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Index Wrap

Rumor of defection lifts stocks

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Rumor of defection lifts stocks

Bears looked to have things under control late in the session as the major indexes sunk within a "trading floor rumor" of testing their weekly S2 support levels when a recovery took hold that lifted the major indexes back near unchanged by session's end.

While there is no confirmation that a top Iraqi government official defected, rumor of this looks to have been the cause for a today's late session rebound which saw the Dow Industrials (INDU) 7,749.87 -0.10% reverse a 129-point deficit in just under an hour.

In today's market monitor, I thought the first lift from the lows in the Dow came from a quick move higher in Dow component Johnson & Johnson (NYSE:JNJ) $51.31 +3.05 when it jumped from the $49.50 after Bloomberg reported that Medicare chief Thomas Scully told a congressional panel that the company's Cypher drug-coated stent was likely to win FDA approval within the next month.

And while a $2.00 jump in JNJ over the course of 10-minutes did have the Dow lifting from 7,632 to 7,650, (see market monitor 02:47:36) the volume build in trading for the broader NYSE and NASDAQ into the close has me thinking the bulk of the recovery into the close was a good round of short-covering.

Volume levels on the NYSE were a steady 145m, 137m and 184m at 1,2 and 3 o'clock PM marks, but swelled to 389 million shares traded in the final hour. That had the NYSE total volume for the day at 1.45 billion, which comes close to Wednesday's 1.5 billion mark. Helping the volume increase along with the rise in the major indexes in the final hour of trade was 3 buy program alerts after not having received an alert since early morning "sell program" alerts were triggered.

NASDAQ showed similar volume pattern as the NYSE with steady volumes of 126m, 120m and 146m, but a 316m volume rate in the final hour of trade. Total volume for the NASDAQ session was 1.29 billion shares and slightly heavier than the 1.22 billion daily average we've seen this week.

The move higher certainly must have caught some bears off guard, but I think I "know" what to look for in the morning if stocks are going to resume their downward trend.

If traders thought for a moment there weren't some "bullish scenarios" at play, then today's little rumor and reaction to that rumor is a little preview of how quickly things can fluctuate or turn on rumor alone.

It is still my belief that the option trader that doesn't over leverage and is open to playing "both side" of things (put and call) has an advantage over pure equity traders that have more capital at risk and become susceptible to being jolted out of a position as greater capital is exposed to a more uncertain market environment. A market environment that is easily influenced not only by rumor, but facts.

Last night I received an e-mail from a subscriber asking for any statistics on how accurate the pivot analysis levels are. I know of no study ever having been performed. As mentioned in a recent Ask the Analyst column (Pivot Analysis to define levels and ranges), I view the pivot matrix and levels discussed as a guide where we look for institutional selling and buying as they implement risk management in their inventories. For you and I, these levels also serve as a guide not only for where we look for support and resistance level from which to INITIATE a trade, monitor for weakness and strength, but to identify LEVELS where stops can be positioned ESPECIALLY IN AN UNCERTAIN MARKET ENVIRONMENT to control risk in our accounts.

I've said before that I "hate rumors." I much prefer fact. However, in UNCERTAIN market conditions, traders need to be prepared for BOTH.

Pivot Analysis Matrix

The major indexes came within "rumor" of trading their WEEKLY S2 levels of support. In our 01:00 PM EST Update, the Dow had yet to reach its session lows of 7,629, which was within 3-points of its weekly S2 when a jump in Dow component JNJ lifted the Dow from the lows. If I'm correct in my analysis that the "rumor" of a key Iraqi official defecting is correct, then that move back through the 7,691 level of MONTHLY retracement may have brought in today's afternoon "buy programs," sending the indexes back near today's WEEKLY S1 levels of support. A solid wall of resitance still exists at the WEEKLY Pivots, which are all above tomorrow's DAILY R2 levels of resistance.

My posture is still bearish toward the indexes, but will discuss how I'd look to control RISK in any bearish trades tomorrow. Traders will note that Mr. Blix will give his report to the United Nations tomorrow, and if today's trade wasn't a little "wild," then be prepared for potential volatility tomorrow.

Here's the type of trade I will be looking for in the morning as it relates to the Dow Industrials. This is the same chart we looked at in today's 01:00 PM update and last night's Index Trader Wrap. However, to better show what I'm looking for in the first half of trading, I'm going to show the Dow Industrials on a 30-minute time frame. There are some great correlations from WEEKLY and MONTHLY retracement with the DAILY levels. What I'd look for in the Dow is a dip at the open back near 7,700. However, for traders still holding FULL position short that didn't take some profits on this afternoon's late rally back above 7,750, I'm going to guard against a potential rally back to the DAILY R2 of 7,873, which would tie in nicely with a our WEEKLY 61.8% retracement level.

Dow Industrials Chart - Daily Interval

I have added two new lines to the 30-minute chart since were taking a closer look at things. I'm still bearish as a downward trend from the 01/15/03 relative high, which was tested once near 7,950 held has resistance. For the BEARISH of BEARS, tomorrow's DAILY S1 of 7,811 and downward trend serve as resistance. Today's close in the Dow is somewhat "neutral" as it comes right at the WEEKLY S1, after seeing the Dow trade so near our WEEKLY S2. I do hope that a trader that was targeting WEEKLY S2 as a target isn't placing orders at the exact decimals given in the pivot analysis matrix. For the Dow, the MINIMUM cushion I'd give is 10-points either side of a level.

S&P 500 futures (sp03h) settled at 819.00 and as I write (09:10:01) trade down 1.3-points at 817.60. Do you see how the 80.9% MONTHLY (red retracement) came into play as resistance before the Dow set its daily low? I'm looking for the Dow to pull back to that level early in the morning. For the Dow to have a bearish finish tomorrow, I would look for RESISTANCE to hold at/near 7,812.

Today's action saw the Dow Industrials Bullish % ($BPINDU) fall 3.33% to 13.33% and is still "bear confirmed" With the Dow in such "oversold" territory, an OVERLEVERAGED bear that doesn't have a profit stop on at least partial positions needs to have his/her head examined in my opinion.

ANY trader trading the SPX, OEX, NDX and QQQ should monitor the above levels in the Dow. A move much above Dow 7,811 has immediate upside risk to 7,873 and 7,950.

Let's take a look at the S&P 500 Index (SPX.X) 817.37 -0.16% on the same 30-minute time scale. This is the same chart we looked at last night.

S&P 500 Index Chart - 30-minute intervals

Within the past few days I mentioned how the indexes were "staggered" a bit. It really shows up when one considered recent comments how the Dow was a little weaker technically and "lead" to the downside when levels of support were being traded and violated. We see from the SPX chart that it didn't get as close to its WEEKLY S2 as the Dow did. We can also make similar "staggered" observation as it relates to trend. See how the DAILY R2 is the "crisscrossing" resistance level? In the Dow, it is tomorrow's DAILY R1. First alert to strength in the SPX tomorrow would be 823.60, then a move above 829.80. Still bearish as long as downward trend is intact.

Today's action saw the S&P 500 Bullish % ($BPSPX) fall 3.8% to 35.6%. Still "bull correction" here and not quite yet at "longer-term" oversold level.

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

By looking at the 30-minute charts, I'm starting to see some things that "concern" me from the bearish point of view. The two downward red trends on the QQQ are my focus right now. The lower downward trend is a trend anchored similar to that of the Dow and SPX. I'm noticing for the first time, this trend and how is sure seemed to have some type of "buying" taking place that served support as the QQQ edged lower today. This is DIVERGENCE from the Dow and SPX and an alert to potential strength. I sure looks like "somebody" is working/trading that trend as support. The QQQ low of $23.32 didn't come all that close to my current "head shoulder" top formation discussed Tuesday evening. I'd play it "safe" in the QQQ and if short/put, would want the $24.11 level to serve resistance.

Today's action saw the NASDAQ-100 bullish % ($BPNDX) fall 4% to 32%. Still "bear confirmed" at 32% and unless the Mr. Blix says something overly favorable the QQQ should find resistance on any rally near $24.11.

Last trade I see in the QQQ in overnight trade is $23.82, which is smack dab on our WEEKLY 61.8% retracement.

Jeff Bailey

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