Option Investor
Index Wrap

Digging out, dug out, and digging in

HAVING TROUBLE PRINTING?
Printer friendly version
Digging out, dug out, and digging in

After two days of shoveling, Coloradoans are digging out from under one of the worst blizzards to hit that state in decades. I finally got dug/winched out just this afternoon and when I tried to go grab a bite of lunch and some back-pain pills, I noticed that many retailers were still not open for business as snow plows were busy with other projects.

While Coloradoans are digging out, equity bulls were able to dig in and root out some profits as coalition war efforts unfold in Iraq. All of the major indexes finished today's trading session with the NYSE reporting volume of just fewer than 1.42 billion shares traded, while NASDAQ volume had just over 1.55 billion shares traded.

An early bout of buying in Treasuries turned toward selling as the session progressed, with the benchmark 10-year YIELD ($TNX.X) rising to as high as 4.044%, before settling out at 4.06%. The continued selling in Treasuries has now reversed two-weeks of buying ahead of the war effort, and current action continues to exhibit a MARKET that is willing to part with a "safer" asset class and find its way toward equities.

Daily market internals turned positive at approximately 02:00 PM EST and held that way into the close. The NYSE ended with 18 stocks advancing for every 13 stocks that declined. NASDAQ breadth ended with 17 gainers for every 14 stocks that declined.

A narrower measurement of breadth had the new highs versus new lows category continuing to show positive breadth at the NYSE for a fourth-straight session. Today's trade saw 51 stocks trade a new 52-week high compared to just 19 stocks trading a new 52-week low. This was just shy of Friday's new high's when breadth was 66:65, but today's trade begins to show some leadership and willingness among bulls to stick with their favorites. For the NASDAQ, this narrow indicator of breadth and leadership remained positive for a third straight session with 58 stocks having traded a new 52-week high compared to 44 stocks trading a new low.

Sectors finished their trade broadly positive with the Gold/Silver Index (XAU.X) 64.65 -2.08% and PHLX Defense Index (DFX.X) 141.28 -1.31% the only two sectors trading down by more than 1%. Oil Service (OSX.X) 87.39 +2.17%, Internet (INX.X) 102.32 +1.88%, Natural Gas (XNG.X) 167.07 +1.46%, Disk Drive (DDX.X) 78.34 +1.25%, Broker/Dealer (XBD.X) 398.36 +1.17%, Networking (NWX.X) 151.78 +1.18% along with the Dow Jones Home Construction Index (DJUSHB) 322.79 +1.18% were sectors showing gains that totaled greater than 1%.

In this past weekend's "Ask the Analyst" column, we discussed both the Internet and Semiconductor bullish % showing some internal strength. As an update to that article, according to Dorsey/Wright and Associates, their Internet Bullish % (BPINET) remains "bull confirmed" at 35.39%, and their Semiconductor Bullish % (BPSEMI) is still "bull confirmed" and has grown to 39.3% bullish. Per the "Current Sector Bell Curve Graph" shown in that article, a trader would now note how the BPSEMI has moved further to the right of the scale into the 32-40% range. A semi- sector bull likes this action and shows this group is trying to show some leadership from a once "oversold" level below 30%. Intel (NASDAQ:INTC) $18.27 +1.61% is "the stock" I like to play as bullish when this sector bullish % reverses up from oversold levels, on the thinking "as Intel goes, so goes the sector." Today, INTC's trade at $18.50 was one stock in the sector that generated a reversing upward point and figure buy signal. I currently hold a bullish position in the Intel Oct. $20 calls (NQJD), but plan on selling them when the sector bullish % approaches the 70% level (should that day come) prior to October. This bullish Intel position offsets a bearish position I hold and have previously profiled in shares of Cisco Systems (NASDAQ:CSCO) $14.04 -1.26% from $12.50. Dorsey/Wright and Associates has CSCO in their Computers Bullish % (BPCOMP) which is till in "bull correction" status at 25.98% and would currently need a reading of 30% to reverse back up into "bull confirmed" status.

I view this type of "pair trade" in INTC/CSCO as somewhat of a straddle, but look to be long/call INTC as the sector bullish % is showing some internal strength, while being short/put CSCO, which has a sell signal associated with its chart, and somewhat tied to the weaker telecom sectors.

In this morning's market monitor, I suggested that traders that may have added 2, 1/4 positions in two of my recently profiled bullish plays in the Dow DIAMONDS (AMEX:DIA) $83.12 +0.24% take profits in the first position earlier this morning. Other than the lower trade at the open, there were two reasons I thought traders might look to lock in a gain on the first position from roughly the $77 level, but hold the other 1/4 position taken near $80.

Let's first look at tomorrow's pivot analysis matrix and see if a pullback bullish entry, which I was looking for this morning near 8,000 still might present itself, or if the Dow is going to just keep on trucking to the 8,400-8,500 level, which would be a DIA equivalent of $84-$85. Since I don't have my hands on the coalition playbook, nor the Iraqi playbook, I thought it best to book some profits.

Pivot Analysis Matrix

While I didn't have access to an updated pivot matrix for today's (Thursday) trade, I made mention that I'm really trying to assess risk/reward and trading levels from the WEEKLY and MONTHLY levels to try and compensate for any type of war-related news/events. I'm not "joking" either when I said that I feel that under "war conditions" the indexes are capable of trading S2 and R2 levels on the DAILY.

While I feel "oil well fires" can hamper a coalition assault, it would be any use of chemical weapons by Iraq that I feel would most likely bring jitters into the market. While coalition troops look prepared to handle chemical weapons, I do think its psychological impact on traders would create a negative reaction.

However, I do agree with some military analysts/strategists that say Saddam won't use chemical weapons (if he has them) until the "last moment" as he may not want to confirm what the U.S., Britain and Spain have been saying all along this early in the war. Saddam's army has enough to deal with at this point and may not want the French to join the coalition. Earlier, the French government said it would join the coalition if chemical weapons were used by Iraq.

As it relates to the Dow Industrials and DIA in the matrix, the 8,400 level looks to be reachable tomorrow, but here again, an advance of that amount may well need further good news on a coalition effort as nightfall now sets upon Iraq.

Market action today appeared to turn bullish as soon as it was announced that ground forces outside the Iraqi border had crossed into Iraq. This continues to hint that the MARKET wants a resolution and a removal of Saddam Hussein from power.

The S&P Banks Index (BIX.X) 274.95 +0.24%, which is really a collection of banks with exposure to the U.S., aren't setting the matrix on "fire," but continue to show some stability if not marginal bullishness from last week's lows. Either market participants are looking forward to a positive resolution on Iraq and perhaps expecting a resumption of investor/consumer confidence which would stimulate economic activity, or broader market bullishness, which tends to "lift all boats" finds just enough willing buyers to have this financial sector showing an intra-day high for a sixth-consecutive session.

In the above matrix, I've "dashed green" a few levels of support. These would represent levels of potential "near-term" support, but were violated today by more than a couple of points where computer programs should have been able to hold support. As such, these "dashed green" are somewhat suspect, and I'm not making any big bets at this point should they be tested again tomorrow, but will monitor for support.

I think the major indexes have probably performed "much stronger" than many bears had perhaps thought they would, and I would think that pullbacks lower than "dashed green" levels would be more likely to find good support and computer buy programs.

Tonight, I want to discuss something I "think" traders/investors might find interesting and perhaps informative as it relates to the indexes they trade, and the PRICE of the 10-year Treasury. I started a conversation I've uncovered as it relates to a prior conversation/observation I first discussed in the market monitor on Thursday, March 13th. I haven't fully back tested this observation but want to follow it near-term and perhaps use it tomorrow should the Dow Industrials (INDU) break above today's high of 8,319. See if this makes any sense.

Here is a relative strength chart, or price comparison of the Dow Industrials (INDU) and the 10-year Treasury Bond's PRICE ($UST) from www.stockcharts.com. What I'm trying to do with this chart is look for relative strength buy/sell signals, but use the scale to the right of the chart to define a value at which a trader should have shifted to or from the 10-year bond into or out of the Dow Industrials. Again... I'm taking the Dow Industrials and measuring its relative strength against the US Treasury bond. See if you see what I "think" I see as it relates to past action points that I could have bought the Dow at, and sold the Treasury.

Relative Strength Chart of Dow Indu. vs. $UST

I like to "think outside of the box" from time to time, and this may be going a little too far. However, I also ask myself "why" a profitable trade may have worked so well and was there a tool that may have been useful to have confirmed an action point of a trade. Our conversations regarding the selling of Treasuries being bullish for stocks, or vise versa, has worked well over the past couple of years. I didn't know that www.stockcharts.com had a point and figure chart of the 10-year Treasury PRICE ($UST), but a subscriber had asked a question regarding its point and figure chart. Wow! I thought. If I believe that money will rotate in or out of bonds and out or into stocks, then why not look at a relative strength chart and compare the two.

What I've found so far is this. It is IMPERATIVE to use the Bullish % Charts to first understand how "oversold" or "overbought" the index is that you're trading. However, in October of last year, when the Dow Industrials Bullish % ($BPINDU) was "bull correction" and had fallen way down to 6.66% (just two out of 30 stocks showing buy signals) the RS chart of the $INDU vs. $UST would have given a "buy signal" at 7,450, and for the RS chart to have given another "buy signal" it would have had to have traded 8,000. I know now that it would have been a decent trade to at least be looking long 1/4 bullish position at that level, especially with the bullish % being so low, when BEARS had the bulk of the risk. If Treasuries sold off and money flowed toward stocks, then the Dow should have risen, perhaps to at least 8,000 if using the above chart.

Now.... I first profiled a bullish trade in the Dow Diamonds (DIA) on 03/05/03 in the September 80 calls (DAVIB) and I paid $4.70 for that call on that day when the Dow Industrials traded a range of 7,775-7,661 (this is the 1/4 position sold this morning). That bullish profile turned out to be about 5-days too early as the Dow Industrials fell to a low of 7,416 before their intra-day reversal on 03/12/03, but can you imagine how "smart" I'd have looked if I had first profiled the DIA as bullish on 03/12/03 at 7,450? I probably would have then better profiled a $75 strike and made a better trade perhaps.

Now... I still have a 1/4 position from Dow 8,000, and that was from a technical level from the Dow's point and figure chart not the relative strength chart above, which might have the 8,300 level either being a target at this point, or another bullish action point, with a target of 8,450.

Holy smokes! Either I sold 1/4 position just right at a target from the above RS chart that I had no clue existed, or else I just sold 1/4 position that may have 8,450 in it and should 8,450 be traded, then the RS chart would show another target of 8,600. Heck, the pivot matrix above shows some correlative resistance near 8,400 and if the Dow closes at the high end of this week's range, then next week's pivot matrix should move higher.

Again... this is probably "too outside the box" to risk real money on tomorrow, but I'm darned tempted to give it a try if some technical levels can be broken to the upside tomorrow. You know... get back on the horse and ride, see where it goes and reestablish a 1/4 bullish position.

Dow Industrials Chart - Daily Interval

I have no problem with my decision to take some profits off the table when this morning's trade began to the downside. There's also technical resistance coming in at the conventional retracement of 8,338 and downward trend from the May 17th relative high. Two things that still have me more bullish is 1) The Bullish % are still quite low and continuing to add stocks to the point and figure buy list and 2) The NASDAQ-100 Index (NDX.X) 1,080 +0.49% broke above similar trend March 13th at approximately 1,000.

Now, I "know" that we've seen selling in Treasuries, which has had some cash flowing toward equities.

If there's "one thing" that has me looking for a good pullback entry point to get long, its that the NASDAQ-100 Index (NDX.X) has kind of "stalled out" the past three sessions, compared to the Dow Industrials. The NASDAQ-100 Index (NDX.X) is our "leadership index) if you're a Dow bull and while I want to see further selling in Treasuries to have me looking for more cash to flow into stocks, then I need the NASDAQ-100 to make a break higher.

I must also remember that tomorrow is "quadruple" witching, and I may have some option expiration strikes and open interest to deal with.

Today's action saw a net gain of 2 stocks to a reversing point and figure "buy signal." This has the Dow Bullish % ($BPINDU) rising 6.66% to 30% and still "bull alert" status. Currently, it would take a reading of 62% to achieve "bull confirmed" status, or a reversal back lower to 24% to go back to "bear confirmed."

NASDAQ-100 Index Chart - Daily Interval

Despite a layoff announcement by Applied Materials (NASDAQ:AMAT) $13.91 +2.73% and a less that bullish near-term outlook from Oracle (NASDAQ:ORCL) $11.50 +1.67% on Tuesday evening, bulls manage to keep the NASDAQ-100 closing above its WEEKLY R1 of 1,066 and MONTHLY R2 of 1,070 during this type of "bad news" from some sector bellwethers. I would much prefer a pullback entry point right now, with the NDX near what looks to be a "zone of resistance" from 1,086-1,102. Bulls want continued selling in bonds.

Today's action saw a net gain of 1 stock to a reversing upward point and figure buy signal in the NASDAQ-100 group of stocks. This has the NASDAQ-100 Bullish % ($BPNDX) gaining 1% to 45% bullish (I typed 44% in the above chart, as I was looking at the bullish % chart, and not the actual closing tally for today.) This has the NASDAQ-100 still in "bull alert" status at 44% and it would take a reading of 68% to achieve bull confirmed. For this reason, I like the NDX bullish on a pullback near 1,018, or a break above 1,102. If bulls take a break above 1,102, then a good stop would be under a relative low, marked by today's low of 1,052.02... say 1,050.

S&P 500 Index (SPX.X) - Daily Chart

After Tuesday's action, the broader S&P 500 Bullish % ($BPSPX) reversed back up to "bull confirmed" and as a trader/investor, I do NOT want to be short with this broader bullish % just now reversing up. The SPX closed above its WEEKLY R2 and downward trend and when comparing this against the NASDAQ-100 technical action from last week, bears should be looking for cover. I like the SPX for partial bullish positions, and I am really liking the 853 pullback entry point as the WEEKLY R1 of 853 ties in so nicely as "resistance broken becomes support."

If "war with Iraq" has any type of favorable coalition news, I'm looking for selling in Treasuries to help catapult the SPX above the 883 level and test the correlative 200-day SMA at MONTHLY R2 of 895.70.

Today's close of 875.50 looks a bit "fishy" with heaviest open interest for March at both the 850 call/put strikes. The calls were the winning trade and settlement is tomorrow morning. With the bullish % just reversing up, bulls may hold on further break above downward trend.

Today's action saw the S&P 500 Bullish % ($BPSPX) find a net gain of 10 stocks to reversing higher point and figure buy signals. This has the bullish % rising 2% to 36.80%. Still bull confirmed and well off the December high reading of 68%. It would take a reversal back lower of 30% to have this market "bull correction status."

Today's action in the S&P 100 saw 5 stocks reverse higher and generate reversing point and figure buy signals. This has the S&P 100 Bullish % ($BPOEX) rising to 35% and still "bull alert." It was after Wednesday's trade that this bullish % reversed up to 30% to achieve bull alert status.

As you can see from the above bullish %, all are now in a more bullish phase as demand begins to outstrip supply.

I'm still not OVERLY bullish and awaiting "confirmation" from the broader NYSE Bullish % ($BPNYA), which saw a net gain of 0.46% to edge up to 38.08% bullish. Here we would need a reading of 42% to achieve "bull confirmed" status. The also broad NASDAQ Composite Bullish % ($BPCOMPQ) is edging up and today saw a net gain of 0.59%. This has the $BPCOMPQ at 38.65% bullish and we would still need a reading of 42% to achieve "bull confirmed" status. Both of these very broad indicators are in "bull correction status," but like the narrower bullish % above, are showing some shift toward demand beginning to outstrip supply on a broader scale.

In my own account, I'm not holding bullish positions in all of the indexes, but I'm definitely more bullish the indexes today than I was perhaps a week or two ago as the bullish % charts are showing internal strength. However, I understand that in times of "war" discipline, care and conservatism is probably the best type of account management.

As an options trader, I therefore would prefer to play the indexes bullish at this point, but look to offset some of that bullishness with select bearish trades in individual stocks. Stocks that have poor relative strength and preferably trade BELOW trend and have some downside room to a bearish vertical count, or bearish type of pattern associated with the point and figure chart. I feel it important to have some type of bearish position in the account, just in case the coalition experiences difficulty in Iraq.

Jeff Bailey

Index Wrap Archives