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Index Wrap

Trading in a Broad Range Market

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Trading in a Broad Range Market

THE BOTTOM LINE -
The further retreat last week to areas at or near prior lows again supports the idea of the indices as being in a broad trading range, which is good for trading. There appears to be a definite perceived "value" area for stocks, especially by institutions, best seen in the S&P 100 (OEX) when this index has gotten into the 400 area. Since the market is now well off its recent lows, the next best new trade is to buy puts in the identified (below) index resistance areas, especially given the short-term overbought condition.

FRIDAY'S TRADING ACTIVITY -
Even with the confrontation over Iraq getting very close to resolution one way or another, traders Friday were reluctant to place bets on what will happen next after the sharp rise Thursday and after a gain of 100 points early Friday. Hey, comes the weekend, take profits if you got em!

This was the first week in a while when the major indices were actually up from the prior weekly close. The Dow was up 1.5% and the Nasdaq gained 2.7%.

The market seemed to feel that Friday was a significant plus, in that the strong gains from Thursday were sustained - on Thursday the Dow rallied some 3% and the Composite more. Traders reacted bullishly to an update from President Bush early on Friday that related to the Mid East peace process. Instead of talking about a "roadmap for peace" between the Israelis and Palestinians, market participants had thought he would say something about Iraq. Stocks were trading lower before the speech, but rose steadily during the course of it.

Traders saw his more general statement as an attempt to diffuse some tension in the Arab world and gave some lift to the outlook for a post-Iraq conflict. The market's latest thing is looking at the outcome as one that would probably come out all right.

The White House also said the president will use a Sunday summit meeting with the leaders of the United Kingdom and Spain to try to forge a compromise resolution on Iraq that can be accepted by a majority on the United Nations Security Council.

That development was one factor prompting as much as a $2 a barrel drop in U.S. crude oil prices, though they climbed back as the day went along. Fears about tight supplies were eased when Saudi Arabia indicated that it is sending more than a dozen oil tankers to the U.S. to increase low crude oil inventories. Traders and investors largely did NOT focus on some positive economic news, with the country nearly paralyzed by the uncertainty over war and its uncertain outcome.

Just after the Friday open, stocks dipped with the University of Michigan's preliminary survey of consumer sentiment for March. It registered at 75, below the 78 that economists had expected. The consumer sentiment index stood at 79.9 in February.

Producer prices rose by 1% in February, after jumping 1.6% in January, as reported by the Labor Department. Consensus estimates were for a rise of 6 tenths (0.6%) of a percent. Core producer prices - which exclude food and energy costs - fell by 0.5%, after rising 0.9% in January, versus expectations for core prices to remain unchanged. The drop in core prices amid the continued overall gain is showing how much energy prices are impacting producers.

Business inventories rose by 0.2% in January, after rising a revised 0.7% in December, the Commerce Department reported. The result was below estimates of a 0.3% increase.

U.S. industrial output increased 0.1% in February. Gains at mines and utilities offset losses in motor-vehicle production, according to the Federal Reserve - this versus expectations for a 0.1% decline. Capacity use held steady in February at 75.6%, stronger than the 75.4% economists had predicted.

The U.S. current-account deficit widened to a record in Q4. The deficit came in at $136.9 billion, up from $127 billion in the third quarter, but was not a surprise.

OTHER MARKETS -
Gold continued to retreat from the $350 area, falling to around $337 in terms of the nearby COMEX gold futures. Gold has tended to move inversely to the financial assets and is now under my "danger" zone (for stocks).

The 10-year Treasury note was up nearly 13/32. The yield (moves inversely to price), fell to 3.704%. The 30-year bond gained 19/32 to yield 4.715%.

The dollar was down some against the Yen at 118.26, versus 118.65 the day before but up slightly versus the Euro, which finished at $1.0742 down from $1.0781 late-Thursday in New York trade.

MY INDEX OUTLOOKS -

Dow Industrial Index (DJX) - Hourly chart:

PER MY LAST WEEK COMMENTARY -
Re the triangle on the Dow hourly chart: "expect follow through on a move to below or above those converging lines." (We got the decline when the breakout was to the downside.) "Based on the measuring implications of the triangle pattern, downside potential is to 75.5 approximately."

MY EARLIER ESTIMATE WAS CLOSE, NOT QUITE EXACT -

When I re-did an exact measurement, the implied downside objective (by the vertical length of the triangle came out pretty exactly where the Dow made its low.

What now? The prior high at 80.7 in the Dow Index (Dow 8070) will be tough to surmount without a correction first given the overbought condition registering in the hourly stochastic models. Buy puts on rallies to or above 81.0 if reached but stop out on an hourly close over 82.0.

More on the "measuring" implications of triangles at -
http://www.OptionInvestor.com/traderscorner/082202_1.asp

S&P 500 Index (SPX) - Hourly chart:

As I said previously the S&P 500 (SPX) would have had to have had a WEEKLY close under 800 to suggest that the S&P was going to have another down "leg" rather than what turned out to be the expected retreat to the low end of its (trading) range. The dip under 810 turned out to be a significant support area and a profitable trade in SPX calls. Hard to do - buy, that is - when the market appears to be falling apart and with a lot of bearish news around. You got to buy em when no one else appears to want them sometimes.

I suggested to buy puts in the 840 area - 841 was reached - and I would stay with that trade, risking to 845. If 845 is reached, I would rather hope to buy (puts) again on any rally to the 850 area. A close over 850, or (better) TWO consecutive closes over 850, would suggest that upside potential might be to 870. Maybe wishful thinking! - to get that kind of rally for a next put trade.

S&P 100 Index (OEX) - Daily and Hourly charts:

The OEX rallied to within a couple of points of its 430-432 resistance area. I suggest buying puts IF the OEX stalls on a rally to the prior 432 highs, risking to 435. Would like even better to buy puts in the 440 area, if reached.

I discussed in my last weekly wrap up the likelihood of major support (buying interest) coming in at 400-405 of course and suggested a short-term trade on the call side if 405 was seen and both stochastic models were again fully oversold - my stop out point was a below 400 and my trade objective was 420, which was seen of course. Take the money and RUN, especially when it's a quick unexpected profit!

410 looks to be support now and I would consider buying (calls) on dips to and under this area, but not below 408.

NASDAQ 100 Index (NDX) Daily chart -

From last week however - suggested put purchases if the NDX got back up into the chart gap area - the closer to 1050 the better. The index did get slightly into the gap by its move to 1042, which happened in short order once the index cleared resistance at 1020. If long puts above 1040, I would risk to 1046 only.

The gap area extends up to 1059. The closer that NDX gets to this area, the better the downside potential in my view. If in this trade and if you want to give it plenty of leeway, exit on a close above this same gap area or on a close above 1059.

990, at the 21-day moving average now looks to be near support. 950 is major support. The Nasdaq TRIN showed heavy buying on Thursday, but this trend would have to continue for the 10-day Arms Index (TRIN) to fall to an "oversold" reading closer to the lower dashed (red) line.

QQQ Daily and Hourly charts:

I last suggested shoring above 25 - if in that trade I would set a stop order above 26.00. If the Q's rally to above 26, they could get up to what I see as tougher resistance around 27.00, an area I suggest shorting.

QQQ definitely broke out above its downtrend channel as you can see above. Near support is probably back at this (upper) channel line at 24.8 currently.

I suggested a possible long side trade if 23.50 was seen and risking to just under 23.00 - the low for the move was 23.54 - hope you were willing to buy in that AREA rather than the exact price! My objective was for a move back up to 25-25.50, which was easily reached and then some.

With war maybe coming up this week, trade carefully, if at all. Might be a good time to trade very lightly if at all!

Leigh Stevens

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