Option Investor
Market Updates

Equity futures higher on day after Presidents' Day Weekend

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Equity futures are pointing to a higher open this morning with S&P futures up 4, NASDAQ futures are higher by 27 and Dow futures are up 35. The bond markets are also going to help things this morning as we're seeing some selling in bonds, as YIELDS are higher. Traders should keep a close eye on bond YIELDS today. Right now the 10-year (TNX.X) is yielding 5.145% and if we can get this yield to move higher today, that should help with Friday's bullish trade in the QQQ's. Today's fair value for the S&P 500 is $4.08 with buy programs set at $5.66 and sell programs at $2.46

Working overtime might keep us out of trouble!

Last Thursday, we used market history to put some money in our pockets. Today, we're going to see if market history pays dividends again as I turned bullish near the end of the day (Friday 03:30 EST) with a long/call in the QQQ's. If history doesn't work in our favor, here's what to be looking for today. If we're long the QQQ's we don't have to "worry" about the upside, what I always "worry" about is the downside.

The Downside

One thing I was right about on Thursday was the suspect nature of the Networking Index (NWX.X) even though we had good news in the group from Ciena (NASDAQ:CIEN). With that in mind, we decided to take profits in shares of Extreme Networks (NASDAQ:EXTR) near $39.75. Did that pay off? YES, that paid off. Later in the day, we decided to short/put the QQQ's near $59.75. Did that pay off? YES, that paid off. Especially when we got the Nortel (NYSE:NT) warning after Thursday's close and the stronger than expected PPI number Friday morning. If I believe I was "very right" in the NWX.X I need to understand what clue set me straight. Let's revisit that chart and see if it can keep us out of a lot of trouble with our QQQ call/buy play we initiated late Friday near 03:30 EST. Remember that the MARKET is made up of SECTORS/INDEXES and those Indexes are made up of STOCKS. The QQQ's are an index that does have some networking stocks in it so we might conclude that the NWX.X might have an affect on the QQQ's.

Networking Index Chart - last seven months

Today, I'd have a "downside alert" set on my trade station at 605 on the NWX.X. I'd also have an "upside alert" set at 635 (just below the 2/14 low of 637.26). For our bullish trade to work in the QQQ's, this is a level I feel the NWX.X must reach. I'd also set another upside alert near 645 on the NWX.X (right near the low set on 12/21/00). In my trading plan for the QQQ's, a trade at that level should have us looking very good. If the downside alert at 605 is triggered, here's what could happen to our QQQ play! And it IS NOT GOOD!

NASDAQ-100 Tracking Index (QQQ) - last seven months

Why did we like a bullish call/buy play in the QQQ's Friday near $55.50? Two reasons and two reasons only! The trade offered a favorable risk/reward (risking $1.75 to make $3.13 or $4.38 depending on your target) and the past history of the day after Presidents' Day being up 6 of the last 7 years (85.7%). That's it! When I highlighted the trade, I was only willing to risk $1.75 per share. If today at some point, the QQQ's were to reach the first target of $58.63, I'd move up my stop to break-even. It would be ridiculous to watch this trade move up $3 then get stopped out with a $1.75 loss, especially with what we've seen happen in the NWX.X!

If there's a bear in the woods!

I was too busy building hot rods in high school back when President Reagan said something about arming ourselves against a "bear in the woods", but I believe he was talking about how the U.S Military needed to build nuclear armaments just in case Russia was a "bear in the woods." Well, I'm the one that pointed out the bearish trade in the QQQ's on Thursday, and I'm the one who pointed out a bullish trade in the QQQ's on Friday. If there's a "bear in the woods" have your stop in place in the QQQ's at $53.75! Don't feel like you're getting out too soon either at the $58.63 if it means a profitable trade. There might just be a bear waiting above that level.

Use the NWX.X to help guide you!

Now is when I'll revisit the "snake anatomy" and how the NWX.X still looks like the "tail of the snake." If the NWX.X is making headway to the upside, we should do just fine in the QQQ's. However, if the "tail of the snake" starts heading lower (below 605) expect the "head of the snake" to turn around and look to see what's pulling on it!

Other Downside alerts you can set!

There are two other indexes we've talked about in the past two weeks that will help traders become alert to potential downside in the markets. The Disk Drive Index (DDX.X) has been holding the 95 level (96 to be more exact) in the past 8 sessions. A trade at 95 would have me alert to a downside move! The DDX.X closed at 98.30 on Friday. One other alert I'd have set would be in the CBOE Internet Index (INX.X) at 195. The INX.X has held above this level for the past 6 sessions and finished Friday's trading at 199.48.

Trading with confidence and conviction!

Set your alerts! NWX.X downside at 605, upside at 635 and 645. QQQ downside at 54 (stop @ $53.75 on our trade), upside at $58.63 and $59.88. DDX.X downside at 96 (95 on our bullish trade) and finally INX.X downside at 195 (195 stop on bullish trade for www.indexskybox.com).

Seitel Update

I received a lot of e-mail on Friday regarding our bullish play in shares of Seitel (NYSE:SEI) and YES that was a buy signal right at our downward channel at $18.50. If the past is any indication of the future, we're going to want to see a trade at $19 to get the stock through that channel line. If we were right in our bullish analysis back on February 2nd, any shorts in the stock should provide support near $17 to $17.50 as institutional bulls should be getting aggressive near those levels too.

Seitel Supply/Demand Chart - $0.50 and $1 box.

Some subscribers were getting frustrated with "technology" stocks earlier in the month, so we thought something a little less exciting might be worth a try. The supply/demand characteristics are looking better and better and a trade at $19 might have us selling near $23 down the road. First sign of trouble here would be a trade at $16. It hasn't been exciting, but "summer exploration" is just 3-months away! What's Input/Output (NYSE:IO) doing? Is it confirming what we're seeing here? You can get free point/figure charts like the one above at www.stockcharts.com.

Jeff Bailey
Staff Analyst

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