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Index Wrap

Not looking good for the bulls

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Not looking good for the bulls

Today's close at the lows of the session is not looking good for the bulls as the weekend approaches. I say this now and we'll watch the markets rally 10% tomorrow on news that Saddam Hussein has gone into exile.

However, there were some things that took place this morning and as mentioned in today's 11:00 intra-day update, "should I see this morning's lows in the SPX and QQQ taken out..... I'd be alert to an extension of trend lower" was evidently what many traders saw/felts and took action on. For that matter, it may well have been when the "buy programs" went away and the move toward the exits by bulls started to build.

Earlier this morning, it did look as if bulls had a shot as the S&P 500 Index (SPX.X) 844.61 -2.28% found some "buy program" premium alerts being found near the DAILY pivot of 860. However, the 5-point rally from that level was stopped almost dead in its tracks when the SPX encountered our 61.8% retracement level of 864.52, and believe it or not, traded a high of 865.48, BUT COULDN'T CLOSE THAT LEVEL ON A 5-minute bar chart basis and the rest was history.

Even more bearish perhaps was that I never received any "sell program" premium alert during the decline, which hints to me there was some formidable and evenly distributed selling not only in the cash markets, but also the futures markets, with little computer-related intervention to help stem the decline.

Before I forget it. John Seckinger is writing an "educational" piece tonight that I think index traders should read. It will be posted in the Education section of the site, under the Futures Corner sub-section, and titled "Developing a Bias." I haven't seen John's article, but he walked me through it during today's session and as things unfold, may come in useful for index traders.

Here's a quick look at the pivot matrix.

Pivot Analysis Matrix

Tonight I'm making note that all of this WEEK's S1 levels were tested and closes were below the S1s, except for the NASDAQ-100 Index (NDX.X) 985.51 -3.05% and NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $24.51 -2.58%. In last night's wrap we thought if the WEEKLY S1 levels of support were going to be violated that it would be the Dow Industrials (INDU) 7,945 -2.04% to do so first, then the S&P 500 (SPX.X) 844.61 -2.28% and S&P 100 Index (OEX.X) 426.71 -2.47% to follow quickly, and finally the relatively "stronger" NDX and QQQ.

As it relates to our thinking of how a "snake" moves, the "tail" or Dow was pulled backward, and the "head," which lately has been the NDX/QQQ looks to be following. True, the QQQ fell 2.58% and the NDX fell 3.05%, which was a greater percentage loss by session's end that the Dow, SPX and OEX, and tomorrow, index bears will look for some "confirmation" to further weakness should the NDX and QQQ take out their weekly S1s and make a clean sweep of these levels which have been serving support this week.

Remember. After tomorrow's close, we will update not only the DAILY pivot levels, but also the WEEKLY levels and the MONTHLY levels, as Friday will mark the end of the month for January.

In tonight's first paragraph, I mention "Saddam Hussein going into exile." I'm not expecting Saddam to do this, but I do consider it a possibility and think that you and I as risk managers in our accounts need to at least think of this as a possibility. One subscriber sent me an e-mail today, where the e-mail was very, very, very bearish and couldn't understand how I could speak bullish about a stock like Forest Labs (NYSE:FRX) $50.94 -0.91% in today's commentary. While FRX probably has NOTHING to do with "war concerns," may have some negative exposure to a "global meltdown of equity markets," I think it rather unwise from the perspective of risk management to have every last dollar in my account on the bearish side of things.

As I've stated before, with index trading, it is very difficult to be call one major index, and put another major index, as the indexes generally move in unison. The index trader controls his/her account risk by staggering or laddering expiration and strike, while also keeping some cash on the sidelines, ESPECIALLY when there are some equally bullish and bearish scenarios all at play in a market environment like we're currently in (or at least I believe we're in).

If the main "topic" or scenario at play is "war with Iraq," and I certainly don't wish a war with Iraq, then think about the Military General that commits his/her troops into battle. Does he/she commit the entire brigade at one target all at once? Or does he account for "ambush" and strategically implement the plan?

Let's get onto the indexes, which after today's action are looking rather vulnerable to the downside.

One thing I want to do tonight is look at a point and figure chart of the Dow Industrials (INDU) as it gives a rather "remarkable" and sobering look at how far the Dow has fallen with yesterday's trade at 8,100 being the first 3-box reversal this index has seen since achieving its January high. The looooong, column of O, without any 3-box reversal until today's trade at 8,100 is sign of MAJOR distribution. Long columns of O are generally found under 2 circumstances. 1) Fear and 2) Market KNOWLEDGE of some type of BEARISH scenario yet to be revealed.

Dow Industrials Chart - 50-point box

Sometimes, the p/f charts that don't show the day-to-day noise are good to look at from a point of risk management. To the left, I posed the question "Knowledge or Fear?" on a loooong column of "O." That was back in early October and the bullish % reading was very low at 6.66% bullish and RISK was high for bears. Please believe me, there were many good points made by traders and investors that the Dow was headed straight for 6,000 at that time. However, its easy now to say that that long column of O from 7,900 to 7,200 was most likely attributed to "fear." An BEARISH army general that sent all his troops to war 7,450 on the sell signal before 7,200 may have seen short-term success, but if holding newly established and "full account" November 7,000 puts (say DJX $70.00 puts) then that general probably was stripped of his stripes.

The p/f charting systems doesn't allow for multiple X and O entries in one day and this is explained in the middle of the chart as yesterday's trade at 7,950 created another "O" entry at that level and charting for the day was completed. Since the Dow didn't trade 7,900 today, then a trade at 8,100 was needed to chart a 3-box reversal higher. Today's high was 8,141, and that was enough demand "X" to have us charting the 3-box reversal. First sign of further weakness is 7,900, while strength would be a continuation of "X" at 8,150.

I've also marked the 8,350 level on the point and figure chart. It was after the close of trading on January 23rd, that the Dow Industrials Bullish % ($BPINDU) achieved "bear confirmed" status.

Today's action saw no net change in the Dow Industrials Bullish % ($BPINDU) and status remains "bear confirmed" at 36.67%.

NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval

Last night I was looking at the QQQ and made a mental note of a pickup in volume of 95.8 million shares, which is very close to QQQ volume levels of 12/19 and 01/07. There's an old trader saying that "volume spikes proceed" price action and this can heighten the level of alertness of traders and VOLUME is an indication of interest, and often times is major disagreement between bulls and bears. With the NASDAQ-100 Bullish % ($BPNDX) "bear confirmed" I'm looking for some downside trade.

If trading bearish the QQQ/NDX, then I'd be looking for downside leadership from the Dow, SPX and OEX once again tomorrow.

I've also quickly punched in the "week to date" high, low and today's close for the QQQ to establish POTENTIAL levels next week, as if today's trade was "Friday." The levels generated from pivot analysis are S2=$23.65, S1=$24.08, Pivot=$24.76, R1= $25.19 and R2=$25.87. Based on observations made this week that mid-point of R1 to R2 served resistance, then my current observation is that based on early pivot analysis for next week, today's and yesterday's highs should be resistance for next week.

The NASDAQ-100 Bullish % ($BPNDX) saw a net loss of 1 stock to a point and figure sell signal, which has the bullish % falling to 48%. Still "bear confirmed" here and a break lower of $24.35 on 5-minute closing basis would be considered a rather major technical breakdown.

Another rather MAJOR change in the bullish % data has the NYSE Bullish % ($BPNYA) from www.stockcharts.com reversing lower into "bull correction" status at 45.8%. I consider this VERY important and a major bearish indication on market internals. This bullish %, along with the NASDAQ Composite Bullish % ($BPCOMPQ) are the most BROAD indicators of bullish % and cover the bulk of stocks in the markets we trade.

Since reversing up into a column of X in mid-October, this reversal lower in the NYSE Bullish % ($BPNYA) is the first reversal lower for this slower moving bullish %. The last reversal lower into a column of "O" for this bullish % was in early September of last year.

The also very broad NASDAQ Composite Bullish % ($BPCOMPQ) is still "bull confirmed" at 43.32% and will take a reading of 42% to reverse lower into "bull correction" status like the NYSE Bullish % did today.

While I can't say for certain, yesterday's large volume spike in the QQQ may indeed have been NASDAQ market makers shorting some up-ticks in the QQQ to hedge some NASDAQ stock inventory.

Please, go visit John Seckinger's comments in tonight's Futures Corner and look to tie it in with last night's commentary and LEVELS in the SPX and OEX. Today's closes below the weekly retracement in both indexes is viewed as bearish, but John gives us an interesting perspective on what to also be looking for in the session's ahead.

Jeff Bailey

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