john magee technical analysis::delphic options research ltd    

The present secondary has been impressive in its power, although on disquietingly low volume. A bearish sign. We watch with interest to see if the early December highs will be taken out. Our analysis says that the accumulated resistance here is too great. If we are wrong it will be the first time we have miscalculated (today). Actually our analyses of this market has been dead on for 27 months. We are most uneasy and would be out, hedged or shorting, or maybe not in equities at all, but in options. (A Coming attraction.) Speaking of terrorism--January could be terrifying.

We have habitually divided our comments into trader and investor conceptual areas. Reconsidering our recent comments on advice to traders to begin peeling off positions we would like to point out the Magee method of near (or tight) progressive stops. Using this method the trader moves his stop up daily to 1/8 under the low of the previous day, on close. If a trader were long the present (impressive) rally the stop might be placed under the low four days ago. Another way to stop it would be on the break of the September trend line. Note that prices have not climbed back above the long term trend line. And note also that the rally is now entering the area of maximum resistance, 10200-10400. In fact, this is the first real test of the rally's sincerity. If this is a bull trap it is a beauty.

Note the graphic illustration of the rally with the use of candlesticks.

Yearly charts below:

We have opined that the 10000 level will act as a formidable barrier to price advance. Our present opinion is that 10000 will act like 1000 from 1965-82, that is prices may make advances across it, but we expect those to be false excursions. A solid advance beyond 12000 would change our opinion. Meantime the rally off the terrorist low shows considerable strength. If we had traded the short term trend long (as we indicated aggressive traders might want to do) we would be peeling off our position here, expecting 9900 and 10200 to be the high water mark.

We would not be surprised to see the downward waves of the S&P and the NASDAQ develop in the Dow. This is a highly speculative statement, but it does appear that the rally off the Terrorist low is, as we judged, stalling and perhaps ending. Projecting is one thing, observing events is another, and the minor uptrend has already broken its trendline. We shall now see if the patterns etched out by the two other indices is repeated in the Dow. At any rate the medium and long term momentum is so clearly down that long positions now in anything but truly exceptional issues would be highly questionable. Shorts. Puts. Perhaps short calls for the flashy. Expect strength prior to the Federal Reserve meeting as rates will fall. Generally this is followed by a brief sell off.

Long term investing: (from our comments of Jan 01) We see no reason to change these comments this week. Isn't that boring?

Dow: The Dow can expect to find support at 10000 and is buyable, but in small commitments or portions of a portfolio or additions thereto. We expect to see it in a very large see saw from 9-12000 for some time and would hedge at the high end and increase commitments and lift hedges on oversold conditions at the low end. Jan 15: Don't hang up. We change our minds everyday according to the conditions of the moment.

S&P: We have pretty much the same opinion about the S&P with the range being 1200-1500 and would follow the same strategy.

NASDAQ: This thing is on wheels--either that or a Roman candle (not referring to candlestick patterns, but to the fireworks.) Can you buy it? If you're faster than a scalded skunk. At least there is a line of defense about 3700. But it's definitely playing with fire.

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