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Index Wrap

Hello\? Nokia\? Sure, I Can Hold.

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        06-12-2001        High      Low     Volume Advance/Decline
DJIA    10948.38 + 26.29 10982.14 10788.58 1.13 bln   1572/1519	
NASDAQ   2169.95 -   .83  2184.20  2105.26 1.69 bln   1727/2032
S&P 100   647.69 +   .96   650.58   635.87   totals   3299/3551
S&P 500  1255.94 +  1.46  1261.00  1235.75             
RUS 2000  506.90 +   .00   507.53   500.37 
DJ TRANS 2794.04 - 35.83  2830.06  2778.95 
VIX        22.98 +   .24    24.65    22.77
Put/Call Ratio      0.87

Hello? Nokia? Sure, I Can Hold.
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Nokia (NOK) warned this morning, which was just an excuse for markets to do what needed to be done. But reverberation throughout the wireless industry was sharp and swift in the early going. What needed to be done (and still does) is that equity values need to reflect the business values of their income streams. In my sometimes never to be humble opinion, values, especially in technology, are still at speculative levels and priced as though growth rates will be 30%-100% for the remainder of the year. Sorry, not going to happen.

Warnings are likely to continue, as was the case for biotech company, Affymetrix (AFFX), which rubbed off on the whole sector. Nobody should be surprised to hear more companies announce that earnings will be less than anticipated this quarter with reduced revenue going forward. Can say "2002 recovery"? Sure, we knew you could!

But that does not mean that we should buck the trend on the premise that we want to be right and fight the Fed. On the contrary, there is no mistaking it. The Fed needs a bit of irrational exuberance to keep consumer spending propped up and thus bring the economy out of the hole he (Greenspan) dug for it with previous rate hikes. Values can remain speculative even if profits are not there. As nutty as it is, we should get used to it as long as Alphonso the Great keeps printing money

Switching gears, there has a lot of talk about summer doldrums and we have seen some of that already as reflected in the low daily volumes. We have all heard the Wall Street adage, "never short a dull market". In today's amazing recovery off the lows, we now can see why it pays to heed the adage. The SPX close at 1255, up 20 points from the low of 1235; the Dow closed at 10,928, up 140 points from its low of 10,788; and the NASDAQ 100 closed at 1852, up 76 points form its 1776 low. Oh, and in what seems like a new record (but probably is not), the Semiconductor index (SOX) opened this morning at 653, fell 34 points to 619, and then rebounded nearly 35 points to close the day with nearly a 1-point gain! Not bad for an industry in search of good news.

While the morning may have been dead volume-wise, the afternoon was definitely live. When volumes are low, it does not take much incremental volume to get more bids hit and prices moving north.

What would cause such a spike in volume as we saw today? None other than unwinding of futures and option positions. We have a triple witching Friday coming up, and when pros need to cover a large number of net short positions (see COT report), they cover. Their action in what is often termed a "buy program" and is akin to throwing a boulder into a swimming pool. It makes some pretty big waves that the rest of us get to, or have to, tread.

And while in a daytrading environment that may be important, the longer-term technical investors (not traders - for we would happily trade anything either direction) are breathing a collective sigh of relief that the breakdown of the head and shoulders pattern on all three of the major indexes did not hold in a failed confirmations. Instead, bulls got closing value support. Right now, that foretells future bullish action for perhaps a few more days.

One other thing that I found interesting today - the put/call ratio on the NASDAQ 100 (NDX) was at a whopping 157:1 ratio (way too much negativity) according to CNBC's reporting of information available at Hamzeianalytics.com. I never checked it myself, but if true, that would be a heavy contrarian indicator that speaks mightily in favor of the bulls.

Let us turn to the charts for more detail.

Dow industrial index (INDU) chart:

The first thing I see here is a failed head and shoulder pattern. Apparently all of our collective families and us saw that one coming. Funny thing about people is that we are ill-equipped to operate in isolation, and I am sure the tribe approach served us well. When we all turn to face the noise in the woods, it is the thing behind us that we pay no attention to that gets us. The noise we collectively turn to face is already noted and handled by the tribe and we are safe from it. Such may the case with the head and shoulders. Anyway, not only did INDU close well above support of 10,850, it took the dirt road down to the Bollinger band and bounced back. Apparently the market thought that was a bit extreme and it bounced back. I view that long candle shadow as bullish. While the daily oscillators are in a state of confusion, the 60/30 setup looks bullish too. I would look for some bullish follow-through tomorrow morning. After that daytraders can follow the oscillators. For a willingness to assume some risk, investors can take a stab at early entry on the long side too. Just watch for a breakdown from 11,000 to 11,050. You will not want to initiate longs then - there is a lot of congestion. Support at 10,850.

NASDAQ 100 (NDX) chart:

Same story, different index. Head and shoulders denied. Support at 1750 by a long shot with only 1776 reached today. Technology got whacked by NOK and AFFX right out of the gate and immediately priced in the bad news. Consequently, it did not have far to fall from the open. But oh what a rebound from support! It has strength written all over it. Unfortunately, the daily and weekly oscillators are looking ugly - both rolling over. Perhaps a burst of strength (and a nicely positive close) could reverse the daily back up. It is possible given the upswing on the 60/30 setup. Support, head and shoulder denial, 60/30 candles, and put/call ratio all say, "up". Daily and weekly oscillators say, "down". Coin toss anyone?

S&P 500 (SPX) chart:

Again, failed head and shoulders, historical support at 1248 broken hard to the downside and bounced from the lower Bollinger extreme. The length of the tail ("shadow" in candlestick lingo) shows incredible strength for the bulls. This morning, you could not have convinced me SPX would be in bullish pasture by the end of the day, especially with what was then a very long red candle that had violated every reasonable level of support on the way down. Yet, here it is. Perhaps SPX will see the 60/30 min oscillators complete their cycle and carry the daily with it, but the daily oscillators are currently ugly. Bulls, keep your fingers crossed for follow through; bears, hope for failure at 1272. Edge goes the bulls in expiration week.

VIX is showing an unusual pattern. Three red candles in a row, except they are edging up, not down. Markets have been opening on the defensive in favor of puts on the OEX, then switching to calls later in the day. In other words, the VIX tells us that bulls are still buying the dips. While that is good for call players, the historically low levels around 22 indicate heavy optimism, which could send the VIX packing toward the bearish extreme of 30 or above. For the longer term, it portends an eventual reversal. When is anyone's guess.

For tomorrow? Hmmm. . .survey says. . .well, we do not have a survey. However with the failed head and shoulders, historical support, Bollinger band bounces from lower extremes, long candle shadows, and 60/30 oscillators headed up all during triple witching expiration week, I vote bullish. However, as noted here many times, the market does not care how I vote. It will do as it pleases to humiliate as many as possible. Things can change overnight as we saw with NOK and AFFX prior to this mornings open. We have economic news tomorrow too in the form of retail sales figures. Heaven forbid what might ensue if we are to discover that consumers have closed their wallets more than anticipated. The swing factor will be in auto sales. Nobody expects rosy figures. But if sales ex-autos are worse than +0.3%, that could signal consumers are in worse shape than thought and send markets down. Then again, lately it has the possibility of cinching a bigger rate cut from the Fed.

And that's a wrap! Best trading wishes from all of us at IS!

More Fed rate cuts in the offing at month's end could begin to light the markets fire over the next few weeks.

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