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Lower Still

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Based on futures prices were are in for a lower open. Dow futures are down 18 points, and Nasdaq futures are off by 3. Fair value for the S&P 500 is $6.52. Buy programs are set at $8.11, and sell programs at $5.13.

Hurting the markets is warnings from Compaq and Comverse Technology. Compaq, the No. 2 P.C. maker, said that revenues would come up 9% shy of first quarter revenues, and would cut an additional 1,500 jobs. Comverse warned that earnings are more likely to come in at 28 cents a share, rather than the 43 cents that had been expected. CMVT also lowered expectations for the second half of the year due to a reduction in capital spending, an economic slowdown, and a strong dollar. Investors are complaining about weak stock performance. After trading as high as $77 this year, CMVT is currently trading around $27.

Don't be scared. Be smart!

Yesterday in the OptionInvestor.com hot list I thought a put trade in the S&P 100 Index (OEX.X) might be a trade worth looking at for a bearish trader. Why did I select the OEX.X and not simply throw out a put/short play in the QQQ or NASDAQ-100 (NDX.X)? Mainly because of the bullish percent charts. For those traders that might be feeling that the markets are too oversold and don't want to buy puts on anything, perhaps here's a way to not be scared, but be smart and still have an opportunity for some downside action.

Lets put the bullish percent charts of the NASDAQ-100 alongside a bullish percent chart of the S&P-100. Think of these charts as to sliding bars on a graphic equalizer on your home stereo. When you're listening for the "perfect sound" you will adjust the sliding scales on the your stereos equalizer, so doesn't it make sense to look at the bullish percent charts the same way? I call it... "Listening to the market." If the bullish percent charts are truly a good way to assess risk, then put on those earphones and let's get to work!

Comparison of NASDAQ-100 and S&P-100 bullish percent

Ok, the NASDAQ-100 bullish percent is on the left and the S&P-100 is on the right. The scale in between is 2% box. Now, before we get started, just remember that anything above 70% is overbought and anything under 30% is oversold. Is either of these indicating an oversold condition? No, not as of the close of trading yesterday. Is one closer than the other? YES! The NASDAQ-100 is closer to being oversold than is the S&P-100.

Now, I've circled the beginning of several months on the above charts and tried to color code them and tie them together. Let's start with the number "3" and note where each one is in relation to the other. Is there any question that in the beginning of March (3 on the chart) that the NASDAQ-100 was oversold? No, the "3" on the NASDAQ-100 side of the chart was at 18% and that is an oversold level. NOW, note where the "3" was at on the S&P-100 chart. It was at 44%. This tells us two things. One is that the NASDAQ-100 was more oversold compared to the S&P-100 and two is that the S&P-100 was stronger than the NASDAQ-100! My thoughts for sometime has been that the main reason for this is that the NASDAQ-100 contains a lot of technology stocks compared to the S&P-100, thus my bearishness toward technology in the past eleven months or so.

VERY IMPORTANT! When the NASDAQ-100 was at oversold levels in March, and the S&P-100 was at 44%, what took place after that? The S&P-100 bullish percent reversed into a column of X's (a brief market rally) and then it turned lower once again. The reason this is important is that I am now ALERT, that the S&P-100 is approaching a LEVEL OF RISK where it has seen reversals in the past! If you look to the left of the "3" on the S&P-100 side of the bullish percent chart you will also see a "C" at the 44% level. Notice the reversal there too from a column of O's into X's!

Now, as I begin my analysis on MARKET RISK, I'm thinking that the NASDAQ-100 is nearing an OVERSOLD level. Do I want to rush in and short an OVEROLD sector? NO! Just because a sector is OVERSOLD does it mean it won't go lower? NO! If the markets are going to go lower, doesn't it make more sense to short/put a sector that is not as OVERSOLD?

YES! It makes so much sense to short a less oversold sector. I'd also say that any bullish rallies in the S&P 100 are less damaging to a bearish trader than are rallies in the NASDAQ-100. Proof of this is to simply to imagine that I shorted the NASDAQ- 100 at the low on April 4th at 1,348 and covered that short for a 46% loss on April 20th. Then compare that with a short at the low on April 4th in the OEX.X at 554 and covered on April 20th for a 17% loss.

Now, I've only got so much space here to go through the other months on the chart, but print that chart out if you can and then simply look at these two indexes and their bar charts or point and figure charts. What you're going to see is how the MARKET looks at risk (per the bullish percent charts) and then manages that risk!

Last night after I stopped rolling on the floor from reading Mr. Canavan's "Market Sentiment" piece, there was one item I found EXTREMELY interesting! Please believe me, I didn't read the market sentiment section until after I had written the above commentary and analysis!!!! I NEVER read the commercial traders report until AFTER I make some notes and observations on my own. That way, I remain unbiased in my own commentary!

In Mr. Canavan's analysis of the COT I'm observing this. While the above analysis I did was on the S&P-100, Mr. Canavan's analysis was on the S&P-500 (SPX.X) but its somewhat the same market (just 100 S&P stocks vs. 500 S&P stocks). He wrote... "The net bearish position of commercial traders increased for the third straight week." Why do you think they did that? I THINK IT IS BECAUSE THERE IS LESS RISK!!!

In Mr. Canavan's analysis of the COT or the NASDAQ-100 he wrote... "I must admit that this data is a bit baffling. Commercial traders have been slowly reducing their net bearish positions for the past six weeks. This is the only index where institutions are getting less bearish. Could it be that the smart money is getting less bearish on technology?" HEY! Isn't this exactly what the bullish percent charts above were telling us?

Doesn't it make so much sense? The reason the commercials are not as bearish in the NASDAQ-100 as they are in the S&P 500 is that there is LESS RISK FOR BEARISH TRADERS IN THE S&P RIGHT NOW! I've said it until I'm blue in the face! INSTITUTIONS ARE EXPERTS IN MANAGING RISK!

Now the kicker... in the beginning of his COT report Mr. Canavan makes a very important observation regarding the small specs (who tend to be wrong) as it relates to the S&P 500. He writes, "Also disturbing for the bulls is the fact that small traders, who tend to be wrong, have over twice as many long positions as short positions.

Oh well... not every small spec subscribes to OptionInvestor.com, IndexSkybox.com or premierinvestor.net or understands the power of the bullish percent charts.

Jeff Bailey
Senior Market Technician

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