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Chillin' with Dylan

By

Await thy edge and hit 'em hard!

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Yes, 'n' how many times can a man turn his head,
Pretending he just doesn't see?
The answer, my friend, is blowin' in the wind,
The answer is blowin' in the wind.

(Bob Dylan)


It was an impromptu last minute trip but the critters were jazzed nonetheless. They've heard the Woodstock lore and jammed incessantly to the vibe but had never schlepped on the two hour trek. Until now. After a late Friday arrival, the fab five settled into the groove at a lazy summer home rental. There, while nursing a few Sierra Nevadas on the front porch of a sleepy Bed & Breakfast, they exhaled and transitioned from de-facto suits to shorts, sandals and some much needed smiles. The conversation went a bit like this...

Snapper: Is anybody still trading? Thursday's anemic volume was the lightest of the year...until Friday! Is this gonna be the norm until after the RNC? Better yet, is everyone gonna sit on their hands until electoral clarity emerges?

Daisy: Maybe--think of the widespread consensus at the beginning of '04. Everyone and their sister was forecasting a nice, strong rally through November before a possible election correction. Sure 'nuff, the tape has struggled through most of the year and frustrated most market participants. Minxy, for sure.

Hoofy: I wouldn't worry Daisy, our reservations at Sizzler still stand. After last year's noice rip, this year has been one of digestion. From a long- term perspective, it's the optimal stair-step pattern. A little pessimism is bullish and enables the Minx to climb the wall of worry.

Boo: Worry? The VXO (volatility index) is a teenager that looks like it wants to trade to a hat size. It hasn't been this sanguine in eight years and it's facilitated a lot of "compression" (to borrow a Succoism). Traders, desperate for performance, have increased the size of their positions to compensate for the lack of movement. That is a dangerous process that may very well lead to outsized volatility.

Sammy: True dat. And I would also remind the bulls that technical field position is a function of time horizon. While we MAY be basing and digesting last year's gains, the intermediate term picture is a defined downtrend (lower highs and lows since January). Until that is breached, Boo will want to short rallies into resistance.

Daisy: Where is resistance?

Boo: The S&P is currently nestled between the 50-day (1104) and the 200-day (1111) and there is further resistance all the way up to S&P 1120-1125. Other levels to watch include Dow 10,200 (previous high/congestion) and 10,250 (200-day) and NDX 1400ish (congestion). And keep in mind, the stochastics in both the BKX (banks) and the XBD (brokers) are twisting more than a Saugerties concert!

Hoofy: Yes, but with the Repubs taking center stage, I'm feelin' like there could be a nice little "hand stand" this week--particularly with the tape thinner than the Crested Butte air. We've seen three weeks of gains that began when every technician was pressing the collective "break" of the indices. Watch crude--it was off 8% last week--as it's become the guide of choice for equity traders everywhere. Also keep in mind that we've got month end (tomorrow) and August payroll data on Friday.

The critters sat back, listened to the sounds of silence and pondered the conversation. The last week of summer was gonna be slow but they were quite aware that the absence of players would be seen as an opportunity by a few sly gorillas. If no one was around to provide liquidity, they figured, these apes would be able to muscle the tape around. And when frustrated players desperate for performance combine with an inviting environment, they knew it would be wise to expect the unexpected.

Good luck today.

R.P.
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