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Stock futures higher, mixed with selling in bonds

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Stock futures are showing fractional gains this morning with S&P 500 futures up 1.4 points, NASDAQ futures are higher by 1.5 points and Dow futures are up 28 points. Fair value for the S&P 500 today is $4.98. HL Camp & Company has their computers set for program buying at $6.09 and set for selling at $3.37. Fair value for the NASDAQ-100 today is $10.55

Bonds are finding some selling this morning as YIELD on the three major maturities are all higher this morning. The 10-year YIELD ($TNX.X) did give an upside YIELD alert this morning at the 5.117% level. This alert came from our fitted retracement bracket on this bond from the 4.689% level on March 22 and fitted to the low YIELD on April 18th at 5.118% The resulting retracement is 4.689% to 5.811%. This bond's YIELD has not been able to break below the 5.066% level now for two trading sessions. I view a YIELD above 5.2% for the 10-year as potentially bullish for stocks.

PeopleSoft beats estimates

After yesterday's close of trading, business software maker PeopleSoft (NASDAQ:PSFT) reported earnings of $47.4 million, or $0.15 per share, compared to profits of $15.9 million, or $0.06 a share in the same period a year ago. The $0.15 per share earnings beat the average estimate of analysts that were looking for $0.12 a share. Yesterday, shares of PSFT closed at $34.24 and traded as high $37.70 in after-hours trading.

PeopleSoft Chart - $1 and $0.50 box

Shares of PeopleSoft (NASDAQ:PSFT) are interesting as they were one of the first stocks to start showing strength back in late March when the NASDAQ was setting new lows. The recent decline comes after prolonged weakening in the NASDAQ and a string of poor earnings and cautious forward-looking earnings. Yesterday's comments from PeopleSoft (PSFT) did say that the road has been a tough one, but PSFT has found success against their competitors products (ORCL, SAP and SEBL).

Yesterday I wasn't quite sure why the NASDAQ-100 (NDX.X) and S&P 500 (SPX.X) weren't completely falling apart. So, I went back through the archive section of IndexSkybox.com, which has a journal of all my thoughts that day. What I found might be of interest as it relates to yesterday's trading in the SPX near 1,165 and coming sessions. On April 9th at 04:30 EST I wrote about a triangle pattern that was forming in the SPX and that pressure looked to be building. At the time, I didn't know which way the break was coming, but felt that the SPX was acting like a snake that was coiling and about to uncoil (up or down). I thought the best trade at that time was to buy both a call and put option (a straddle) with the same strike price and expiration (May 1,125). The calls eventually became the winner as the SPX settled at 1,288 on May 17th (index option expiration date.)

There are two things I find interesting about that article and what is taking place in the SPX today. On April 9th, the SPX closed at 1,137. Here we go!

S&P 500 Index Chart - $10 box

The SPX has almost come full circle (OK, 3/4 circle) since it gave the bullish triangle pattern back on April 10th. Today traders are faced with very similar market conditions as those found in late March. The bullish percent charts have been deteriorating, earnings season has been less than spectacular and the Fed has cut interest rates three times in each of the last two quarters (six rate cuts since beginning of the year).

Two things I think traders need to be cognizant of here at SPX 1,171. Yesterday's low was 1,165, which is 5 points higher than where the bullish triangle pattern was triggered on April 10th. As you can see from the above point and figure chart, that sure looked to be a fairly significant level where market participants agreed on a higher SPX. Anyone that disagrees with that must explain the move to the 1,310 without the supply/demand chart giving a sell signal.

A trader should not ignore the 1,130 bearish price objective from the recent vertical bearish count in the SPX. I find that level very correlative with the apex of the bullish triangle that was formed back in April of this year. We could easily reach that 1,130 level when you consider the shape of the bullish percent charts.

As of last night, the bullish percent for the S&P 500 ($BPSPX) was 47.59%. In April of last year, the bullish percent chart was at 38% before it found its low and reversed higher to reach the overbought level in May of 74% without looking back! Now the bullish percent for this index has fallen from 74% to 47.59% and hasn't looked back either. Just as in May when I became cautious and advised bulls to be snugging up stops on their stocks that they had big profits in, I'll do the same for bears that have profits in stocks that have gotten clobbered since late May and early June. Snug down some stops!

The internals of the SPX remain quite weak and I would not rule out the 1,130 level. The bullish percent for the NASDAQ-100 ($BPNDX) now reads 25% bullish and this is down from Tuesday's reading of 30%. In March and April of this year, the bullish percent for the NASDAQ-100 reached 12% on two different occasions before unwinding to 82% bullish (extremely overbought)! The bullish percent for the New York Stock Exchange ($BPNYA) as of last night was at 33.37%. In April of this year this indicator reached a level of 30%.

My current feeling is this. The bears may have one more push to the downside, but new positions on the bearish side might want to be initiated with 1/2 normal trade size (using bullish percent as measurement of market risk).

George Soros said, "Short-term volatility is greatest at turning points and diminishes as a trend becomes established." Check out a bar chart for the SPX from March 20th to April 9th. Traders recently lived that volatile roller coaster ride of volatility. Now study the bar chart from July 10th to present and understand some of the similarities.

Jeff Bailey
Senior Market Technician

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