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ISM Services have indexes building gains

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The Institute for Supply Management said the service sector expanded in May, with its services index rising to 54.5 from April's 50.7 reading, and above economists' forecast of 52.0.

The 10:00 AM EST release of the ISM services index, which showed expansion above 50.0 brought in a bullish wave of enthusiasm with has lifted the Dow Industrials (INDU) 9,023 +1.12% back above the 9,000 level with a 100-point gain, with the broader S&P 500 Index (SPX.X) 983.64 +1.24% gaining 11.9 points on broad sector gains. The narrower S&P 100 Index (OEX.X) 494.17 +1.24% is higher by 6- points.

The S&P Banks Index (BIX.X) 309.72 +1.02% has exceeded its reverse head and shoulders pattern objective of 308.84 in today's trade and I would advise bulls that played this pattern in the Regional Bank HOLDRS (AMEX:RKH) $113.34 +1.5% to take some gains off the table at this pattern objective. Either that, or snug a stop up under the $110.00 level as a move above the August 19, 2002 relative highs of 114.10 could bring in some "euphoric" short-covering. Similar to the BIX.X, the RKH broke its reverse head/shoulder neckline at the $101 level.

This morning's sector winner has the Airline Index (XAL.X) 48.70 +7.12% above the 46.00 level and now at 9-month highs with American Airlines parent AMR Corp. (NYSE:AMR) $8.40 +19.9% and Continental Airlines (NYSE:CAL) $14.35 +9.45% leading sector gains after Goldman Sachs' Glenn Engel wrote in a research note that "May traffic numbers showed moderate progress in narrowing industry losses, and booking/yield trends suggest further gains in June." Mr. Engel said he thinks the group has room to rise and raised his ratings on AMR and CAL to "outperform."

A quick look at the XAL.X point and figure chart has the XAL.X trading its bullish vertical count of 48.00, while today's trade at 46.00 triggers the "spread-triple-top" buy signal. In this weekend's "Ask the Analyst" column, we looked at a sector bell curve, which showed the Aerospace/Airline sector bullish % (BPAERO) in a more "favorable" field position as it relates to the more overbought MARKET conditions, and this sector does look to have further upside that its current bullish vertical count. While Professor Davis' Purdue University study regarding point and figure chart patterns was limited to equities, the "spread- triple top" does show an 85.7% probability of a 22.9% gain in 7.7 months. From 46.00, this could give us some idea of a 56.50 target for the XAL.X.

Technology sector action has the NASDAQ-100 Index (NDX.X) 1,212 +1.13% gaining 13.6 points, with its Tracking Stock (AMEX:QQQ) $30.15 +0.97% just off its session high of $30.40. As noted late yesterday and then in last evening's Index Trader Wrap, bulls may have targeted a bullish target of $30.30, or further upside to a "zone of resistance" from $30.40-$30.47 and WEEKLY R1. In this morning's market monitor, we've been following a bullish trade in the QQQ from $29.85 and with today's trade at $30.40, which comes from our WEEKLY pivot analysis retracement, I'm going to strongly suggest that bulls look to protect gains with a MINIMUM stop of $29.98.

Jeff Bailey

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