Option Investor
Market Updates

Consumer confidence might be a surprise

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I'm a firm believer that the MARKET is all knowing. While today's action looks like it may have caught the MARKET off guard, which may not necessarily be the case. Remember those jumping bond YIELDS we witnessed on Friday and yesterday? At the time we didn't know for sure why bond were selling off and YIELDS were rising, but perhaps today's stronger than "expected" consumer confidence numbers explains that activity. While bond YIELDS are jumping higher today, this might be "dumb money" now looking for the exit in bonds after a sharp sell-off from the previous two sessions. What traders now need to be doing is understanding what levels stocks are at. If "smart money" was selling bonds on Friday and buying stocks on Friday, we need to also look for levels where this smart money might be selling. Case in point would be the Networking Index (NWX.X). It might be easy for many investors to thing that CSCO and all the networkers are great buys, but if we look at the NWX.X we might see that current trading levels are right at resistance. Remember this chart from several months ago?

Networking Index Chart - last six months.

While the NWX.X is up 10 points currently, our chart we've left untouched for months tells us that there may well be resistance near the 490 level. Trends are all negative currently and upside looks to be the 562 level if 38.2% retracement were broken. It might be a huge mistake for traders to load up on networking stocks, as the above chart is yet to show signs of bullishness. I prefer to see some levels of resistance broken before looking long. Then I'd only start easing into some positions. Don't trade blindly. Look at a chart first, set some targets and identify where you're stop would be. Currently, a trader might say his/her target is 562 with a stop at 52-week lows of 448. Risking $37 to make $77. There has to be better odds in the market than this, especially when resistance has yet to be broken to the upside.

Jeff Bailey
Assistant Analyst

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