Option Investor
Index Wrap

Bulls won the battle, but there's still a war going on

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We sensed a bullish day for the major indexes in last night's wrap, and while bulls obviously seized a "target of opportunity" and propelled the indexes higher, the bullish side of me, which continues to grow, feels, or at least has the same thoughts as Defense Secretary Rumsfeld when he and others say "the toughest battles have yet to be fought."

Much like the various battles that are taking place in Iraq as coalition forces make progress toward Baghdad, there are small battles being won by the bulls as they recently defended some important levels of support and pushed to opposition back higher.

Wise has been the coalition general that hasn't overly exposed or committed all his troops at once, and continues to make tactical decisions, one step at a time.

In now way, shape, or form, does a bull hang his head after today's trade, but this is no time to be overconfident either.

Did today's trade have anyone thinking that it was almost a replay of the first days of the coalition ground movement into Iraq? When "easy progress" was first made into Iraq, but things seemed to get a little tougher or gains "slowed down" as the session lengthened?

There were a couple of "reasons" for this in my opinion. For one, trading curbs for program trading were put into place at approximately 10:02 AM EST, when the Dow Industrials (INDU) 8,285 +2.66% traded 8,239.86, or 170 points above Tuesday's close.

While some traders think that trading curbs for computerized program trading were put into place to protect bulls against a major intra-day decline, they were also established to protect bearish traders that are short a market.

Considering that trading curbs were put into place just 90- minutes into the session, I thought trading volumes were at both the NYSE and NASDAQ were rather strong. NYSE volume was just over 1.56 billion shares, while NASDAQ reached 1.61 billion. These were the strongest volumes seen since the major indexes achieved their relative highs found on Friday, March 21, when volumes were 1.79 and 1.78 billion respectively.

There were some bullish signs of leadership from today's internals as new highs versus new low breadth reached their highest point for this year. The NYSE reported 118 stocks having traded a new 52-week high compared to 16 stocks trading a new low. I've been hand tracking this breadth since January 6th and it was on that day that the NYSE reported 130:11 for this category. While such bullishness from this breadth indicator marked a top in January, one must remember that the NYSE Bullish % ($BPNYA) was at 52% in January, and after reaching a low of 35.39% on March 13th, this VERY broad bullish % is slowly creeping higher at 41.51% and currently needs a reading of 42% to reverse back up into "bull confirmed" status.

NASDAQ reported 127 stocks trading new 52-week highs compared to 30 stocks trading new lows. Since I started hand tracking this indicator of breadth, it is the strongest I've seen since January6. The next closest comparison is January 9, when 104 stocks managed to trade a 52-week high compares to 27 stocks having traded new lows. Similar to the NYSE Bullish %, the VERY broad NASDAQ Composite Bullish % ($BPCOMPQ) continues to creep up and saw a net gain of 0.83% (approx. 25 reversing upward buy signal out of approx. 3000 stocks) and is getting close to reversing back up into "bull confirmed" status at 42%.

While I don't discuss these two VERY broad bullish % indicators in each night's wrap, I follow them to get a feel for the VERY broad market internals. They too have been creeping up despite last week's declines and I wanted to see how the internals did on a more bullish day. The bullish side of me would have been VERY concerned if the bullish % lost ground on a bullish day like we saw today.

I'm still looking for these VERY broad bullish % to reverse up and really tell us that internal strength is really broadening out, which then depicts a more healthy stock market.

Before I get to the pivot matrix, which saw many of the "early tests" for bullishness achieved in today's session, I want to once again revisit the relative strength comparison between stocks and the 10-year Treasury Bond's Price ($UST).

There were some positives that took place today. In a recent update, I showed a relative strength chart of the Dow Industrials (INDU) vs. the 10-year Bond's Price ($UST). I checked the RS chart of the Dow, SPX and NDX against this bond and they all look pretty much the same. Tonight, lets look at the S&P 500 (SPX.X) relative strength chart versus the 10-year Bond's Price ($UST).

The "observation" made is that we did indeed see further shift take place FROM bonds INTO equities, but there's still work to be done.

Relative Strength Chart - SPX vs. $UST

All I'm doing here is monitoring the relative strength of the SPX versus the 10-year Treasury bond. The RS "sell signal" is an alert that bonds were finding a more meaningful amount of buying in recent weeks, while today's reversal back up into "X" shows there was definitely a shift away from bonds and back toward stocks. However, for it to really be MEANINGFUL, equity bulls want to see a RS "buy signal." A RS "buy signal" means that a previous levels of bullishness in stocks versus bonds is being seen. Today's RS reversal back up into X is a positive for equity bulls and the bullish side of me would want to see a RS "buy signal."

The reason I show the above chart of stock versus bond price strength is that it is difficult to really try and say... "stocks are strong when ten-year YIELD goes above "X-YIELD level." The RS chart of stock/bond gives us a bigger picture of things. I would use the above chart to NOT be 100% in stocks at this time, or 100% long the indexes in my account!

Let's take a look at the pivot matrix for tomorrow.

Pivot Analysis Matrix

"Pink boxes" at the OEX WEEKLY R1 and NDX WEEKLY R1 show both indexes trading very close to these two levels. NDX bulls that were holding long BEFORE this morning's open were beside themselves at NDX 1,066. What "stunk" was that this morning's gap higher at 1,047 from yesterday's close of 1,022 for new bullish entries didn't get the full 40.8-point gain in today's trade. However, this is "only fair" as it took some "guts" to hang tough at the WEEKLY S2, but those "guts" paid handsomely today.

Call me "chicken" if you will, but if I held a FULL bullish position in the QQQ/NDX by today's from WEEKLY S2 or WEEKLY pivot, I'd protect some of those gains with both the NDX and OEX almost pegging their WEEKLY R1s.

As it might related to the previous relative strength chart of the S&P-500 and 10-year bond, I see correlative YIELD resistance in the matrix at 3.984%. ANY index trader that is eyeballing the March 21 index highs or higher wants the 10-year YIELD to get above 3.984% as its March 21 YIELD high was 4.117%.

Now, today's gaps higher in the Dow DIAMONDS (AMEX:DIA) $82.75 +2.42% and S&P Dep. Receipts (AMEX:SPY) $88.12 +2.41% are going to "throw" their DAILY pivot levels out of whack with the underlying indexes themselves (the lows are higher in the tracking stock than the index), so I would tend to focus more on the underlying index levels themselves. NASDAQ-100 (NDX.X) and QQQ should be pretty close.

One thing to have an eye out for tomorrow is this. the NASDAQ- 100 achieved it WEEKLY R1 almost to the penny. The OEX came close. After this happened, I set an upside alert at today's highs for alert to further strength, in an effort to monitor and index for further LEADERSHIP. I'll be doing the same tomorrow.

I really feel that you, the trader/investor/subscriber, have been very patient with things and are to be commended. I get a few "you're always pointing out resistance" comments from traders and "it keeps causing me jitters."

Fantastic! Stay on your toes. But if any of us think that a 2- year decline in equities isn't going to find 2-years worth of resistance levels, then we need to re-think things. Either that, or some of us bulls need to wait until the indexes break to new 52-week highs.

As time passes though, and should the major indexes begin to clear their December/January highs, then there will be greater time distance away from resistance.

Heee, heee, heee... laughs the bear? The October lows aren't getting any closer, so there shouldn't be too many bears laughing at this point.

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

"Things change fast" and a 6-session decline (since 03/21) has been nearly erased in the past two-sessions. In my opinion, the SPX should NOT trade back below 840 in this bullish run. Bulls should be prepared for near-term resistance at WEEKLY S1 of 887 and more formidable resistance at 900, especially if that level were traded tomorrow. 900 would be correlative resistance at DAILY R2 and MONTHLY R1 along with upper Bollinger band (21-day SMA / 2 Std. Dev). I've added a "bullish resistance trend at 940, just in case the war effort in Iraq goes VERY good for coalition forces.

The S&P 500 Bullish % ($BPSPX) saw a net gain of 1.6% or 8 stocks to reversing upward point and figure buy signals today. This has the bullish % growing to 43.6% and highest reading for this indicator since the lows. Internals are stronger than they were at SPX 895!

Dow Industrials (INDU) - Daily Intervals

As previously disclosed, I held a bearish trade from approximately Dow 8,150 and bullish trade on Dow pullback near 8,050. Today's "gap" higher in the Dow really came at about Dow 8,200. That has me posting in the market monitor that I would close out the put trade on a pullback near 8,150, but the pullback never came. As such I closed that trade out on break higher of 8,266. In my mind, if I was looking to close out a bearish trade at 8,150, then I've got to think that's now a level to buy any weakness, weakness that may not come anytime soon. I'd expect some technical resistance near WEEKLY R1 of 8,405 and correlative 200-day SMA tomorrow. If things continue to build bullish in Iraq overnight, I'm not ruling out bullishness above 8,405.

Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull alert" at 40%. Some "tests" for strength off the bottom might be a stock like Alcoa (NYSE:AA) $20.10 +3.55% as it relates to a Dow component that might be in a position to generate a reversing upward point and figure buy signal on a trade at $22. We can sense from the previously discussed new highs/new lows indicators that there is strength at the top of things (stocks that have been at/near 52- week highs), but a real healthy market also needs strength from the bottom.

NASDAQ-100 Index Chart - Daily Interval

"Whew!" says a NASDAQ-100 bull. It goes without saying that there was strength above the WEEKLY S1 of 1,035.60. It is "suspicious" that the NDX traded right to its WEEKLY R1 of 1,066 and couldn't really get through that level for the most part, but a move above that level has 1,074 from our WEEKLY retracement (blue) in play and I see some correlative resistance in play as it relates to last week's trading.

If I don't see some selling in Treasuries early tomorrow morning, a bull that "had the guts" to buy this volatile index at/near 1,025, I'd error on the side of caution and protect a gain in the options. You can tell I'm more "conservative" toward this one and why I didn't "have the guts" to buy it at 1,025 and preferred the stodgier Dow Industrials.

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 1 stock to a reversing upward point and figure buy signals. This has the bullish % rising to 50%.

I'm running way late again on tonight's index wrap, but OEX is a pair with the S&P 500.

A quick update on the S&P 100 Bullish % ($BPOEX) had it seeing a net gain of 1 stock to a reversing upward point and figure buy signal. This has the bullish % moving up to 44% and still "bull alert" status.

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