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It only took the initial lifting of the uncertainty about an Iraq conflict to unleash significant buying and short-covering last week. And you thought traders would stand aside to see what happened when U.S. forces got closer to a possibly tougher fight around Baghdad? Wrong!

Saddam is not the only master of the unexpected, as the market never fails to be the mother of all surprises. The buying was institutionally dominated as money managers are forced in as soon as the crowd speculates on victory - buy the fact, sell the rumors or unknown, just as oil bought the scare and sold the reality

The S&P is leading and the Composite lagging so short the Nasdaq, such as QQQ in the 27-28 price zone. There may be some tougher periods ahead and the market has gotten ahead of itself - the indexes are overbought near-term, suggested by the short-term oscillators and bullish extremes in my trader "sentiment" indicator.

Meanwhile, it was a nice week to be long calls - just take some (all) of the profits and run! This is not to say that there will be a sharp collapse, judging by some strong underlying buying interest by the pros. What we have is the common run the market up quick and fast while main street investors stand back from much new buying.

Unlike Thursday, when the market got off to a tough start (the Dow fell 135 points in the morning) there was steady strength all day as there was more certainty about how the U.S. was faring tow days into the strikes. (Thursday's tone was all set somewhat by President Bush's speech on Wednesday night, when he warned that the war may be "longer and harder" than some people have predicted.)

Given the spectacular nature of the strikes again Baghdad, traders found continued encouragement that the war wouldn't be too drawn out. By the week's close, many if not most market participants appeared at least somewhat optimistic that military action was progressing in a favorable way.

Traders are also concerned that there is a turbulent time ahead for stocks and bonds.

Major players in the market have been hedge funds and shorts, as everyone else is probably too scared to do much of anything new. The public will likely take its "usual" 6 months to come back in the market.

Of course, many figure that the recent strong rally signals that the market is too optimistic about the shape the war in Iraq will take. There is the fear that the economy and corporate earnings will continue to stay lackluster once the war is over.

Some thinking in traders I talked to or heard on Friday say that a resounding win in Iraq is already priced into stocks, per a repeat of 1991's Gulf War rally, when stocks rebounded some 18.5 percent in 15 trading after the action started.

So, buyers were getting in ahead of the expected war rally in a classic buy the rumor, sell the news gambit, suggesting that as the conflict winds down, traders will then take profits. The market in terms of its public focus on the Dow average, has gained nearly a 1000 points off its low, up some 13% and represents the longest winning streak since August of 2000.

While many analysts and the other media news talking heads continue to caution that the U.S. economy remains sluggish, many traders were betting that the so-called war rally may be their best opportunity of the year for big gains. And once the guns fall silent, there is a fear that the rally may fade as well. Nobody wanted to be short was the long and the short of it, pun intended.

Gold continued to fall with nearby futures reaching the 327 area, down some $10 from the prior week close at $337 in terms of the nearby COMEX gold futures. Oil prices were the most encouraging news as nearby futures fell sharply last week.

One report I noted last week was that between Tuesday and Thursday of the prior week, investors took out $2.61 billion from stock mutual funds, while adding $1.38 billion to bond funds. Bonds are seen as the dominant "safe haven" - much more so than gold which is a non-interest earning asset. In fact, it costs to store it.

If you are interested in the BIG picture, you may be interested to know that the mother of all market theories has never given a sell signal. Dow theory would expect to the Industrials to go to a new closing monthly low relative to its low before the big 2000 top - the idea being that the Dow 30 should "confirm" the lower lows in the Dow Transportation average to confirm a major bear trend. Anyway, of passing interest per the chart below:

Of course the market has lost a lot since the top 3 years ago but the bigger picture view offers the possibility of a market rebound in coming months - hope springs eternal for my retirement account!

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

The S&P benchmark, the S&P 500 or SPX, did something that we haven't seen in a year by closing above its 200-day moving average which stood at 892 on Friday. Last March, SPX managed to get above this key average for all of 2+ weeks, before the relentless bear market dragged stocks down again.

Stopped out of my first foray into puts, I also speculated that a close or two above 850 would suggest upside potential to 870 at least, where I would drool over the put potential again - WRONG or early on that thought as SPX blasted through 880! And, I thought I was being outrageous by suggesting 870 as a target.

What now market? I can forecast that the market is vulnerable to any bad news given the fact that SPX is now both fully overbought on price and "sentiment" terms - for that I have another chart view below. Bullish sentiment is ahead of the fundamentals if we look at the still-sluggish state of the economy and actual earnings. At 900, the S&P is up to the upper moving average envelope that suggests that prices are extended (a push to far) relative to the 21-day moving average trading "mean". So, whether SPX extends its gains to next resistance in the 912 to 920 zone, or makes a sky shoot to the 930 area, a setback is coming.

S&P 500 Index (SPX) - Daily:

My other key indicator here is the Equities call to put daily volume ratio - as call volume ran more than double put volume at week's end, a clear "danger ahead" sign.

The lead time to a top is typically 1 to 5-days once this kind of extreme is seen. Get ready, get set, to take out some put insurance to the risk that the market is ahead of itself. Baghdad or bust is not going to suddenly mean a booming economy.

Dow Industrial Index (DJX) - Daily chart:

In terms of the Dow, significant resistance or selling interest can be expected at 8800, if not sooner. But just on the chart, and basis the overbought stochastic reading, a sell off is getting closer.

What we do NOT have shaping up is the mother of all technical sell signals - well, at least a pretty reliable one - when a new high is made WITHOUT a confirming higher high (relative to the prior peak) in the oscillator type indicators.

For example, note the picture perfect bullish technical divergence above when, at the 7500 bottom (a new low), but with the stochastic making a HIGHER low. Love those divergences as I wrote about in my last week's Trader's Corner article. See - http://www.OptionInvestor.com/traderscorner/tc_032003_2.asp

If I just did heavy buying of puts or calls when these divergences happen a few times a year - well, I could retire on the Spanish (not French) Mediterranean that much sooner.

Dow Industrial Index (DJX) - Hourly:

The Dow has made a nice move since getting above the "line" of resistance as shown on the hourly chart below. The upper boundary of the steep up trend channel also suggests that resistance will get more significant around 88 on DJX. I anticipate good support at those prior highs - resistance "becomes" support - in the 81-80.80 area. This area would be a good profit target for puts bought on a further extension of the current advance.

I especially would welcome another 200 point gain - like Friday's - to do some new put buying in DJX. Watch, now the market fall apart on Monday! There is this validity to a close above the 200-day moving average not being "confirmed" so to speak UNTIL there is a second consecutive close above the 200-day. Stay tuned.

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

I was being cautious I thought to suggest OEX put purchases in the 440 area (risking to 445), but the bulls had all this pent up fury. Maybe they heard too many gold bugs saying financial assets were finished, done, kaput. 463-465 is where I peg next resistance.

Meanwhile there is an HOURLY non-confirmation in the latest push to a new price peak. This divergence on the 60 min charts, while never as important as such a signal on a DAILY chart basis, is often the early warning that a move has gotten ahead of itself - a bridge too far.

475 is the next BIG potential resistance on the S&P 100 and would represent a complete retracement of the last big down swing. It could happen - unless traders head those warnings by the Commander in Chief that the next or further stages of the Iraqi conflict may not be so easy as the romp through the desert. But all good wishes to the troops for great good fortune.

NASDAQ Composite (COMPX) Weekly chart -

Just a point on the bigger picture in the Nasdaq, as prices at least achieved an upside penetration of the weekly down trendline as you see in our next chart. However, as always, the proof of the staying power of a rally is the ability to pierce the prior rally peaks - in this case that is COMPX above 1467, then 1520.

If the Nasdaq continues to push higher we'll soon see the 8-week Relative Strength Index (RSI) registering an overbought reading at 70. If so and there was a move that took this Index up toward he 1500, take a strategy contrary to that trend by booking call profits and taking out puts. I favor selling into rallies in this way.

QQQ Daily charts - two views:

My next shorting target in QQQ was on a move to and above $27. I still favor this trade as the Q's bump up against the upper envelope line that often has suggested that the Nas 100 tracking stock has reached an area where selling will push the stock back down. Significant technical support can be surmised as occurring on a drop back to the 25-25.50 area. At 28.50, an arrested (stalled) rally is a potential double top.

There are not divergences yet shaping such as a lack of confirmation in volume or things of this sort. All we can say for SURE is that the market reacts more bearishly to negative news when an advancing trend is steep enough to cause the 2-week stochastic or RSI to reach the upper end of its typical range.

My profit objective on long stock and long calls was, it turns out, pretty conservative at 25.5-26.00. Maybe the Q's will reach 29 on this run, but that's the long shot - such as if the recent consolidation was a bull flag or about midpoint in a move.

Leigh Stevens

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