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Index Wrap

Does any of this sound familiar\?

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Does any of this sound familiar?

Does any of today's geopolitical news sound familiar? Does it take one back to a time that some would like to forget? It may have dawned on some, but for the first time, I'm having flashbacks to the "cold war" era.

While my existence doesn't span the entire cold war timeline of 1945-1991, I do remember when the cold war ended. My most vivid thought is that the threat of nuclear war between the U.S. and Russia had come to an end and life seemed to be "safer."

I will admit, I'm not a historian, and I had to search the web to find out just what the timeline was for the "cold war."

I found a plethora of web links from my search engine and actually found some "best cold war memories" or quotes from others of that time.

"In the summer of 1962, we moved to Burlington, Vermont. This didn't get us any farther away from the Russians dropping a Big One in our lap. One of the Air Force's largest strategic bomber units was directly across from Burlington on the other side of Lake Champlain." V. Chase (taken from www.cnn.com)

This quote has some meaning to me. Especially as it relates to today's announcement from the U.S. Government that its intelligence sources say that North Korea has an untested ballistic missile capable of reaching the western U.S..

Vice Admiral Lowell Jacoby, director of the U.S. Defense Intelligence agency said that the three-stage version of the Taepo Dong 2, has not been flight tested, leaving some questions about North Korea's capability to successfully launch the missile.

Previous U.S. intelligence reports have said such a missile might be able to carry a nuclear weapon-sized payload across the Pacific Ocean.

My opinion of today's "news" regarding potential nuclear threat from North Korea? I don't like it. Not from a stock market point of view, but from a more personal point of view.

Is this really a threat? I'm not entirely sure, but if I put myself in North Korea's shoes, and did decide to launch an untested missile at the U.S. I'm thinking the implications of such an attack by North Korea is much worse for North Korea than the U.S..

If North Korea launches the missile (I hope this NEVER happens) and it goes "plop" in the ocean, then what? Oops!

If I lived on the West Coast of the United States, what do I think? Sell my investments and raise cash in my account? Not unless I plan on moving east and burrowing myself in the hills. Sell my investments and sit things out? If I'm going to sell my investments and sit things out, then what good does that do if I live where a bomb is going to hit?

These are terrible thoughts for sure. I do hope however that we as traders and investors at least think about today's North Korea news. The impact is more "psychological" than anything in my opinion. Don't get me wrong. I'm not brushing it off, but I'm not sure if I have any control over it.

What a renewed "cold war" would do in my opinion is damage the global economy. One of the greatest benefits seen after the end of the cold war the opening up of global commerce. With a global economic recovery still very slow, closing international borders on a global scale isn't going to help a global economic recovery.

If there is one thing I dislike about this "job" it is discussing unpleasant thoughts or events. It is depressing to me. I wish it would go away. Since I can't make it "go away," and all I can really do is trade trend, levels and manage the risk in my trading account, lets get on with the job at hand.

Today's declines in the major indexes weren't overly bearish. In a way, I think that other market participants were rather rational today (very light volume at the NYSE and NASDAQ with just over 1.2 billion shares on the NYSE and 1.1 billion on the NASDAQ) and while we saw some volatility early in the session, the indexes, especially the QQQ, traded somewhat to plan as it relates to last night's wrap.

I will confess. When the QQQ traded a morning high of $24.24, which was a penny above today's S1 of $24.23 and a level we looked for early resistance, then fell back to $24.07, I was thinking things were going almost EXACTLY to plan. My "surprise" came when a bid in the indexes, and the U.S. Dollar came out of nowhere (QQQ rebounded to $24.33 session highs). It took me awhile to find the "news" that a rumor was floating around that France was going to side with the U.S. and its plans on how to seek a resolution on Iraq, or Saddam Hussein.

Let today's little "blip" rally higher early in the morning be a WARNING that uncertainty exists among bullish and bearish camps. Things can change QUICKLY and the trader that makes the BIG BET at the WRONG TIME, ahead of some unforeseen event (good or bad) can get clobbered.

I use the word "surprise" in the place of "a bit confused." I'm trading and managing my account so that any type of "surprise" (good or bad) doesn't severely harm my account.

Here's a look at the updated pivot matrix.

Pivot Analysis Matrix

There was really very little that took place as it relates to last night's displayed pivot matrix and levels traded. The NASDAQ-100 Index (NDX.X) 956.77 -1.52% did trade its WEEKLY pivot and so did the QQQ, for however brief. The other major indexes and BIX.X sector did not. For me, it seemed like a major intra- day event when the indexes traded their DAILY S1's.

In the above matrix, we see that the S&P 500 Index (SPX.X) 818.68 -1.26% and SPY $81.20 -1.59% both traded their MONTHLY S1's. This may be an important observation as it relates to Monday evening's Index Wrap where we were using the retracement technique of placing retracement at the WEEKLY R2 and S2 and a separate retracement from the MONTHLY R2 and S2 to define a level of support or downside target for this week.

There are few correlations that I find in the above matrix except with the exception being in the OEX DAILY S1 of 411 and WEEKLY S1 of 411.

While the QQQ was my "main index of focus" today, it will be the OEX and SPX tomorrow. My thinking here is this. If on Monday I identified a bearish target of 816-819 for potential support in the SPX, and a correlative support zone of 412-413 in the OEX, then current levels of trade with the SPX at 818.68 and OEX at 413.61 should be monitored closely.

To drive home this point, remember last week when both the OEX and SPX whipsawed back and forth for 8-session between OEX 425 and 438. Some subscribers were about to "pull their hair out" as the indexes appeared to "range trade." In uncertain market conditions where "unpredictable" news seems to be rather prevalent, one way to keep from pulling your hair out is to take some profits off the table when a target nears.

S&P 500 Index Chart - Daily Interval

The SPX is now very close to a "zone" of support identified on Monday. Do I let my winner run? Or do I lock in at the target? YOU have two choices. Place trailing stop above WEEKLY 61.8% retracement of 831.37, or if you're more risk averse can follow with a tighter stop just above the thick yellow point, which was our "MAX WEEKLY decline" from last week. The reason I mention 828.10 as a stop, is that it gives a little room above tomorrow's DAILY R1 of 827.70. If that is still too much room, then how about a stop just above tomorrow's DAILY Pivot of 823.10? All you're doing is allowing the MARKET to make the eventual decision for you and giving the trade a further chance to work lower. In uncertain market conditions like I believe we're in, another strategy is to "leg out" or sell a portion of your profitable bearish position.

It is very easy to "put on" a trade. It is very difficult to take a profit or cut a loss. A systematic approach to lowering stops in bearish trades just ABOVE a level of resistance and deemed acceptable by YOUR account risk management objectives is a great way to let the MARKET decide FOR YOU, when the trade should be close out.

Today's action saw further deterioration, or internal weakening take place in the S&P 500 bullish % ($BPSPX). The bullish % fell 1.6%, so a net of 8 reversing point and figure sell signals were found in the S&P 500. This has the bullish % falling to 39.4% and still "bull correction" status.

S&P 100 Index Chart - Daily Interval

The OEX is nearing a "zone of support" found from retracement work derived from the WEEKLY (blue retracement) and MONTHLY (red retracement) from their respective S2-R2 levels. The OEX did NOT trade its DAILY pivot today, even when "good news" came into the markets. I've placed a "thick yellow" horizontal line at tomorrow's DAILY R1 level of 417.90 that should be ample room for a less aggressive trailing stop.

If you were to twist my arm and get me away from the use of trailing stops to control risk in a trade, I would have to say that the still deteriorating internals give higher probability that the OEX does trade through the 411 level (with information currently at hand) into next week. If Saddam Hussein goes into exile and North Korea's current government in overthrown, then this analysis could change.

Here is something that some traders may not understand about retracement. The 80.9% level of 411.57 in the WEEKLY retracement (blue retracement). This is basically 50% of the range between 61.8% (419.60) and 100% (403.55). A trader looking to initiate his/her FIRST bearish position at current levels, might ONLY do so with a 1/2 position. Instead of putting on a new FULL position close to a potential level of support at 411, use your knowledge of how a retracement bracket "divides things up" to establish trade size.

Today's action saw a net loss of 4 stocks to reversing point and figure sell signals in the S&P 100 Bullish % ($BPOEX). This has the bullish % falling to 33% and still bear confirmed. Levels at or below 30% are deemed "longer-term oversold" and I would currently be looking to close out the BULK of bearish positions should the OEX trade near its MONTHLY S2 of 393.56. This 393.56 level is very near the October lows. In October, the S&P 100 Bullish % fell to 18% before reversing all the way back up to December's 76% bullish level.

While not index related, I did receive an e-mail from a subscriber that is still short Citigroup (NYSE:C) $31.42 -1.96% from October (when the bullish % were very oversold) and he has been busy the past couple of months, selling covered puts to bring his cost basis back up to "break-even." I'm not criticizing this trader, as he didn't understand how important the bullish % are when assessing RISK in the markets and individual stocks. Stay disciplined!

Dow Industrials Chart - Daily Interval

The Dow looks just "terrible" and a downgrade to "sell" on General Motors (GM) $34.02 -5.63% has yet another Dow component creating havoc for the Dow 30. If the Dow "blows through" its WEEKLY S1 of 7,745 and trades 80.9% retracement on the MONTHLY, then OEX and SPX traders can make the tie that those indexes will follow. Even if I'm trading the QQQ/NDX or SPX and OEX, I'll have alerts set on the various levels or at least monitor them during the day to look for any progression of levels being traded.

The Dow was the first to trade a DAILY S1 level of support, then the SPX and OEX quickly followed. It was a while until the NDX and QQQ hit their DAILY S1's. Look for SIMILARITY as each day passes. If you witness DIVERGENCE of any kind, then you're on the alert to some type of change.

We currently see all the indexes right at their WEEKLY S1 levels of support and at levels of CORRELATIVE support in the retracement brackets. Be alert to POTENTIAL institutional computer buying at these levels. If we start to see "hovering" near these levels, lock in some bearish gains if need be to control your account management!

General Motors (NYSE:GM) was the stock that reversed to a point and figure chart sell signal today and had the Dow Industrials Bullish % ($BPINDU) falling 3.33% to 16.67%. The very narrow Dow Bullish % is now considered "deeply" oversold. In March of 2001, July 2002 and October of 2002, the Dow Bullish % reached levels of 9.99% to 3.33% bullish. First sign of a rebound from the bullish % would come with a reading of 24% bullish, or a net gain of 2 stocks to reversing point and figure "buy signals."

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

I'm looking for a break in the QQQ into the $23.17-$23.36 zone and today's trade in the QQQ went pretty close to plan as outlined in last night's wrap. Either bulls are complacent or they're "out of their" mind for buying the QQQ when we're seeing Dow components, that are supposed to spend on capex are getting hit lower.

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) fall 1% to 36%. Still "bear confirmed."

Jeff Bailey



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