Steve Zito, MS Fin/BS Econ Wharton School, HTML Writers Guild
uses economic and technical analysis to forecast the direction of the stock market. The views in this newsletter are opinions only, and should not be solely relied on for your investment decisions.
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NASDAQ COMPOSITE
INDEX closed 1542.96

June 19, 2002 - Nasdaq Tech Rally Over

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June 19 Go To Page 2 Nasdaq Composite closed at 1542.96 on June 18
Nasdaq has risen just 7.48 (0.5%) since June 10 page CNBC reported from the floor of the NYSE Tuesday that everyone is skeptical of the 6.7% Nasdaq surge from Friday's opening lows, for that reason alone Joe Kernen preached the current rally must go higher. Unfortunately rally ran out of steam on Tuesday's close, since the cause of the rally was options expiration arbitrage with stock and index options expiring June 21. What is that for readers not familiar with Wall Street money machinations? Simply put, as the Nasdaq declined steadily for last 20 trading days since May 20 averaging 10 points lost per day, the large brokerages and hedge funds sold options on stock positions which in turn were sold short to drive prices further down. The option premium was collected 100% from naive speculating public daytrading options in $5,000 accounts at online brokerages like Charles Schwab. PUBLIC always loses this game. On every Friday and Monday just one week before options expiration every month, the large money interests and banks start "buying back their stock positions" with knowledge that out-of-the-money stock options premiums are collapsing in the final weekend before expiration. This has produced nice mid-month rallies in stocks every month, with the last 3 months averaging 7.8% on the upside for a week or less. When Nasdaq hit 1566 Tuesday, the gain off Friday's low was 8.3%. The opening on Monday at Nasdaq 1526 was short-covering from these huge arbitrage positions, and the rally is over. Nasdaq is going to resume its fall, but today downside should be limited to 1471, about 4% from the 90-day moving average. What is the significance of the 90-day moving average? I was a daytrader for so many years, and that is what daytraders are using as a benchmark, both at home on PC's and at large bank and brokerage trading centers. With economic fundamentals too difficult to comprehend for a typical average stockbroker, they have to rely on charts for timing decisions. Expect a selloff through the end of the week. Whatever Nasdaq does this coming Friday, expect major trend reversal in the following week, Monday, June 24, with new options positions being put on to replace the expiring June series. Short-term 10-day chart shows short RSI and MACD breaking down from positive to negative. Intermediate 90-day Nasdaq Index chart shows stochastics over-bought at 78%/78% with RSI and MACD failing followthrough into positive. Long-term 2-year Nasdaq chart shows stochastics bullish, but not strongly enough to buy "at all costs" and next retest of recent Nasdaq lows at 1445 will present a better opportunity. Greatest potential for upside is wireless communications, down 66% in a year. Biotech made a false start, but too many insider racketeering issues remain unanswered, evidenced by Martha Stewart's scandal. The best value will be semiconductors.
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