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Futures show fractional gains

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Stock futures are showing fractional gains this morning with S&P futures edging up 2.5 points, NASDAQ futures are also up 2.5 points and Dow futures are up 15. Fair value for the S&P 500 for today is $1.62. Computer programs are set for buying at $2.78 and set for selling at $0.36.

S&P 500 now "bear alert"

Yesterday morning we alerted traders that the bullish percent indicator for the NASDAQ-100 had reversed below the 70% level and to be cautious in bullish trades. Yesterday's trading now shows the S&P 500 bullish percent ($BPSPX) from www.stockcharts.com reversing from above the 70% level to below at 65.4%. This is a natural progression we often times see as the internals of the market deteriorate short-term. Traders and investors need to be aware that this is how things stand at the opening of trading, but they can become more than a one day phenomena. This doesn't mean stocks can't rally, but it does tell us how we should be managing our accounts. Currently, traders should be looking to hedge long positions, especially if we were to get a short-term rally. Here's a look at the S&P 500 bullish percent chart. Then we'll talk about the possibility of a short-term rally as it relates to the bullish percent.

Bullish Percent for S&P 500 - 2% box

It takes more time for 6% of 500 stocks to trigger buy/sell signals than it does 100 stocks. There is also a much different makeup of the S&P 500 than the technology laden NASDAQ-100. Nonetheless, PremierMarkets.com views current activity as a sign that "the guts" of the market is starting to see a systematic deterioration as the MARKET reduces risk from stocks in the form of lower stock prices and weakening supply/demand characteristics. I usually use the NASDAQ-100 as a "shorter- term" risk indicator and the S&P 500 would be longer-term indicator. Perhaps this makes sense as we've seen the NASDAQ-100 bullish percent reverse sooner that we have the S&P 500.

Bullish Percent for NASDAQ-100 - 2% box

It's hard for many traders to believe that the NASDAQ-100 is "less risky" this morning at 1,779 than it was on May 14th, when the NASDAQ-100 was trading 1,769, but I think its important for traders thinking they're going to be shorting every stock in site to think twice before doing so. Today is the day a trader could really get smashed if he/she goes into a trade without understanding risk. If you had shorted the NDX on May 14th at the close of trading at 1,769, 5 trading sessions later the NDX would have moved about 16% higher.

Now manage your trades accordingly!

I'm not going to preach, but I am going to practice what I preach and manage the bearish trade we profiled yesterday in a full position short in shares of Intel (NASDAQ:INTC) when the stock was trading $27.35. Heck... after we profiled the trade, shares of INTC actually traded higher to $27.70. We weren't "freaking out" that the stock had moved more than 1% against us just after we profiled the trade, mainly because we were aware that the bullish percent for the NASDAQ-100 had some downside to the May 14th level of 42%. Now look how we're going to manage that trade today and incorporate the bullish percent data to manage risk in our trade with INTC.

Intel Corporation Chart - daily interval

By correlating the bullish percent data from the NASDAQ-100 to a chart of INTC, my attention is drawn to what took place on or near May 14th. If the bullish percent data is similar in time, then perhaps the same is true with INTC. Now we're alert that the possibility exists for INTC to perhaps rally and we can adjust our trading plan accordingly. Yesterday, we profiled a full position short in shares of INTC with a stop at $28. At the time, we didn't know what the bullish percent data would read at the close of yesterday's trading. Now that we do, we can lower our stop to a minimum level of break-even in the trade. If INTC is going to our bearish target of $24 today, then we may not get stopped out at $27.35.

Study the 05/14 updates at 03:30 EST in the archive section

Now, if you have time, jump back to the archive section for Monday May 14th at 03:30 EST. At that time, we were actually having traders cover their bearish trades for what should have been a profit in the Semiconductor HOLDRS (SMH) at $46.60. Yesterday, the SMH finished the session at $45.13, which is lower than the 05/14 close. As it relates to our trade in INTC, that analysis perhaps tells us that the SMH is weaker today on price basis than it was on May 14th, but INTC is just about the same price, thus showing marginal relative strength. If the NASDAQ- 100, SMH and INTC show any type of strength today, don't be surprised if we alert traders to cover their bearish trades short-term in Intel. We now have some very good things to be looking for and are alert to somewhat similar market environments dating back to May 14th! Still not a believer? Check out the other updates written that day. In the 11:30 EST Update, understand that the bullish percent chart displayed was from the previous trading session's data on May 11th. At least we're aware of a potential reversal!

Jeff Bailey
Senior Market Technician

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