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50-day may be the play

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Last week we wanted subscribers to be alert to the Biotech Index (BTK.X) test of its 50-day moving average for hint of how the market trade going forward. On Friday, we saw the S&P 500 Index trade right on its 50-day moving average and get a bounce today.

S&P 500 Index Chart -

Part of what an equity bull wanted to see take place in the Biotech Index (BTK.X) near its rising 50-day moving average is taking place in the S&P 500 Index (SPX.X). Notice though how the Biotech Index (BTK.X) test of its 50-day MA came ABOVE its 200- day moving average. Technically, that type of test and bounce can be more powerful than a test below a longer-term moving average like the 200-day. Here, in the SPX.X we see a nice bounce taking place, but bulls still need to be cognizant of the FACT that the SPX is trading below a longer-term moving average. For this reason, we are trying to focus our "bullish intension" on some of the biotechs. Our thinking being, the leaders lead and are often times the last ones to show marked weakness in a broader market decline.

Should the SPX.X be able to get above the recent relative high of $1,175, then our thought is that the biotechs should be pounding out some new relative highs and be "outperforming" the market. We've done some retracement in the past on the SPX.X where we "rolled up" retracement and identified the 1,175 level as a potential level of resistance. That coincided with the 200-day moving average. I think it is OK for bulls to be looking long the SPX or SPDRS (AMEX:SPY) in here, with a stop just below the 50-day moving average. A trader/investor could take a 1/2 position long, then look to ad on a move above the 1,176 level in the SPX, or above the $119 level in the AMEX:SPY.

Watch the Dow Industrials too!

The Dow Industrials has clawed its way back near the psychological 10,000 level and traded a session high of 9,930. I'm still finding a "problem" with breadth based on our "hypothetical" portfolio of $1,000 invested since the September 10th close. Currently, 14 of the 30 stocks are showing gains so equity bulls still get the distinct feeling that leadership is limited to the stronger stocks and we're not in the "buy anything and everything" type of environment. A move above the 10,000 level would most likely give a boost to investor psychology, but a move/close above the still declining 200-day MA at 10,113 is needed for equity bulls to really have some type of "tidal wave of enthusiasm" continuing to build.

NASDAQ-100 adjustments

The Nasdaq Stock Market said it will re-rank its Nasdaq 100 index, replacing 13 issues, effective Dec 24.

In a statement, Nasdaq said the 13 new issues to be introduced into the Nasdaq-100 Index (NDX.X) are; ImClone Systems Inc (NASDAQ:IMCL), Charter Communications Inc (NASDAQ:CHTR), CDW Computer Centers Inc (NASDAQ:CDWC), Symantec Corp (NASDAQ:SYMC), Sepracor Inc (NASDAQ:SEPR), Invitrogen Corp (NASDAQ:IVGN), Express Scripts Inc (NASDAQ:ESRX), Cephalon Inc (NASDAQ:CEPH), ICOS Corp (NASDAQ:ICOS), Cytyc Corp (NASDAQ:CYTC), Protein Design Labs Inc (NASDAQ:PDLI), Integrated Device Technology Inc (NASDAQ:IDTI) and Synopsys Inc (NASDAQ:SNPS). These stocks will REPLACE the 13 issues Nasdaq has decided to REMOVE. Ariba Inc (NASDAQ:ARBA), BroadVision Inc (NASDAQ:BVSN), CMGI Inc (NASDAQ:CMGI), CNET Networks Inc (NASDAQ:CNET), 3Com Corp (NASDAQ:COMS), Inktomi Corp (NASDAQ:INKT), Level 3 Communications Inc (NASDAQ:LVLT), McLeodUSA Inc (NASDAQ:MCLD), Metromedia Fiber Network Inc (NASDAQ:MFNX), Novell Inc (NASDAQ:NOVL), Palm Inc (NASDAQ:PALM), Parametric Technology Corp (NASDAQ:PMTC) and RealNetworks Inc (NASDAQ:RNWK).

The Nasdaq 100 includes the 100 largest non-financial Nasdaq- traded stocks according to market capitalization. The index is the most heavily traded option on the Amex, where it is exchanged under the ticker symbol QQQ.

Jeff Bailey
Senior Market Technician
Option Investor

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