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A bear is "banking" on a decline

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A bear is "banking" on a decline

I don't know what had me looking at the S&P Banking Index (BIX.X) just after the close of today's trade. I'm thinking it was the ability of the NASDAQ-100 Index (NDX.X) 970.55 +0.16% to stay above what I deem to be "critical support" of 960 all day, and perhaps kept the Dow Industrials (INDU) 7,929.30 -0.69%, S&P 500 Index (SPX.X) 838.16 -0.64% and S&P 100 Index (OEX.X) 423.49 -0.59% from more substantial losses than were found by session's end.

I have to find an answer I thought to myself. What "sector" is often thought by market theorists that can hold the "key" to market direction. While there are a few, like the deep cyclicals and transports, which often move higher in front of an economic recovery. Market theorist's have also noted that a market often advances with financials leading the way.

Now, before any bears go bonkers and say "how can you think about bullishness when the markets are ready to crumble, keep an open mind. Just because market theorist's note that financials lead an advance, doesn't mean a technician cant use that theory, then test it in the charts. I've also said in previous commentary, regardless of how much "conviction" I have toward market direction, I'm always on the lookout for "trouble" or "confirmation" to my thinking/analysis.

Aha! I thought. Last night I received this e-mail from a subscriber, and a market participant, after my Index Trader Wrap was posted to the web site. The subject line read: A little advice from a techno-fundamentalist.

My definition for the term/word "techno-fundamentalist" is a trader that believes in fundamental analysis, develops a scenario of how things should unfold based on the "fundamentals" and then looks for confirmation from the charts.

Jeff: The market really did get a resolution today (Wednesday). The cold economic facts are that this administration has already invested a huge amount of capital in deploying over 100,000 troops to the Middle East. Can you think of any scenarios where they would be withdrawn without Saddam being removed from power? I doubt the market sees any. So the question the market is looking at is what is the likely cost of bringing the troops home. After the responses to today's speech, the cost is probably higher rather than lower in terms of previous sentiment. There's a reason the charts are pointing down. Fragile economy + escalating war related cost risks (fear), investor optimism (greed) at this point.

My two cents,

Name withheld (Jeff Bailey doesn't publish subscriber names)

Now, this isn't the only e-mail like this that I've gotten in recent weeks. I'm not "shouting down" subscriber e-mail from early October when the major indexes were trading new 52-week lows, but I received similar e-mails of gloom and doom in early October. I very rarely disagree with subscriber e-mail like that above, where a thought process is carried out and points are stated. I'm not saying I agree or disagree with the above e- mail, but I think I know how to test these thoughts.

And test them I will. The above "type" of e-mail had us testing "market theory" regarding the S&P Banking Index (BIX.X) on October 8, 2002. Here's the link to that article.

You be the judge if it was a sector that a trader could have been monitoring for market direction.

Aha! I thought, again... "administration," "invested," "capital," and "fragile economy."

What does "administration" have to do with anything? How about the President's recent budget proposal that proposes an increase in government spending and tax cuts? The "bet" the President makes is that the tax cuts are needed to help stimulate the economy longer-term, while an increase in spending not only helps bolster some revenues for those fortunate to be on the other end of the spending, but to also make America a "safer" place to live.

We can envision the RISKS of the Presidents budget (the MARKET will do the same and hedge the risk if it feels necessary), but if it works and pulls the economy out of its slump and America does become a "safer" place to live, then the President Bush may get a spot as one of America's most remarkable Presidents.

Personally, I'm glad he has to make the decisions at hand and not me. Can you imagine the great weight on his shoulders?

The words invested, capital and fragile economy all play into the banks. Don't they? Fragile economy especially. Remembering here that banks loan money. For the economic doomsdayers, their scenario for increasing deficits and slow economy that doesn't generate tax revenue (needed to eventually pay off the near-term increase in deficit) lay the groundwork for eventual weakness in the banks.

So now I want to begin testing this subscriber's e-mail and many others like it. It's not just subscriber's either. I've read multiple articles from gold-related newsletters calling for the coming "financial" collapse.

One thing I did for "grins" was to plug in the S&P Banks Index (BIX.X) recent daily, weekly and monthly (high, low, close) values. I'll show these in the pivot matrix in a minute.

I also plugged in yesterday's (Wednesday) high, low, close daily range to see what today's S2, S1, P, R2 and R2 were. They were S2=267.20, S1=269.70, P=274.30, R1= 276.80, R2=281.40. Then I looked at today's trade in the BIX.X. Today's high, low and close for the BIX.X was H=274.07, L=269.54 and C=272.10.

Aha! Today's high in the BIX was very close to today's pivot and low was right at today's S1.

Here's the pivot matrix for tomorrow. Sorry Microsoft, your off the list for now, as I feel the banks are once again an important sector that we need to be monitoring for potential clues to market direction.

Pivot Analysis Matrix

"Holly correlative support Batman!" I thought. What's with all of these "269" correlations in the BIX.X? 269 at monthly S2, 269 at WEEKLY S2, 269.54 was today's low trade in the BIX.X, 269.70 was today's (Thursday) S1 for the DAILY S1, and 269.70 is tomorrows DAILY S1 (in the above matrix). Is the BIX.X at some type of "key" level of support, and if broken to the downside "has a bear banking on a decline?"

If broader market bulls were "banking" on an advance in October, then it may be important to monitor this sector near-term, as it may once again dictate market direction.

I've got to investigate further! Now I'm going to put a conventional retracement on the BIX.X just as we did last night for the Dow Industrials, and in this morning's 09:00 Update for the S&P 500 Index.

S&P Banking Index (BIX.X) - Daily Interval

The S&P Banks Index (BIX.X) 272.10 -0.02% traded unchanged today. I'm not a candle stick chartist, but I believe that on a candlestick chart, today's trade creates some type of "doji" which can alert a trader to some type of major indecision and potentially big move coming from the break of direction. In tonight's market monitor, I've asked for some help from fellow analyst's at OI, or even subscribers that study candlestick charts to give me some help on this topic.

As it relates to the above chart, I've used the same type of attachment points from the October lows to recent rally highs to define a range. Note the 274 level here as resistance not only from the pivot analysis matrix, but also the 38.2% retracement. If BEARS have true conviction toward a lower BIX.X, then I would thing the BIX.X has near-term resistance at the 274 level.

Today's low of 269.54. What in the heck offered support on today's decline? Only thing I see is from the pivot analysis matrix and correlative support from the MONTHLY S1 and WEEKLY S2 of 269. Now, after tomorrow's trade, I'll have to recalculate new WEEKLY pivot analysis levels and this is why it may be important to understand the MONTHLY pivot analysis and potential implications should the BIX.X break below the 269 level tomorrow. As it stands, we have no further levels of technical support, other than the 50% retracement level of 266.78. If 266.78 were to be broken, then I would have to assess downside risk level as MONTLY S2 of 258.90. This 258.90 level ties in with 61.8% retracement on the above chart.

For now, it becomes my observation that if the BIX.X trades 260 in the next couple of weeks, then the major indexes are susceptible to a lower trade. If the BIX.X can hold current levels of support and begin breaking above levels of resistance, then the major indexes should recover with the BIX.X.

Dow Industrials Chart - Daily Interval

The Dow sunk below it recent lows and now begins to mark a break- down of the recent consolidation range. The point and figure chart of the Dow Industrials gave a triple-bottom sell signal at 7,900. Things look "tense" in the Dow and I'm a bit surprised the Dow didn't get "flushed" lower.

I can't be "overconfident" as a bear in the Dow right now, and I would really want to have the BIX.X confirm weakness. Why? The Dow Industrials Bullish % ($BPINDU) is currently reading 26.67%, and levels below 30% are deemed longer-term "oversold." While this narrow bullish % has shown it can go to a low of 3.33% like it did in October, bears look to be on the cusp of a major breakthrough to the downside. There was no change in the Dow Bullish % ($BPINDU) today. Still "bear confirmed" at 26.67%.

S&P 500 Index Chart - Daily Interval Chart

I view today's break of WEEKLY S1 of 841 and 61.8% retracement VERY BEARISH for the SPX and now vulnerable to WEEKLY S2 of 826. Now, I've placed a little "pink circle" on the SPX. My observation here is "break, rally, flush," which has the SPX breaking BELOW 883.36, rallying the next day, then getting "flushed" lower. Be alert to this, but don't necessarily "freak out" should it take place.

Watch the BIX.X. If the BIX.X can't get back above the 277 WEEKLY pivot of 277, then it and the SPX could get "flushed" lower on a reversal.

Today's action saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 1.6 stocks, or 8 stocks to reversing p/f sell signals. This has the bullish % slipping further lower to 43.40% and still "bull correction" status.

It's this still "relatively high" bullish % reading, that a Dow Bullish % at 26.67% may still see further declines. Again, the SPX is much BROADER than the Dow.

S&P 100 Index Chart - Daily Interval

The OEX broke its WEEKLY S2 of 425 and closed below that level. As bearish as it looks, a bear would still like to see the banks break lower and give some confirmation and ALWAYS expect the unexpected and keep your account management under control. OEX should NOT trade back above the 440 level. Do you know where Saddam Hussein is? Is he going into exile? I don't know, but if you're OVERLEVERAGED short/put and COMPLACENT, then you had better know where he is and what his plans are. Again... ALWAYS think "worst case scenario" for your account management and have an action plan in place to protect your account.

NASDAQ-100 Index (NDX.X) - Daily Interval

The NDX traded strong all day and held its WEEKLY S1. If there is one index chart that has a broader market bear a little on edge and "honest" in his/her account management its this one. Wednesday's "juke higher" and selling into the close looks to be a classic type of market maker, "let'em rally and sell the strength." For that to be true, then the NDX.X needs to break the 960 level. Resistance should be firming at 991 and the NDX should NOT trade above 1,018 if there is "doom and gloom" on the horizon. Using retracement levels, understand the correlative nature of how the BIX.X "rocketed" off its October lows, and similar action in the NASDAQ-100. Maybe the "banks" are a key sector to be monitoring right now.

Today's action saw a net loss of 2 stocks to reversing point and figure sell signals in the NASDAQ-100 Bullish $ ($BPNDX). This has the bullish % slipping back 2% to 43% and still "bear confirmed" status. NDX should break 960 soon in my opinion.

If I find something out on what I think is a "doji" in the candlestick of the BIX.X, I'll mention it in tomorrow morning's update, or check the market monitor as I've asked for assistance there.

Jeff Bailey

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