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10-Year YIELD at 4.835%!

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On Friday I was looking for a YIELD on the 10-year Note (TNX.X) to trade above the 4.835% level to potentially trigger a trading rally of "biblical proportions." This morning the YIELD on the 10-year is pegged right at 4.835%. If you're a bullish trader it's time to get on your bike and ride!

Equity futures higher

Equity futures are looking strong this morning with S&P futures higher by 12, NASDAQ futures are up 36 and Dow futures are higher by 76. YIELDS are higher across the board as we see selling in bonds. I'll be monitoring YIELDS all day and we want to see the 30-year and 5-year YIELDS get above some short-term downward trends. If they do, equity bulls should have a good trading week. Fair value for the S&P 500 is $9.62, with buy programs set at $12.48 and sell programs set at $6.47.

Low Volatility Option Play

For months I've been saying, "if the deep cyclicals don't lead an advance, the technology stocks will have trouble moving in the months ahead." This morning I'd be looking long International Paper (NYSE:IP) calls at the open. Traders can use a stop just under $32.75 which is where I have my 61.8% retracement bracket. Bullish traders will be targeting the $38 level short-term. The April $35 call was offered at 1.65 at the close of Friday's trading.

Thursday's bounce in the OEX didn't "just happen."

Remember that silly technique I've been teaching subscribers about regarding how to "fit the retracement levels" to ascertain where a stock or index might find support or resistance? This weekend I was trying to get caught up on some subscriber e-mail and one reader wanted to know if the OEX would have been a good "low risk" play, just like the one I had pointed out on Thursday in the Dow Industrials near 9,100. My first thought was that the OEX is an entirely different breed of index and there's no way I would have said it too was a "low risk" play, just because I thought the Dow was. So, to try and prove the reader wrong, or at least drive home the point that you shouldn't jump to such conclusions, I put my retracement technique to work. Woe Nelly! Look what I found!

S&P 100 Index Chart as it looked on 08/31/00

The above chart is an exact duplication of a retracement technique I've been trying to teach subscribers about for months. Institutions, market makers and specialists tend to trade levels. They look at stocks much differently than the "common man." On August 31, 2000 it would have been fair to say that short-term resistance was near 834, but support lie below at 800 (50-day MA), then 780 (200-day MA) and finally at 734 or 61.8% retracement level. Our retracement level did NOT say, "the OEX is going to heck in a hand basket and won't stop until it reaches 0% retracement at 546.41." What it did do however was give the trader levels to monitor for the months that lie ahead. It may have also given the trade some confidence on Thursday, 3/22/01 to buy some OEX 545 calls. Like I said in the above chart, "if I only know then what I KNOW now, I'd be a very rich man." Here's what the OEX chart looks like now.

S&P 100 Index Chart - last eleven months

On Thursday, when the Dow Industrials was trading around 9,200 I used the exact retracement technique above to outline a bullish trade in the Diamonds (DIA). A trader may have also found the technique beneficial on Thursday in the OEX. I'm not a big believer in "random market theory." I think the market trades off of levels because that's how big money looks at things. Now look what we can do for the sessions ahead to help us trade the OEX.

Current range

Every trading plan has some assumptions. My current assumption is that the MARKET is looking at the OEX as it relates to a range from or near 546.63 to 656. These numbers aren't "exact" so lets think of things in terms of round numbers and call it 545 to 660. Why on earth wouldn't I now attach a retracement bracket between these ranges and see if there is anything there that makes sense as it relates to "levels within a level" that the MARKET might be trading off of. All I'm doing here is placing a retracement bracket at a high near 660 and a low near 545 (I'm thinking like an institutional trader). To me this makes sense. As a trader, there's no way I would attempt to try and trade the OEX from 545 to 655 without having some sort of levels to be monitoring. Check this out!

S&P 100 Index Chart - 60-minute interval

I don't know what you're thinking, but I'm thinking we're going to kick some serious "cans of worms over" in the coming sessions in the OEX! Now that I've got some levels to monitor, I can watch bond YIELDS. If the OEX is trading anywhere near any of the above levels and bond YIELDS start to fall, I can buy puts and do some shorting and use this chart set up to guide me with my stops. If I see bond YIELDS rise, I've got some nice targets to be shooting for. If my current account is weighted to the long side with stocks (and PremierMarkets.com is weighted long right now) I've got to have some tight stops set under my stocks that are long. The reason for this is that current support can really only be found near 545. Today's first hurdle is going to be that nasty 50-period MA at 585. If I'm long at the open, I want to see bond YIELDS rise and this index get through the 50- period MA and battle above 38.2% retracement near 588. Just remember, whoever bought near the 550 level is currently up 5.6% as it relates to the index and might be looking to take profits near 588, especially if bond YIELDS start falling.

See why I hate to make "market calls."

As a last note, the above analysis is why I hate to make market calls! Why would anyone attempt to try and think they know what the MARKET is thinking when all you have to do is be a trader! It's never as simple as just watching the bond YIELD and trading levels, but there isn't a lot of guesswork being done if we are watching what the market is doing in different areas (Jeff B's and Jeff C's job is to inform/educate you) and then try to trade levels just like an institution. That's what trading is all about! If you think an institutional trader bought OEX near 550 on Thursday because he/she thought the economy was growing and that fundamental for the 100 stocks in the OEX were improving along with their gross margins, you might be mistaken. I think they were buying this index of stocks only because it provided a low risk high return potential trade near 550. I'd also like to thank our subscriber "Paul" for getting me thinking here.

Jeff Bailey
Senior Market Technician

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