Option Investor
Market Updates

Drop, pop and flop

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Stocks dropped at the open, popped in their first hour of trade, but have since flopped and trade lower as the S&P 500 Index (SPX.X) 889 -0.23% finds morning resistance just below the 900 level, while the actively traded NASDAQ-100 Trust (AMEX:QQQ) $25.01 -1.3% rallied early to $25.78, just 3-cents above the $25.75 level we looked for resistance in last night's Index Trader's Wrap, and quickly fell back to the $25.00 where some heavier open interest exists with option expiration drawing near.

While I can't say the action so far today was guaranteed to happen, what we've seen so far isn't that much of a surprise.

Current action has most sectors in the red, with limited bullishness. Sector strength is rather limited with the Oil Service Index (OSX.X) 89.45 +0.76% and Dow Jones Home Construction Index (DJUSBH) 312 +0.85% as the current sector winners.

Technology is under pressure after a quick little pop in the earlier part of the session with the Networking Index (NWX.X) 130.26 -3.35%, Fiber Optic (FOP.X) 45.09 -2.73% and Wireless Index (YLS.X) 52.48 -1.9% leading declines. All three sectors still hold handsome gains from their October lows, but now look VERY defensive and most likely bulls begin to scramble to protect gains. I'd look for he Wireless Index (YLS.X) to seek out the 50.00 level like a heat seeking missile into Friday.

Last night I was looking at some of www.stockcharts.com's sector bullish % charts and just about fell out of my chair when I saw their S&P Telecom Services Sector Bullish % ($BPTELE) in "bull correction" status at 77.7%, after having reached a recent high of 88%. This represents a VERY high level of risk to bulls and a sector that looks very vulnerable to further profit taking. I'm trying to get in touch with stockcharts.com to find out how broad or narrow this sector bullish % is, as Dorsey/Wright and Associates Telephone Bullish % (BPTELE) is still "bull confirmed" at 42.4%, with a recent relative high of 44%. It would take a reading of 38% to have Dorsey's telephone sector bullish % to reverse back lower to "bull correction" status. The comparisons have me thinking that www.stockcharts.com telecom bullish % is very narrow and not having as many stock observations ad Dorsey's. Still, Dorsey's current relative high reading of 44% isn't too far off from last December's relative high reading of 46%, before it reversed back lower and fell to 22% by mid- February.

This morning's action is what I would depict as being greatly influenced by index option expiration and somewhat manipulated as traders jockey the indexes around to take some of the various index options out of the money.

Jeff Bailey

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