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Correlations abound for institutional buying

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Correlations abound for institutional buying

In Friday evening's market monitor at OptionInvestor.com, we looked at week-to-week pivot matrix comparisons and thought that institutions might have their computers turned toward buying in order to replenish some drawn down inventories of stocks after a bullish run last week.

A war effort that didn't appear as close to an end as some had perhaps thought found sharp reversals in the indexes on Monday, but buyers were found today as the major indexes all closed very close to their weekly pivots. After reviewing some of our comments from Friday evening's market monitor, I have the impression that institutions do have the computers turned on and accumulating stock on weakness. Perhaps something an index trader looks to do this week as market internals continue to improve.

Here's a quick look at the past two week's pivot matrix, along with this weeks pivot matrix and levels. Correlations that used to be resistance, which were broken to the upside some "overly" bullish trading, now line up as support. For those that believe institutional computer programs are running the pivot analysis formula, then it might make sense (at least I think it does) for the computer switches to be more to the "buy side" and today's action hints that there may indeed be some institutional bulls nipping away at stocks after yesterday's drubbing.

Recent 2-weeks Pivot Matrix along with current WEEKLY matrix

Friday evening, I wanted to "step back" a bit and look at the WEEKLY pivot levels to see if any of the levels were duplicated in this week's matrix. It "made sense" to me that the powerful move higher last week (3/17-3/21) that took many of the indexes past their WEEKLY R2 would have some institutional computers at least bidding some stocks on a pullback. The "first" level I looked for support was this WEEK's (3/24-3/28) WEEKLY pivots, which correlated closely with last WEEK's R2's.

Yesterday's trade did take the major indexes back below this WEEK's pivots, but its today's close in the major indexes and partial recouping of Monday's losses that hints to me there's some institutional buying taking place as if computers are trying to get some inventory squared as bullish inventories were most likely drained after last week's bullish move higher.

In this morning's market monitor, I thought it difficult to be establishing new bullish positions this morning, especially for those bulls already holding 1/4 or 1/2 bullish positions. I still like 1/4 or 1/2 bullish positions in an account at this point with 2 or 3 month expiration, but to get me further interested to add to a position, I'd want to see the indexes pull back a little further. Preferably, a bull looking to further leg into some bullish positions would like to see a "gradual" decline, and not the torrid drop like that found on Monday.

Let's take a look at tomorrow's DAILY pivot matrix along with the WEEKLY and MONTHLY levels, but suffice it to say, I'm looking for some "formidable" support to be present at the WEEKLY S1, with potential challenges of the WEEKLY R1's. Make no mistake. The markets are moving on just about ever word out of Iraq at this point, with rumor, fact and anything else driving action. Still, there are some very strong "technicals" in play at the WEEKLY S1's where a bull should find some confidence in entry points.

Pivot Matrix (DAILY-WEEKLY-MONTHLY)

The major indexes show a rather "mixed close" around this WEEK's pivot levels. The NASDAQ-100 Index (NDX.X) 1,066 +1.85% had been the "leadership" index into last week, but as previously noted, began to stall out with the Dow Industrials (INDU) 8,280 +0.79%, S&P 500 (SPX.X) 874 +1.2% and S&P 100 Index (OEX.X) 444 +1.15% playing some "catch up."

It's the "violation" of the 1,069-1,070 level on Monday and decline to 1,045 yesterday in the NDX, which has me currently thinking the indexes are vulnerable to a pullback to their WEEKLY R1s at this point, but I'm carrying a bull's torch as the bullish % indicators showed no deterioration after Monday's trade and market internals continue to show sign of improvement.

NASDAQ-100 Index (NDX.X) - Daily Interval

I view the 1,040 level a good "pullback" bullish entry point, as this is a level that showed up as resistance in week's prior, that now shows up as support in the WEEKLY matrix. It was about three week's ago that the 1,020 level was a level that bears needed to see hold resistance, which didn't, that saw the NDX surge to the recent relative highs. It's "interesting" how the 1,020 level is represented in the WEEKLY retracement and perhaps become a "pivot" on a much larger scale. The NDX found some buyers today and was able to hold above yesterday's low. If not for this weekend's developments in Iraq and a more formidable defense being found by its military, I hadn't ruled out a move to the 1,151 level should the coalition have been able to take Baghdad by the end of this week. However, that doesn't seem to be a reasonable scenario at this point. While I really have no ability to forecast a coalition effort, I would view this week's "MAX gain" as being 1,120 and a "MAX decline" being 1,020. This would have me "comfortable" in holding a 1/2 bullish position at current levels, but the uncertainty of war and current range within the levels would have to have cheaper price levels to get me to further build a position.

Today's action saw a net gain of 1 stock to a reversing upward point and figure buy signal in the NASDAQ-100 Bullish % ($BPNDX). This is in addition to Monday's net gain of 1 stock to a reversing upward point and figure buy signal. In my minds eye I can envision several point and figure stocks of charts that probably saw some columns of O develop on Monday, but no "sell signal" being given, with some reversing back up into a column of X today. Current status is "bull alert" at 49% and we'd need to see a reading of 68% to achieve "bull confirmed" status. It was on March 14th that this indicator turned "bull alert" status, which I would benchmark to the 1,020 level. With the bullish % still showing gains, I'm not currently looking for bearish trades and would only trade bearish with a very short-term time horizon at this point.

S&P 500 Index (SPX) - 5-point box

In our March 18 Index Wrap we tried to look back at history and one thing we noted was a 6% pullback in the OEX (since SPX moves pretty much the same, using it here too) and while history is no guarantee as to being a guide to the future, a 6.06% pullback from 895 on the SPX p/f chart would put risk back near 841, which is a "zone of support" on the p/f chart.

While the "time line" discussed as it relates to "Operation Desert Storm" isn't aligning perfectly with the 6% pullback in the OEX/SPX after US-lead troops had amassed at the Kuwait border, we could be seeing the 6% decline RIGHT NOW as coalition forces begin surrounding Baghdad on what could be a "final assault" on Saddam Hussein's government forces.

I'm looking for formidable support in the SPX from 855-845. Bulls should trade within their comfort zone to compensate for volatility and war-related news here, but if bulls are comfortable with 1/2 bullish position, then I'd hold tough here.

S&P 500 Index Bar Chart - Daily Interval

I showed the above chart of the S&P 500 (SPX.X) in this morning's market monitor, but wanted to show it here with both the MONTHLY and WEEKLY retracement overlaid. The p/f chart shows the "triple-top buy signal" at 855, and we can perhaps see how the WEEKLY S1 of 850 comes into play as a past level of resistance that should now serve technical support on a pullback.

It is the "uncertainty" of war that only has me one-half bullish positions still so that a bull can "make it through" some volatility and not succumb to emotions. Still... every trader has a comfort level, but as we saw this weekend, a little difficulty or "bad news" on the war front can have some sudden impact on the trade.

Today's action saw no net change in the S&P 500 Bullish % ($BPSPX). Despite Monday's declines, the S&P 500 Bullish % actually saw a net gain of 1 stock to a reversing upward p/f buy signal. No big changes from the internals the last two sessions and after reversing up into "bull confirmed" status after last Tuesday's trade at 34.2%, current reading is 41.4% bullish.

S&P 100 Index (OEX.X) - Daily Interval

Current bullish target for bulls would be the WEEKLY R1 of 468.50 and the 19.1% retracement of 466.75 from our WEEKLY retracement (blue). Current level of trade is right at the WEEKLY pivot and gives me somewhat of a 50/50 feel for new bullish entries and a pullback into the WEEKLY S1 of 432 and MONTHLY 38.2% retracement of 430.8 puts the OEX in a "zone of support," which was the "zone of resistance" that bears didn't want to see broken two weeks ago. Bears that may have been a bit complacent at the 435 level and have seen the recent high should be looking to cover on weakness and that's where I think a good bullish entry point for new positions can be found.

Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and current status remains "bull alert" at 43%, which is the relative high reading for this indicator since achieving 43% after Friday's session. When I look back to this bullish % reaching a recent low of 21% on March 12, when the OEX traded what is now its WEEKLY S2 of 408, I would view a bullish % reading back near 70% (if achieved) to have the OEX capable of 480.

Dow Industrials Chart - Daily Interval

The Dow Industrials (INDU) recouped about one-third of yesterday's losses when it was trading at its best levels of the session and was a difficult bullish trade for me to make today. I like the Dow Industrials as bullish, but again prefer just 1/2 position at this time. I do like a pullback entry point of 8,050, which would be just above the overlapping WEEKLY S1 of 8,026 and 38.2% retracement from our MONTHLY retracement.

At the close of trading Friday, I will recalculate the MONTHLY pivot analysis levels, so that we can try and get some further levels of resistance to correlate with. I've done a "quick" check and pretended that the current month's high and lows are in for the Dow and used today's close to get a feel for things. I further like a 8,050 entry point as a preliminary MONTHLY pivot analysis would have the MONTHLY pivot at 8,072.

Today's action saw the very narrow Dow Industrials Bullish % ($BPINDU) unchanged at 40% bullish. Still "bull alert" status here.

A stock that Dow Industrials traders may want to keep an eye on as a "key stock" near term is shares of American Express (NYSE:AXP) $35.26 -2.99%. On Friday, this stock traded $37.00 and its point and figure chart generated the "bearish signal reversed" pattern. This pattern is characterized by a series of lower highs and lower lows, which is "quickly" reversed to the upside. The supply/demand pattern is that of a systematic series of lower lows and lower highs, which can create complacency among bears that systematically have been shorting the stock with "predictable" success as they work the stock lower, but the "quick" reversal up can trap complacent bears into a powerful short-covering rally.

Dorsey/Wright and Associates classifies this stocks as a "financial," which has this sector bullish % still "bull correction" status at 45.4% bullish and a reading of 48% would have the sector reversing back up into "bull confirmed" status. My reason for mentioning this stock as an observation stock right now is to perhaps try and get a feel for how some bears are trading right now in a stock that is very "consumer-related" as to spending habits. The stock was a Dow laggard today, but I'd monitor the stock for another sharp rebound from today's declines as it pulls back in and tests it trying to flatten out 200-day SMA of $34.95 (today's low was $34.95).

As an observation stock for index traders, especially Dow, SPX and OEX, I'd view the holding of the $35.00 level near-term as bullish, or a rebound from today's decline also bullish. A more bearish move would be for the stock to continue to suffer decline after triggering one of the most bullish point and figure chart patterns from Professor Davis' study of probabilities.

Jeff Bailey

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