Summary for Week Ending 19th April 2003

The trading week was shortened by the Good Friday holiday, and as intimated last week, action was mostly dull and directionless. There was some news from Iraq, although it is doubtful if this will have any future bearing on market sentiment, and it would follow that participants are now free to concentrate on the larger picture, that is, the drivers of the economy.

Looking at the week that was, we can easily see that both the DJIA and the S&P traded within the previous weeks range. We had a higher low formation in the previous week that we were looking at, and I would have expected that the highs be taken out quickly if this was to follow through. I have been mentioning that both markets are getting caught in a rut, and this opinion was again made apparent with this weeks action. The continued behavior of choppy trading sessions and the distinct lack of any intention to trend in either direction makes for very dangerous trading conditions (unless of course you are writing naked options !).

As a way of explaining the current malaise, let have a look at the last month of swings in the S&P 500:

Down 52 ; Up 61 ; Down 42 and Up 34 (so far)

As it fairly obvious at this point is that the market just cant seem to get out of its own way. There are a number of factors that may be contributing to this, and I believe that the overhang of the Iraq war is the principal contributor. Just prior to the invasion we had a strong move forward, which appeared to be punters trying to get set early for a repeat performance Gulf war I. Unfortunately Gulf war II has so far not produced the desired effect as far as a bull market is concerned, at least not as yet...and I personally still do not believe that it will. This leaves a number of players with positions placed and at some point they will lose patience and begin to exit. We may have seen the start of this with the minor volume blowout on Wednesdays outside reversal which has placed a lower swing high, following from the previous weeks higher swing low, so we have in effect, market compression. This of course leads to the obvious question,

Has the upside been expended ?

The answer to this is the same as the answer to last weeks position regarding the higher swing low. Whilst we have this sideways choppy market, I expect the choppiness to continue. The most likely point at present for a major COT is around 21st - 27th May and this is someway off. Following from that we have the 6th June. In the meantime all we can do is wait and watch carefully for a strong sign of the pattern breaking. This will almost certainly be coupled with a volume signal. Until then, I'm staying in cash.