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Futures see selling after release of CPI

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Economists had been expecting the Consumer Price Index (CPI) to come in around 0.2% for January, but this morning's number shows prices at the consumer level rose 0.6%. Once this number was released, futures dipped lower. Currently we're seeing S&P futures trading lower by 5, NASDAQ futures are off 35 and Dow futures are down 35. Fair value for the S&P 500 is $3.98 with buy programs set for buying at $5.55 and sell programs set at $2.46.

Look at the NASDAQ Composite from a market makers perspective

So often I encourage traders to look at trading like an institution and this morning we're going to look at the NASDAQ Composite. To build a foundation, we're going to quickly go back to November 29, then get current to yesterday's close. All along we're going to use the retracement bracket and try and ascertain how market makers may be trading the NASDAQ as they try and control risk in their inventories. At the same time it may give subscribers some important insight into where things may go from here.

NASDAQ Composite as it may have been viewed by market makers on 11/29/00.

The above is an attempt to get inside a market maker's head back on November 11, 2000 and try to ascertain how they may be viewing the markets as it relates to risk/reward using a bar chart and retracement levels. Try to concentrate on the 61.8% retracement level simply as an area that market makers were sellers at as they got rid of stock they bought when making markets during a decline. Think of the 50% level simply as a level where they may have been covering some short positions in stocks as they sold at offers during a brief rally. Think of the 38.2% retracement level as an area where the market maker expected heavy selling from "panicky bulls" as they wanted out of the NASDAQ and many four lettered stocks. If a market maker was properly "weighted" for any type of market, this system might work to their benefit. Sell high and buy low. When you have to provide liquidity you usually a buyer when the MARKET wants out and a seller when the MARKET wants in.

NASDAQ Composite as I think it is viewed by market makers.

As we now move forward, we can see what took place and if the above plan would have actually worked. I'd say the recent rally 3-weeks ago didn't come close to the 3,003 level and this tells me that the MARKET or MARKET makers are trying to play some "risk management" on the sell side. If the 38.2% retracement level is taken out at 2,232, look for market makers to simply "roll down" their retracement levels and go to work once again. This is very similar to yesterday's 03:30 EST exercise with JDSU.

NASDAQ Composite Index Chart If a close below 2,232

Here's what I think market makers have got to be planning for if the NASDAQ takes out 2,235. I think they'll be trying to control their risk to the 1,758 level. Mind you, I'm not predicting the NASDAQ will go to 1,758, but I think market makers and perhaps institutions will be trying to at least hedge themselves to that level.

What to look for at the open

Bonds have been all over the board this morning and the bond pits have been active. Currently both the 10-year (TNX.X) and 30-year (TYX.X) YIELDS are higher (selling in these bonds). The YIELD on the 5-year (FVX.X) is lower (buying in these bonds). Short-term this may give hint that the bond market is positioning itself for a lack of Fed action near-term. If "inflation" is starting to creep into the economy, the Fed may be hard pressed to lower rates further. Keep an eye on the Gold/Silver Index (XAU.X). We saw a jump in this index last week when we got a stronger than expected PPI number and we might see the same today. Yesterday the XAU.X traded lower, but did not give back all of Friday's gains. Yesterday the S&P Banks Index (BIX.X) and the Securities Broker/Dealer Index (XBD.X) got hit to the downside and we had mentioned how these two indexes might succumb to selling last week if the market feels the Fed's hands will be tied on the inflation front. Usually, these two indexes do well when the Fed is cutting rates, but they didn't do well yesterday.

Jeff Bailey
Staff Analyst

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