Stocks traded in a narrow range on very low volume at week's end, as uncertainty and trader anxiety reigned about the course and length of the Iraqi war and its ultimate outcome on the U.S. economy. What a difference a week makes!
THE BOTTOM LINE -
This market could be the kiss of death for those who try to play index options unless volatility jumps due to some dramatic event such as an unleashing of WMD by Iraq or a widening U.S. conflict with the rest of the Arab and Muslim world.
FRIDAY'S TRADING ACTIVITY -
Oil service stocks rose in the regular session. However, after the close, giant oil services stock Halliburton (the company that Vice President Chaney used to head) fell on reports that the company is out of the running for a big contract in the post-war rebuilding in Iraq. The stock I love to name, Boots & Coots rallied some 35% on news that it will not file for bankruptcy - maybe they have some oil wells to put out and this expertise (and danger) ain't cheap. The sector investors love to hate, with reason - the Airlines - fell some 2.5 percent.
There were some gains in gold and crude oil - the yellow metal rebounded $5.50 on the week and crude oil price jumped some 12%, after a big down move the week before - when there was the expectation that global oil supplies would not be much affected by the war being waged on the country holding the 2nd biggest global oil reserves. Crude oil finished just over $30 a barrel.
Last week investors and traders were hit with the realization that there could be a prolonged conflict, which may well cause consumers and business spending to decline significantly. The capitulations that were hoped for by Iraqi forces were not materializing, nor were (this time) the Shites in the south of the country revolting against their central government.
U.S. officials appeared somewhat on the defensive by week's end as they maintained that their offensive battle plan and timetable was on track and would result in the goals of regime change and disarmament.
There was significant media play given to a U.S. field general who said that the unexpected tactics used by Iraqi forces and Muhaajeen irregular fighters had complicated efforts to move supplies up from the south and was slowing the campaign. The Joint Chiefs chairman had to get on the horn by holding a press conference to say that the military was on schedule with its invasion plan. It seems accurate to say, as one media military advisor stated: "war is a gamble". Couple this with our regular throwing the market dice and its double trouble.
On the plus side, the market has not given back a lot of the big rebound that occurred off the low - some 1100 points in the Dow, of which there has only been about a 1/3 retracement. It seems that the market wants to look beyond this war to the resolution of a post-Saddam world when the Administration and business leaders will want to get on with their economic game plans.
For now, the market is captive to the war. U.S. forces have more or less ringed Baghdad and some humanitarian relief supplies are starting to come into the southern deep water port (Umm Qasra) that is under U.S./British control.
ECONOMIC & BUSINESS NEWS -
Commerce also said that personal income rose by 0.3% - this report was above economists' expectations for a scant 0.1% growth - not for nothing do they call it (economics) the dismal science. Well, its true that there's not much economic cheer of late. And real disposable income fell 0.2%, the biggest drop in 7 months.
OTHER MARKETS -
MY INDEX OUTLOOKS -
S&P 100 Index (OEX) - Daily chart:
Key OEX resistance is first, 448-450, then in the 460 area - first resistance being at the 200-day moving average, the second being represented by the top of my upper trading (envelope) band. I don't think that much progress will be made to the upside. It takes buying to get em up, but only a small amount of selling and buyers sitting on the sidelines will cause the market to drift lower.
The chart above - the most bullish of my indicators is the big jump in equities put buying that occurred on Friday, putting my call to put volume ratio down into a "bearish extreme" reading. This "sentiment" indicator functions as a signal for another rally at some point, although the lead-time for this can be 1 to 5 days. Sometimes bearish sentiment goes high and stays there without the contrary move (up) happening, but this is the exception rather than the rule.
The 14-day stochastic model got to an extreme and is now on a bearish crossover signal, showing that momentum is now more on the downside. This indicator can get to a more neutral reading or back into a oversold condition by lower prices OR a sideways drift - or, a combination of both things.
I have no specific new trading recommendations, except to sell into (buy puts) on rallies into the aforementioned resistance areas. If long puts currently, exit is suggested if OEX gets to the 430 area and holds this level - 420 is the next technical support and I would be even more keen to take put profits in this area.
S&P 100 Index (OEX) - Hourly chart:
What I note with the hourly OEX chart above is that the index hasn't yet fallen back into its broad hourly downtrend channel, as I measure it currently - I expect it will, and that the Index will retrace of its recent rally, such a common 50% of it - to the 428-430 area or to around 420, a 62% retracement.
The ability to hold above 430 this week would keep the correction shallow and "set up" the next rally, such as when better conditions start to prevail in our wartime situation.
Note on SPX (chart not shown) - S&P 500 near support is at 850 with the most key technical support looking like 840 in the S&P 500 index - this area looks like it will offer support on any decline, but Iraq is the wild card. Any events such as the unleashing of any terror weapons of mass destruction (WMD) could be more negative than what is suggested by the current chart in terms of how it might impact the market.
Nasdaq 100 Index (NDX) - Daily and Hourly charts:
The recent decline "set up" after the bearish price/oscillator divergences were seen on the hourly charts per the lines sloping in the opposite direction on the right hand chart above. At least now, both of the shorter-term stochastic models are back down to oversold extremes - not so of course on the bigger picture 14-day slow stochastic. Technical support on the NDX is at 1040 - then in the 1020 area, where there is some significant chart support.
1028 is the level on the 21-day average currently and is an average I keep an eye on but 1020 looks like the more significant technical support. Two consecutive closes below 1020, suggests that NDX may again get to the 1000 level, which is at least a psychological area of significance. The even 100 and 1000 levels are generally important.
Just to keep the bigger Nasdaq picture in mind, I look at the long-term monthly charts with the semi-logarithmic (equal percent moves are equal on this scale) scale to see that all the important indexes are at long-term support or back to their long- term "rate-of-change". Important trendlines like this tend to see more than one "touch" to the line.
Nasdaq 100 Index (NDX) - Monthly:
QQQ charts - Daily and Hourly:
As usual the QQQ hourly history traces out the key chart points in good fashion due to the big participation in the Nasdaq 100 tracking stock. My last suggestion on the Q's was to short the stock above 27. Buy it back in the 25-15.25 area unless there is a decisive downside penetration of this area, in which case 23.75-24.00 looks to be support and the buy-back point.
I will be watching for when the daily stochastic (length = 14) indicator gets back to the lower extreme. When the market gets oversold, just as when it gets overbought, reactions to news events tends to cause bigger moves at that point.
Myself, I would just as soon sit on the sidelines for a while longer and take a time out as I remember the "war is a gamble" maxim. Especially so, given the fact that I prefer to take "normal" earnings and economic-driven risks in trading the indexes.