john magee technical analysis::delphic options research ltd    

The reaction of the last 10 days has been sharp and dramatic. In December we opined that January might be a terror. A question yet to be resolved. Nonetheless the nearest important (moderately) low at year end was decisively taken out and now the low from mid-December is in easy range. Note that there was a minor broadening formation over the year change. We remain skeptical of bullish positions. In fact in the Dow we think short positions have very limited and identifiable risk. The candlestick chart of the recent Dow below is illustrative.

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 analysis 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.

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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