Option Investor
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Holding their highs

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Program trading curbs kicked in this morning when the Dow Industrials (INDU) 8,293 +2.75% jumped more than 170-points from yesterday's close of 8,069, and while I've heard some trader talk that today's rally lacks bullishness because market volumes are "light," I think those comments may be somewhat misguided considering that we often times see institutionally driven market volumes come from computerized program trading.

For trading curbs to be lifted today, the Dow Industrials would need to return within 80-points of yesterday's close.

Here's a snapshot view of my U.S. Market Watch screen at the 01:00 PM EST mark. I've made some comments in the margin of this table as it relates to some observations that may tie in with past comments in my Index Trader Wraps and my current view of today's trade going forward.

US Market Watch of Index/Sectors - 01:00 PM EST

At the lower end of my "Market Watch" I've made some notes as to the flattening of the YIELD curve, as a strong round of selling has been seen in the shorter-dated 5-year Treasury, with its YIELD ($FVX.X) rising at a "faster pace" than the 10-year YIELD ($TNX.X) and longest-dated 30-year YIELD ($TYX.X). I view this type of flattening, as will most equity traders as bullish for equities as the "greater-amount" of selling coming from the shorter-dated 5-year, which is considered to be a "safer YIELD" than the 10-year and 30-year (due to length of maturity) is a sign from the bond market that it is willing to relinquish some of its hold on "perceived" safety and take on some greater risk in equities.

In our Index Trader Wrap, equity bulls also wanted to see a 10- year YIELD move back above the 3.83% (38.30) in the 10-year YIELD ($TNX.X) with equity index bullishness building on a 10-year YIELD ($TNX.X) move toward 3.933%. As you can see from the above, the 10-year YIELD has met this type of objective in short- order, and I'm now looking for further selling in the benchmark bond toward a YIELD of 3.984% to further build gains in the major indexes.

One test we set last night for the equity indexes was that index bulls, whether or not they were trading the NASDAQ-100 Index (NDX.X) was for this index to show some renewed "leadership" that had seemed to have been lost in the past couple of session, with a move back above 1,025 and then 1,036 to see a test of its WEEKLY R1 of 1,066. Amazingly... the NDX.X session high has been 1,066.14 and from here, I would want to see a move above that level as a sign that there's still some leadership in technology stocks to be found. If so, then this would build further bullishness in my mind (and perhaps the markets) that the Dow, OEX and SPX, can build further bullishness toward their WEEKLY R1 levels and perhaps further.

Helping to bolster the NASDAQ-100 is today's recapture of the 200-day SMA in the Semiconductor Index (SOX.X). This was a concern of mine in recent sessions. From here, I would NOT want to see a SOX much lower than this 200-day SMA. According to Dorsey/Wright and Associates, their semiconductor sector bullish % (BPSEMI) held steady at 40% bullish and "bull confirmed" status during the recent decline as internals held together. There is still room to the more "overbought" levels of 70% and if we're going to see that high of bullish % (this sector bullish % tends to run the range of 30%-70%) then I'd want to see the SOX.X hold its 200-day SMA from here.

Energy stocks along with precious metals stocks are today's weakness, but not overly so considering the bullishness found from the broader markets. This gives "obvious" hint that today's gains in equities is most likely "Iraq related" with coalition troops now approaching Baghdad. While we would most likely expect some energy weakness on Iraq success, today's losses aren't overly done, and has me "understanding" that there is quite a bit of "Iraq success" being built into things. As long as things continue to progress in Iraq, I would think bullishness can build in equities, and would look for continued selling in Treasuries to fuel that bullishness.

Still.... I don't think bullish equity traders should be OVERLEVERAGING their trading. Things can change quickly and while I certainly hope that Saddam Hussein or his military would not use chemical weapons on coalition forces, this is a risk that I feel still exists that could impact market psychology.

Jeff Bailey

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