday. The McOsc of issue and volume gave way today and dipped below the lower edge of the neutral band just as the OEX tagged the upper regression line of the horizontal channel that started back in August and ended mid Sept. It is just being used for reference since there were some expectations of the mkt entering a wide trading range for an extended period. Advances and declines on the NYA chart show what is occurring from an intraday standpoint. Surprisingly the TICK and TDAC are both acting contrarian and are voting for some up action the next two days. That is what they said yesterday too. Could be they have too much phase shift built into them.

RSI and SMI:

Gold stocks are still shiny in comparison to yields and stocks. Only time will tell if they have anticipated something of a crisis nature.

Of Special Interest:

Take a look at this intraday chart of PREM and you will have a picture of how sustained the bearish sentiment was on the street today. It oscillated between the Fair Value and Sell Programs all day. These lines are created from the numbers CNBC and others post each day. A typical day will see the PREMIUM(difference between the SPX futures and cash index) migrating back and forth between the Sell Program and Buy Progam lines. A very bullish day will see it between FV and BP most of the day.We have had 2 back to back option premium levels of .85, usually a bearish level. Both the NDX and OEX are classified by the artificial intelligence program as still in the bearish mode. Our Cycle work agrees except it is calling for a reversal upwards in the NDX. As a caution here, both the AI and the cycle work are all based on history and in truth no one can tell for certain what will happen tomorrow. As we have seen so far this week, expirations can be very choppy affairs. So much depends on other things like interest rates and the dollar and put call ratios.

Cycle comments: Our call for a midmonth turn in oil and silver seems to have been correct.The "feel" of many more markets seems to be leaning to the sell side- possibly an instinct for liquidity?A break below the lows slightly below 16900 in Japan may cause some more of this liquidity instinct to come into play.Below 16900 the next support is 14000 or so.Longer term players wondering about position trades should use our proprietary CODI chart to gauge risk and reward to enter long positions or scale out of them appropriately.We feel that chart best enables longer term or position traders to have a feel for overbought or oversold parameters. Presently CODI is still in the high risk zone for longs, so a good decline is probably close in time.The VIX ,AMOSS, and other charts are necessary for shorter term trades.

Comments for Friday's open, October 17, 1997:

Well, you can't say we didn't warn you! Last Friday, before the start of expiration week, we showed how a good long trade could be made buying near the close and selling on the first up day at the start of expiration week. That trade netted 33% in one day. Then we said that Tuesday would probably see some downside volatility. For longer term position traders, we warned numerous times this week before the decline started that CODI was in the vicinity of the Sell Alert line, and that if you couldn't get out of long positions instantly, that it was time to be extremely careful. We also noted that people who were still long would probably have an opportunity to exit, which they could have done on Thursday's early trading, when the market was up. So in effect, we were giving advice to two classes of investors- for gunslingers, to enter Friday on the long side and sell on any price spikes up at the early part of the week, and for longer term close-only and position traders, to expect some kind of a decline in the near future.