Option Investor
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Defensive buying in Treasuries has indexes vulnerable

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A strong round of buying in the Treasury market today has stocks looking vulnerable to giving back the bulk of yesterday's gains, and some intra-day action that I'm seeing could have the Dow Industrials (INDU) 7,971 -0.87%, which is currently down 71 points, vulnerable to some intra-day support from pivot analysis at the 7,900 level before the session is over.

The March 10-year Treasury futures contract (ty03h) $115'095 +0.35% is finding buyers and looks to challenge its 52-week contract high set on Thursday at $115'205. Current action has the benchmark bond's YIELD ($TNX.X) falling to 3.894%. Both the 5-year and longer-dated 30-year Treasury are also finding a strong round of buying this morning, and taking on a more defensive look.

In yesterday's 11:00 Intra-day Update and just prior to that update in the market monitor, I profile a bearish trade in the Dow Industrials (INDU) and wanted to show a quick intra-day chart of the Dow on 5-minute time frame. This morning I was doing some work with retracement brackets that index traders might look to add with last night's Index Trader Wrap.

Dow Industrials Chart - 5-minute interval

I've place a "brown/gold" retracement on the Dow chart, which is attached from today's DAILY R2 and S2 levels. I'm noting some correlative support between this retracement and "conventional" retracement (pink) which is from the October lows to December highs. It would be my thinking that some overly complacent bears that may have let some FULL POSITION bearish trades ahead of this week's option expiration are going to be looking to square up some positions today, should the Dow slip lower the 7,902- 7,905 level.

In this morning's market monitor, "bears liked" the buying in bonds and a weaker U.S. Dollar Index (dx00y) 100.15 -0.39% as a combination for equities to not find much cash available to extend the recent 2-day rally. It took about an hour for the Dow 5-minute chart to close below the DAILY pivot of 8,008.80, but when it did, has found good intra-day resistance at that level. This hints that some institutional computer programs are taking on a "sell bias" at current level and may maintain that bias throughout the day until a correlative level of support is found. Say.... 7,900.

Similar action in the intra-day technicals is unfolding in the other major indexes. A "key" intra-day level was perhaps discovered in the NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $24.93 -1.22% right here at this $24.93 level.

Past observations have been that the Dow has tended to LEAD a decline, and pull the QQQ and NASDAQ-100 Index (NDX.X) along for the ride lower, and as I type, this certainly looks to be unfolding.

Option traders may look to implement some OPTION trades in the QQQ from the put side, but ONLY because the QQQ tends to outperform on a percentage basis when weakness takes hold. I've taken further positions in the OUT THE MONEY QQQ $23 puts, but only from a "scalpers" point of view and looking for some $0.20 type gains on a short-term basis and using the Dow Industrials as my guide for some near-term weakness in the QQQ. Should the Dow fall to its 7,900 level today, then I'm looking to guard what gains there may be in a bearish QQQ play.

Jeff Bailey

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