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Can the cyclicals confirm\?

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With the major market averages all making some bullish moves above their 50-day simple moving averages, I'm wondering if the deeper cyclicals will "confirm" the broader market bullishness. The group looks like its under accumulation in recent weeks as a pattern of lower highs are being found, but a trade above the 505 level on the bar chart and 510 on the point and figure chart loom large.

Morgan Stanley Cyclical Index Chart - $5 box

The Cyclical Index (CYC.X) looks to be under accumulation and bulls may be sticking with the group under a scenario of a still growing economy, yet slower than most thought earlier this year. We've noted retracement resistance at the 50% retracement level of 505 week ago (retracement from $617.49 to 391.09) marking yearly high lows from May 1999 and September 1998. Point and figure chartists and bulls in the group find today's trade at 495 hopeful as this trade has the vertical count turning bullish to 560. However, the "big trade" near-term would come on a break higher at 510, triggering a spread-triple-top.

One stock I profiled on Friday as a "lottery play" was in cyclical stock International Paper (NYSE:IP) $38.53 +2.50% and the September $40 calls (IPIH). Point and figure chartists "know why" as the stock sits in consolidation at $37 support, but represents similar correlative technicals with the CYC.X on a break at $41, which would be a triple-top buy signal.

International Paper Chart - $1 box

According to Dorsey/Wright and Associates, the "forest/paper products" group is "bull confirmed" at a very low reading of 28%. It would take a trade at $41 for IP to contribute bullishly to the bullish % and that makes for a relatively attractive "lottery play." Considering risk in the underlying stock to a stop of $36 was more than $1, the Sept. $40 calls offered an attractive option price. Looking to sell strength in the options at $42- $43. IP bulls would like to see broader cyclical bullishness continue.

Jeff Bailey
Senior Market Technician
Option Investor

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