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Lower trade after economic data

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After a higher open, the major indexes have stumbled to a lower trade and it has been interesting to see how the various levels of pivot analysis have come into play this morning.

Earlier this morning, we saw a couple of "buy program" alerts generated when the S&P 500 Index (SPX.X) 853.70 -1.23% traded a morning low at 857.71, which wasn't too far off from our daily pivot of 860. While that SPX did bid back to the 865 level that bid failed to build right at our 61.8% retracement, of 864.52, which is a level that traders were monitoring from last night's Index Trader Wrap. The subsequent retest of 860 didn't find another "buy program" and we've seen the SPX trade a session low here. With Treasuries reversing their earlier bearishness and now seeing buying, if a shorter-term trader or risk averse bull, then I'd be snuging up some stops to break-even or looking to keep any recent bullish entry losses to a minimum.

One stock I am monitoring closely and hold bullish positions in my own account on, are shares of Forest Labs (NYSE:FRX) $51.55 +0.31%. I showed the chart below in this morning's market monitor as the stock looked to be attempting to get back above its upward trend. While still showing a gain here, the broader market weakness has seen the stock pull back from its highs, but here is what I'm looking for, or thoughts as it relates to call option position in the May $55 calls.

Forest Labs (FRX) - Daily Interval

Yesterday, I thought I wanted to see FRX get back above that starting to round 50-day SMA, and this morning's little gap higher has seen FRX do just that. However, there's still some work to be done, and based on trend anchored from the recent relative lows near $35, I'd like to see FRX close back above this longer-term type of upward trend and make a clean break of the shorter-term downward trend. It would also be views as bullish if FRX can make a move back above the 21-day SMA of $52.60. If so, then I'd look for FRX to challenge the upper-end of its Bollinger Band.

In last night's Index Trader Wrap, we looked at some of the Stochastics (5,3,3) in the various indexes. One thing I kind of like, or view as bullish in FRX, is that its Stochastics look a bit "stronger" or a little more advance from the oversold level.

We also commented on MACD in the indexes (12,26,9), which are trending lower, but BELOW their zero level. FRX is trending lower too, but I currently view the ABOVE zero level as more "bullish" than the indexes.

Bar chart traders of individual stocks might use some of the above type of observations and comparisons between a stock they are trading and the indexes, to formulate opinions on the stocks they trade. LOOK for those stocks that DIVERGE from the indexes as they may then become the stocks that trade inverse and become some of your better trades.

As it relates to pivot analysis and levels of retracement, here is an intra-day look at the QQQ up to 12:00 PM EST.

NASDAQ-100 Index Tracking Stock (QQQ) - 5-min. Interval

In last night's Index Trader wrap, we looked at the QQQ with the upper and lower bounds of retracement set at the WEEKLY S2 and R2 levels from pivot analysis. This type of retracement might be used by those traders that are more "swing-trade" oriented, but also by those traders that look to trade a "set of levels" over a week's time. I'm showing the QQQ chart on the 5-minute interval to show traders and investors just how this "technique" really has seen the levels traded again today.

I've mentioned before, that market makers or computers that might utilize the pivot analysis levels and retracement DO NOT try and predict market direction, but instead simply trade levels, manage inventory against the levels, while measuring buy/sell side order flow. For you and I, we have "inventory" in our accounts. The "inventory" is the long or short positions in the account. However, you and I can't measure order flow like a market maker, or a computer and this is to our disadvantage. It's our weakness so to speak and there is little we can do, unless we're actively putting on buy/sell trades every minute of every day and holding a LARGE inventory of stock to really get the feel for order flow.

I may have seemed "ridiculous" in last night's Index Trader Wrap at OptionInvestor.com to talk about how "important" it is to see a 5-minute bar chart close above or below a particular level.

As an intra-day commentary point, this morning's 09:52:30 comments in the market monitor almost played out just as we were alert to. The QQQ CLOSED on a 5-minute basis, just below the weekly pivot of $25.10. That was perhaps a traders first alert to near-term weakness, and had the trader somewhat bearish toward a rally back HIGHER near a LEVEL of potential RESISTANCE from the retracement bracket of $25.38. Note that the QQQ did rally back near that $25.38, but also note that the QQQ did NOT CLOSE above that level on a 5-minute interval and then reversed course, once again closed below the $25.10 level and then began falling further, taking out the session low and then traded a session low, just one penny ABOVE our next level of retracement at $24.81. At the time of this writing, the QQQ has traded a session low still of $24.82, and most likely, there bids being found at $24.81.

If you and I are simply thinking like a computer, then we would expect SELLING at $25.10 and would only build further bearish thoughts on some type of 5-minute close below the $24.81 level.

Again... this is a short-term example of how the pivot levels can come into play and how the tool for retracement can be combined with either the daily, weekly or even the monthly levels. As stated before, the daily pivot analysis levels would be more appropriate for "day traders," as would the weekly levels. However, the weekly levels and even the monthly levels of pivot analysis would be more appropriate for swing traders.

In a phone conversation with John Seckinger this morning (fellow analyst here at OptionInvestor.com), John has discovered a major confluence of support in the QQQ near the $24.25 level. I've asked John to write up an article showing how he has observed this level of support. For those that do have a trading station like q-charts where you can place retracement on a chart, the confluence of support is found by taking retracement in the QQQ from its October lows to recent December highs, which has 50% retracement at $24.27. You will note from the above chart from our WEEKLY pivot analysis and retracement set there, that the $24.27 level is not all that far from this week's $24.35 level.

The other confluence of support at $24.24 in the QQQ is by taking retracement from the December 6, 2001 relative high of $43.24 and the October 8, 2002 low of $19.76. The $24.24 level is identified here at 19.1% retracement.

How does one use this information? It would be my view, that I would NOT want to be OVER LEVERAGED right now in Feb. $24 puts, or March $24 puts without some type of observation that this level of support is broken.

From the bullish side of things, if OVER LEVERAGED from the call size or long side of things with the NASDAQ-100 Bullish % ($BPNDX) currently bear confirmed, then I'm assessing risk to that level, and hoping like HE@@ that it holds or my OVER LEVERAGED account could be damaged further if a break of that level were seen. If OVER LEVERAGED in any trade, what impact would my account have at QQQ $24.25? This is a question every trader asks themselves on an ongoing basis, as they constantly monitor risk in their trading accounts.

Jeff Bailey

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