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Worlds apart and looking for trouble

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Worlds apart and looking for trouble

If traders aren't scratching their heads after today's trading session, then they've been washing their hair with high strength anti-itch formula shampoo after the Homeland Security Council lowered its threat of terrorist advisory level back to "yellow/elevated," after raising the threat level to "orange/high" on February 7th.

Subscriber's interested in reading full comments made by the Homeland Security Council should visit the Whitehouse website and statement at this link.

While the Homeland Security Council was lowering its threat level to "code yellow," WorldNetDaily reported that a Muslim website was warning of imminent attack on the United States within the next week.

I wouldn't say that the reaction from market participants was of mass confusion, but a mid-session reversal from selling to buying in the Treasury markets into their 03:00 PM EST close, which did have equities at afternoon lows, but not session lows, didn't seem to be "defensive" enough to have equity traders bidding stocks back near their highs into the close.

Today isn't the first time we've seen a late session round of buying in Treasuries into their 03:00 close drag stocks along for the ride, only for stocks to then rebound from the 03:00 mark, and if anything, the higher prices found in the indexes by their close certainly hints that there was some "relief" or weight lifted from equities on the thoughts that the threat of a terrorist strike on U.S. shores was lowered.

Suffice it to say, that by session's end, I feel, based on observation, that the bond and stock equity markets are "worlds apart." Since I'm more bearish on the equity indexes, partially based on the continued buying in Treasuries, I'm on the "lookout for trouble" as it relates to the bond market. I not only predicted an S&P 100 Index (OEX.X) 423.50 +1.14% close between 413.30-416.60 for tomorrow (this would be a -1.65% decline to 416.60 from today's close), but when bonds reversed course in a more meaningful manner at 12:59:08 I profiled a bearish trade in the NASDAQ-100 Tracking Stock (QQQ) $24.77 +2.27% at $24.75, the Q's along with the major indexes rallied immediately after the bond market's closed. While the Q's fell to an afternoon low of $24.51, the late session bullishness has me thinking the stock market thinks it knows something the bond market doesn't, or else jittery bears.

Since I've been focusing on lower Treasury YIELDS (buying in Treasuries) as a sign of a more "defensive posture" from the markets that would signal further weakness in the major indexes, I'm looking for any sign of "trouble" on a technical basis in the bond market.

In my opinion, an equity bear got just about everything they wanted from the bond market today, but by session's end, stocks hadn't cooperated fully.

10-year YIELD Chart - 0.50 box scale

In my mind, if things were "rosy" for stocks, then the 10-year YIELD ($TNX.X) "shouldn't have traded" a spread-triple-bottom at 3.75% (37.50 on the chart). I can't for the life of me figure out why a fairly important level of YIELD support was broken to the downside, while equities maintained a bullish posture by session's end. If I'm looking for "trouble," then I would want to be on the alert for a potential "bull trap" in Treasuries, as depicted by the 10-year YIELD chart.

Remember, YIELDS move INVERSE of a bond's PRICE and the above YIELD chart and the spread-triple-bottom sell signal on YIELD is actually a sign of increasing DEMAND for this bond's YIELD. The potential "bull trap" would be alerted to on a sharp and sudden reversal back higher, which would only come from selling in the bond. Another "reason" for at least being on the alert to a "bull trap" in this bond's YIELD is something I noted the other night in the market monitor. Dorsey/Wright and Associates tracks point and figure charts on Treasury bond prices. I was looking at both the March (ty03h) and June (ty03m) futures contracts and made note that both chart's bullish vertical counts on PRICE were 115'000. While vertical counts can always be exceeded, today's close shows the 10-year March futures contract (ty03h) at 116'100 +0.10%, and the June futures contract at 114'305 +0.10%.

I will say this. If the 10-year YIELD does achieve its bearish YIELD objective of 3.2% in coming weeks, months or years, I would certainly have to believe that the major indexes will be lower. However, if today's YIELD trade 3.75% is a "bull trap" in this bond and a major reversal back higher takes place, then I would want to be alert to strength in the major indexes.

In tonight's market monitor, I quickly discussed that one reason the Homeland Security Council lowered the terrorist threat alert to "yellow" was the possibility that the council truly didn't perceive a threat of terrorism, which would be based on its intelligence gathering efforts. The lowering of the terrorist threat alert could also have been a well-advised and strategic moved to lower the level one notch, to then give room to raise it back to "orange/high" should the U.S. actually use military force with Iraq.

I will argue a bull's case or perhaps a bear's short-covering rally, that the lowering of the threat level today could be interpreted by the equity markets that a war effort with Iraq may not be as immediate as some had thought.

Bottom line: Tomorrow morning's bond action may dictate how the day's trade takes place. A bearish trader looks for Treasuries to either be stable at current levels or see further buying, lower YIELD. Conversely, for bullishness, a rebound in YIELD could have shorter-term bond bulls looking for the exits on a near-term basis, which could further fuel today's "code yellow rally."

"Economy" traders should NOT take offense to my not mentioning today's economic data, but I would have to say that it is "war worries" that really seem to be impacting trading. Yesterday's "Turkey news" immediately reversed buying in stocks, while today's "code yellow" reversed selling in equities.

Market Internals notes: Some quick notes on market internals.There has been little change in the bullish % charts. Today's action did see a net gain of 1 stock to a reversing point and figure buy signal in the NASDAQ-100 Bullish % ($BPNDX) as it edged up 1% to 34%. This bullish % is still "bear confirmed" at 34%, and would take a reading of 38% to achieve a reversal higher into "bear correction" status. One thing I'm noting today is that the NASDAQ showed 61 stocks trading a new 52-week high, which is even with 61 stocks trading a new 52-week low. On a daily basis, this shows a somewhat "neutral" type of reading from this indicator. On quick review, the last time this indicator of breadth was near "even" levels was on Monday, when it session total reading was 71:60. The NASDAQ-100 closed at 994.69 on Monday, and today's close of 994.80 also gives a "neutral" type of observation.

Lets take a quick look at the Pivot Matrix for tomorrow. Remember, the WEEKLY and MONTHLY levels will change after tomorrow's close, but there's some correlative support and resistance levels that traders can monitor risk/reward against. I've also made some observations as it relates to the 10-year YIELD, which I've highlighted in pink squares.

Pivot Analysis Matrix

The NASDAQ-100 Index (NDX.X) 994.80 +2.08% and NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $24.77 +2.27% show correlative resistance at the WEEKLY Pivot and DAILY R1 and the WEEKLY pivot levels in both the NDX and QQQ have not been tested the past three sessions. Of the indexes listed above, the S&P Banks Index (BIX.X) 273.59 +1.44% has come closest to testing its WEEKLY pivot in the past three sessions, with a high trade today of 275.11. Again... I added the BIX.X as an index that would be deemed "economically sensitive" and made notes that this was a stronger sector that might be useful to monitor for strength. Correlative support near 270 and resistance at 276. I'm still not seeing much "meaningful" weakness in this index at this point to have me thinking, or the MARKET thinking economic meltdown.

We see correlative support from the WEEKLY S2 in the SPDRS (AMEX:SPY) $84.43 +1.32% at WEEKLY S2 and DAILY S2. To get to correlative support, I'd think further buying in Treasuries would be the catalyst.

Note the slight "difference" in the coloring of LEVELS in the pivot matrix when it comes to the 10-year YIELD ($TNX.X) as it relates to the WEEKLY and DAILY resistance, where the WEEKLY pivot of 39.06 hasn't been tested. In PINK, I've made an observation of how close today's low YIELD trade was in relation to the WEEKLY S2 of 37.42. Again... this has me alert to a potential "bull trap" in this bond's YIELD. If the 10-year YIELD makes a move much below the 37.42, or 3.742% level, it could be a trigger for selling in equities.

S&P 500 Index Chart - Daily Intervals

We've looked at the SPX point and figure chart the last couple of nights, and I've been showing little "dotted trends" on the $5- box p/f chart. Those trends would be similar to that shown on the above chart. We see some "overlap" at the 839 level between conventional retracement's 61.8% and our WEEKLY pivot analysis retracement at 839. This also correlates with the trending lower 21-day SMA of 839.90. Lots of resistance in play in the SPX near 839. Bulls have been able to challenge this 839 level for three consecutive sessions, but haven't been able to hold a close. Trend traders will trade the trend as long as it holds to the downside, with a risk averse bear's stop just above the 845 level, or a loser stop at 855 from the point and figure chart we've been showing. Still, a bearish trader holding FULL position would be well served to remove at least 1/2 of their bearish exposure should the SPX break above 845. If bonds see further buying and YIELDS head further lower, it would be my thinking that bearish will leverage the 840, looking for a break of the shorter-term trend of 823 into next week.

S&P 100 Index Chart - Daily Interval

I've "blown up" the OEX chart a bit compared to the SPX chart to better show the little "zone of resistance" from 425-426 that the OEX has been able to trade into in recent sessions, but just unable to hold a close above that zone. Bears need further buying in Treasuries, but traders must HONOR the security they are trading. If risk averse, then I'd suggest a tight stop just above the 428 level, which is this WEEKS pivot level. Again... the WEEKLY retracement will change after tomorrow's close.

I've spent a lot of time in earlier commentary and need to finish things up now as I'm way past deadline. However, the major indexes all look very similar as it relates to the last three-day trading.

I feel bonds will be the key driver still, and a bears major concern at this point is some type of sell-off in Treasuries that would free up cash, that could have bearish equity traders running for cover and spurring a rally. I feel bears have been willing to short as buyers remain in bonds.

The current market environment remains rather "unpredictable" and very news driven. This "news driven" type of market environment is nearly impossible to predict and traders need to honor and stick with the disciplined approach of keeping trade size rather small, where sudden periods of volatility don't bring emotions into the picture. Smaller trade sizes also helps a trader limit risk in an uncertain market environment where volatility is common.

Jeff Bailey

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