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Index Wrap

Was that a bull or a bear in the china closet\?

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Was that a bull or a bear in the china closet?

I will admit to my hesitancy this morning when discussing the S&P 100 Index (OEX.X) 422.99 +3.44% (+14 points) chart and early action from the bond market, which looked to have the WEEKLY pivot of 420 in play. I'm also hesitant tonight in saying tomorrow's trade could quite easily see the S&P 100 adding another 7 points to today's gains, but there were some levels traded today that I don't think many bears thought would be traded (including my bearish side) where early selling in Treasuries could have some short-covering building into the weekend.

Throughout the day, I was looking at the percentage gains in the major indexes and at mid-session, I was a bit surprised at how evenly distributed the percentage gains were among the Dow Industrials (INDU), S&P 500 (SPX), S&P 100 (OEX) and NASDAQ-100 (NDX.X). But as the session unfolded, the NASDAQ-100 ramped its gains to nearly double the other major indexes, and hints to me that there was one heck of a lot of buying taking place and perhaps some bullishness taking place that some bears didn't understand and were looking for the door.

In my mind, there was "no way" the NASDAQ-100 (NDX.X) 1,029.79 +6.1% should have been able to trade its WEEKLY S2 level of resistance this week, let alone today. But it did, and this is where we now focus our attention for leadership.

While I would certainly welcome a pullback to see if there's a support level that can hold and provide a bounce, I'm also cognizant that there are some bears looking for a second chance to cover positions at yesterday's lows, but now feel like that opportunity may be slipping by.

Let's take a quick look at the pivot matrix, with some focus on the fact that the NASDAQ-100 (NDX.X) and QQQ along with the 10- year YIELD ($TNX.X) all three traded their WEEKLY R1s.

Pivot Matrix

Since the NASDAQ-100 traded and closed above its WEEKLY R1 level of resistance, I'm immediately looking for upside levels where any type of resistance might be found. I'm not doing this to necessarily look for shorting opportunities either, but to try and get a feel for just how bullish things could get.

The first "area" that I see is between 1,045 and 1,050 (DAILY R1 and WEEKLY R2). True, I could have also chosen the MONTHLY R1 of 1,039 and paired it with 1,045, but I'm going to error on the upside right now, as the NDX proved it could trade the WEEKLY R1 and deserves some respect. I certainly want to be aware of 1,039, but I'm trying to find some correlations in the matrix near-term and pairing DAILY/WEEKLY. In my opinion, it would take some VERY jittery bears or VERY good market moving news to have the NDX trade its DAILY R2 of 1,062 and MONTHLY R2 1,069.9. However, over the years, I've learned to never underestimate the bear that wants or needs to cover positions.

I'm focusing on the NASDAQ upside levels, because this is obviously the index of strength within the matrix. Two week's ago, just prior to Valentines day, the NDX made a 2-session move from 950 to 1,018. Since that time, roughly two weeks, the NASDAQ retraced that level intra-day yesterday, and in one single day (today) those bearish gains have gone poof. To think that we can't see further short covering tomorrow, would be similar thinking that it would be fun to sneak up on a wild Grizzly bear and startle him into a charge.

I've highlighted the correlative NDX WEEKLY and MONTHLY S1 and Pivot levels. I'm now getting pretty comfortable with the thought that 960 becomes a longer-term support level, and that there may well be some substantial buyers at 990, which is where today's opening gap took play.

I want to take a look at the NASDAQ-100 Tracking Stock (QQQ) $25.62 +5.73% tonight, instead of the NASDAQ-100 itself, for one reason, and one reason only. Volume!

NASDAQ-100 Tracking Stock - Daily Intervals

Today's 128 million share volume is the largest amount of volume we've seen in the QQQ since the Q's broke and closed below the $27 level (19.1% retracement) on 12/04/02. It was that "volume" spike which actually had us thinking the QQQ was a good short/put on the rally back higher in mid-January. When I look at the above chart, there are very few "bearish" technicals that I see, other than the MACD threatening to roll below its zero level.

What I think Index traders need to be looking at right now is the possibility of an extended short-covering rally taking hold and how an extended rally could fuel the other indexes.

I don't know what amount of stock has been shorted below the $25.34 level, but I do know that it is all at a loss as of today's close. The QQQ $25.34 level is roughly equivalent to 1,018 in the NASDAQ-100 (NDX.X) which was also this WEEK's R1.

Tomorrow, this becomes a support level and if we were to see any selling in Treasuries, the WEEKLY S2 becomes an obvious target by session's end.

From here on out, this also becomes the "lead index" for strength. It's earned it in my opinion, regardless of what I have thought about capex spending, etc, etc. I need to show some respect for the Q's and the NDX as a trader.

Today's action saw a net gain of 3-stocks to reversing upward point and figure buy signals, which has the NASDAQ-100 Bullish % ($BPNDX) back at 33% bullish. This is not enough to have the bullish % reversing back up into "bull alert" status, which would only come with a 36% reading.

How would I look to play the Q's? With looming uncertainty regarding Iraq, I would play the QQQ/NDX from the bullish side, but I would do it similar to that mentioned in the March 5th market monitor and Index Trader Wrap http://members.OptionInvestor.com/IndexTrader/iw_20030305_01.ASP with the Dow Diamonds (AMEX:DIA). Buy a partial position with at least 3-months expiration. This allows minimal capital exposure, some time to assess further strength on a move higher, or strength of support on a pullback. For those still holding a QQQ straddle/strangle trade as mentioned previously with 3-month expiration, I would be doing NOTHING with that trade, and continue to let it work. Straddle/strangle traders are encouraged by today's VOLUME, as it shows major disagreement, and that's EXACTLY what you want.

I'm still very cautious with regard to trading aggressively bullish in the indexes at this point, but I will note that the 1/4 bullish position profiled in the Dow Diamonds Sept. $80 calls from $4.70 are bidding $4.80. There's still some time until September expiration. No, I didn't get the bottom, and am still just skeptical enough and unwilling to make big bets that we've hit the bottom, but a 1/4 position bull in the Dow Diamonds doesn't mind that the DIA traded its bearish vertical count yesterday and trades $78.44 +3.55% at today's close.

There's a lot of work to be done, and overhead supply to be working through.

Dow Industrials Chart - 50-point box

"Suspicious" is what a bear has to be thinking at this point, after the Dow Diamonds (DIA) traded their bearish vertical count of $75 on an intra-day basis, and 36-hours later, trades $3, or 300-points higher.

While not a "pattern" per say, the point and figure chartist will be on the lookout for "low pole warnings" where a long column of "O" (supply) is retraced by more than 1/2 of its decline by a reversing upward column of "X" (demand). I've marked a recent low pole warning on the Dow's chart, to show that this is simply an "alert" to strength. However, with the DIA having reached a bearish vertical count, and the bullish % at 9.99%, I'm currently on the alert to strength. The first sign of renewed strength would be a double-top buy signal at 8,000, which would be getting close to tomorrow's DAILY R2.

Today's action saw no net change in the Dow Industrials Bullish % ($BPINDU). Current reading is "bear confirmed" at 9.99%. I don't have time to show all 30 of the Dow stocks, but I looked at all of them today. In tonight's market monitor I made some points here. Stocks like Alcoa (NYSE:AA) $19.88 +5.3% didn't even show a 3-box reversal higher on its point and figure chart and it would currently take a trade at $27 to get this stock to show a point and figure buy signal. Walt Disney (NYSE:DIS) $16.20 +6.71% did not even reverse 3-boxes and would currently take a trade at $19 to trigger a buy signal. This has me thinking, based on observation (there are a lot of stocks like this) that it could be awhile before we see the Dow bullish % begin to reverse higher. To see any type of reversal up, it would be my thinking that we would need to see some type of consolidation or range trade take place, where some "buy signals" in these very deeply sold stocks would be generated.

As such, I've placed the MONTHLY S1, which is at 7,629, on the above Dow chart to show a level where we might look for a pullback to take place. I will want to monitor this level should the NASDAQ-100 pull back to what looks to be a correlative type level in the matrix at 959.10.

S&P 100 Index Chart - 5-point box

It was in October that both the DIA and OEX achieved their bearish vertical counts within days of each other. However, the OEX hasn't come close to its bearish vertical count of 390. While I NEVER fully bank on a stock or index trading a bullish or bearish vertical count, until the OEX can prove strength with a trade at 435, I must still plan for a potential decline in the OEX to 390. It is this type of thinking that has me less aggressive from the bullish side right now, but I'm still rather torn for market bullishness with the strength I find in the NASDAQ-100. In today's 03:15 update, I was thinking we might see a trade into the 423-425 zone early tomorrow, and a late afternoon trade at 423.10 got the OEX just into that zone.

Today's action saw a net gain of 2 stocks to reversing higher point and figure buy signals in the S&P 100 Bullish % ($BPOEX). Still "bear confirmed," but inching up to 23%. As mentioned last night, this bullish % is getting very close to October's low reading of 18% and of the major indexes, this is the ONLY index which did not break a 52-week low in October.

S&P 500 Index Chart - 5-point box

I'm at a loss for words as it relates to Tuesday evening's wrap as the SPX traded the bottom of the channel and WEEKLY S2 and now has rallied back to the mid-point of the channel. The SPX now becomes a tough trade in the middle-of the channel, and the NASDAQ-100 showing strength, which could further the SPX rally back up to 850 and WEEKLY R1.

The only trade I see is that a bear that feels he/she missed a closing opportunity at the lower end of our channel and WEEKLY S2, look for a second chance on any type of weakness tomorrow. The only new position bearish trade I see is on a rally up into the 845 area, with a tight stop at 855.

Today's action saw a net gain of 5 stocks to reversing upward point and figure buy signals in the S&P 500 Bullish % ($BPSPX). This has the bullish % rising 1% to 28.4%. Still bear confirmed.

Jeff Bailey

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