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Stocks build gains, despite data

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Forget what you believe and trade what you observe. That's an old axiom that traders have learned over the years. Last year semiconductor stocks were headed lower despite positive earnings, but the market back then seemed to have a different agenda. Today were seeing some "bad" economic data, but stocks continue higher. This has left many wondering just what the heck is going on?

Unfortunately I don't have a firm answer, but for some reason stocks continue higher. One chart we're watching right now is the QQQ and we will build on this observation with the internals of the market and the bullish percent of the NASDAQ-100. The only "explanation" I can come up with is that institutions have a buy side bias right now and I think trading desks too. I don't know why, all I care about is when and how much.

NASDAQ-100 Index Tracking stock - 60-minute interval

Right now I'm monitoring the QQQ at the $42.67 level. The above chart shows the QQQ did pierce the 200-pd MA on the 60-minute chart and I'm looking for pattern recognition here. I'm noting the action dating back to July 13th, when the QQQ had rallied to the 200-pd MA at $44.25 and was turned lower from there. What I want to see for a bullish trader is DIVERGENCE from that pattern. Note how the QQQ did not break above the previous interval high back on July 13th. I'd expect some aggressive shorts to be trying to hit the QQQ right in here and try and scalp $1 to the downside at 50% retracement of $41.83. Should we see a move above today's earlier high of $42.73, I do think bears will have to assess risk to 38.2% retracement of $43.67. I'm also looking at the daily chart of the QQQ and would note the rolling 50-day MA currently at the $44.19.

NASDAQ-100 Bullish Percent

Friday's trading resulted in the NASDAQ-100 bullish percent chart reversing back into a column of X's and has that indicator back in "bull alert" status. With money still flowing into the Treasury bond market, I can only point to the bullish percent chart of the NASDAQ-100 ($BPNDX) as the reason why the market is getting bid at this point. I could make the case that trading desks have gotten the call to square their inventories back to neutral from a bearish stance and this could explain why some the broader NASDAQ Composite and larger stocks in the NASDAQ-100 continue to trend higher. If we were thinking supply/demand, I'd also bring into the picture the "tired" market. While the market certainly has lacked aggressive buyers in recent weeks, I'm not sure how aggressive sellers are either. As I've said before, smart money is very good at assessing risk/reward and the recent low levels of the NASDAQ-100 bullish percent was not favorable for bears to be aggressive. Current levels for that matter are not considered favorable. Current market environment looks to be a factor of "lack of selling" as much as anything. While this seems very simplistic, it also seems to be the only thing that makes any sense.

Jeff Bailey
Senior Market Technician

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