Option Investor
Index Wrap

To cold, to hot, just right

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The major indexes finished fractionally lower after what has been somewhat of an emotional roller-coaster for traders the past seven sessions, when just over a week ago, stocks had cooled off on a pullback from their mid-March highs, only to have gotten a little "hot" at Monday's open after coalition forces made progress inside of Baghdad, to now trade basically "unchanged" in today's session after Monday evening's (U.S. time) bombing of a residential area of Baghdad that U.S. intelligence sources said may have held Saddam Hussein and two of his sons.

While stocks attempted a mid-afternoon rebound today, the bond market just wouldn't cooperate with equity bulls, as Treasuries remained rather defensively pegged near their session highs. The 10-year June futures contract (ty03m) $114'080 +0.49% gained 18/32 to close just under its rolling lower short-term 21-day SMA of $114'288, but strong enough to recapture a close back above it still trending higher 50-day SMA of $114'080, as if to finish its session "just right" and between a short and intermediate-term time frame.

While I was out of the office yesterday and didn't get a chance to follow the markets much after the first-hour of trade, one of the first things I did this morning was look to see if there had been any type of relative strength shift between the major indexes and the 10-year Treasury ($UST) with our point and figure relative strength chart. I found NO new relative strength buy signals as it relates to Monday's close (p/f RS charts are updated at the day's closing value comparisons).

While Monday's closing comparison of the 10-year cash bond ($UST) and indexes didn't generate a relative strength "buy signal," it is notable that the VERY broad NYSE Bullish % ($BPNYA) reversed up to "bull confirmed" status as it saw a net gain of 1.6% or approximately 34 stocks (according to Dorsey/Wright and Associates) to reversing upward p/f buy signals. This action now has all of the bullish % charts in a "bull" phase and has the VERY broad NYSE Bullish % ($BPNYA) from www.stockcharts.com following Thursday's upward reversal in the NASDAQ Composite Bullish % ($BPCOMPQ).

From here on, traders now begin providing some focused attention on the narrower bullish %, which were the "first" to reverse up into their bullish phases. For instance, it was the Dow Industrials Bullish % ($BPINDU) and NASDAQ-100 Bullish % ($BPNDX) (usually the first two bullish % to reverse up then down), that reversed up into "bull alert" stages on March 17 from 9.99% and 34% to now stand at 43.33% and 57% bullish.

Let's take a quick look at the pivot matrix for tomorrow. As noted in today's 11:00 AM EST, both the SPX and OEX traded their MONTHLY R1s on Monday and are colored blue. The NASDAQ-100 Index (NDX.X) 1,046.30 -0.6% and NASDAQ-100 Tracking Stock (AMEX:QQQ) $26.06 -0.11% both traded their WEEKLY pivots today to the downside today, after they both, along with the other indexes traded their WEEKLY R1s to the upside on Monday.

Pivot Analysis Matrix

In "green" I've highlighted support levels where I'd look for firming under a continued pullback from Monday's highs. During today's trade, the bullish side of me for the indexes really never got bullish as Treasury YIELDs remained near their lows of the session and at 02:22:05 PM EST, made note of this just after the Dow Industrials (INDU) 8,298.92 -0.01% had just made a session high near 8,343. No big deal here, but Treasuries were a bit too defensive in today's trade to be buying bullishness.

In Friday evening's market monitor, I was looking at 10-year YIELD support from 39.03-39.09 and I see the 39.09 level showing up again in tomorrow's DAILY S1. For stocks to continue to see some bids on pullbacks, I would think equity bulls want to see the 10-year YIELD ($TNX.X) stay above the 3.90% level.

In "pink" I've highlighted some of tomorrow's DAILY S2 levels. These pink levels have some technical significance or correlation to what we will see in tonight's bar charts.

10-year YIELD Chart - Daily Interval

There was quite a bit more "bullish" attention in the bond market today and not all of it was necessarily viewed as a "defensive" posture as traders may have been positioning themselves ahead of a Treasury auction in shorter-dated maturities. Still, today's buying in Treasuries from their open and continuation below a little zone of YIELD support from 39.51-39.54 most likely kept institutional bulls on the sidelines in today's trade. I'm looking for some Treasury selling to be found at the WEEKLY pivot of 39.09 (3.903%) with some good near-term technical YIELD support at crisscrossing trends.

Now... I've made some comments on the above YIELD chart as it relates to the NASDAQ-100 Index (NDX.X). On Thursday, NASDAQ-100 component PeopleSoft (NASDAQ:PSFT) $15.13 +0.86% and today, RF Micro Devices (NASDAQ:RFMD) $5.33 -11.9% warn on Q1 earnings. This has perhaps built in some "caution" among technology bulls that the "beta trade" of buying high volatility stocks ahead of a "victory in Iraq" having the NASDAQ-100 begin to look more like the 10-year YIELD than the Dow Industrials, SPX and OEX.

Here's a chart of the NASDAQ-100 Index (NDX.X) and how I'm currently trying to "tie in" some downside support with the 10- year YIELD at its DAILY S2 and the NASDAQ-100 Index (NDX.X) and NASDAQ-100 Tracking Stock (AMEX:QQQ) $26.06. While I'm looking for some "backfill" in the NASDAQ-100, I'm still viewing the 1,018 level has firm support.

NASDAQ-100 Index Chart - Daily Intervals

While I didn't get to "watch" the NDX trade much on Monday morning, I did look at some intra-day charts and the "overlapping" resistance of 1,087, seemed to be an early morning point of gravitation that the NDX couldn't progress higher from. When 1,081 was broken to the downside at 12:10 PM EST, that level served as a "lid" or resistance for 2.5 hours and the NDX fell from there. I think the NASDAQ-100 got a little "to hot" on Monday's open considering the PSFT warning from Thursday evening. With oscillators more defensive near-term, it may be a self- fulfilling destiny for the NDX and QQQ to fill their gaps from last week and regroup/consolidate between 1,033 and 1,018.

Internals from the NASDAQ-100 Bullish % ($BPNDX) remain bullish. Monday's action saw a net gain of 4 stocks to reversing upward p/f buy signals and today's action saw no net change. Still "bull alert," but bullish % growing to 57% and a new high on this reading since reversing up to 40% on April 8th.

It is interesting to note that NASDAQ-100 heavyweight Microsoft (NASDAQ:MSFT) $25.58 +1.62% bucked the NASDAQ-100 trade today along with the GSTI Software Index (GSO.X) 103.29 -0.91%. While never sure, this action may hint that institutions are perhaps looking for some "predictability" among technology earnings along with some liquidity that MSFT has on a daily basis. MSFT was today's most actively traded stock (54 million shares) in a rather "light volume" NASDAQ session of 1.2 billion shares.

S&P 500 Index Chart - Daily Interval

Compared to the NDX, the SPX traded above its March 21 relative high on Monday, but couldn't hold above overlapping resistance of 895. With the 10-year YIELD below its WEEKLY pivot at today's close, I would think the SPX vulnerable near-term to pulling back into the 870 level and WEEKLY Pivot. This is also tomorrow's DAILY S2. If the NASDAQ-100 Index (NDX.X) "fills its gap" to the downside, that should have a "negative" impact on the SPX and create the pullback.

Now... on Friday, we'll get March retail sales at 08:30 AM EST and the S&P Retail Index (RLX.X) 287.55 +0.03% held tough. I've seen some slightly more "bullish" forecasts of 1.1% from some economists in recent days for retail sales (ex-autos), which are above market forecast for a 0.6% gain. This might be a "kicker" to the bullish side for the SPX and OEX that the NASDAQ-100 might not necessarily have. A patient bull might look for an SPX pullback just under 869 into Thursday, using the "zone of support" from 860-861 to leverage a bullish trade into the retail sales numbers. Both banking indexes BIX.X 274.4 +0.56% and BKX.X 748.4 +0.73% held marginal gains in today's session and helped keep the SPX and OEX near unchanged levels for the better part of the session.

Today's action so no net change in the broader S&P 500 Bullish % ($BPSPX). Monday's trade saw a net gain of 15 stocks to reversing upward point and figure buy signals and has this market still "bull confirmed" and growing to 48% bullish.

The narrower subset of the S&P 500 Bullish % had the S&P 100 Bullish % ($BPOEX) seeing a net gain of 3 stocks to reversing upward point and figure "buy signals" on Monday to 47% bullish. Today's trade saw the OEX Bullish % remain unchanged. Still "bull alert" at 47% and it would take a reading of 62% at this point to achieve "bull confirmed" status.

Dow Industrials Chart - Daily Interval

Monday's trade saw a "matching high" in the Dow Industrials to its March 21 relative high of 8,522. Citigroup (NYSE:C) $37.61 +1.04%, JP Morgan (NYSE:JPM) $25.99 +1.36% are both heavyweight components of the KBW Bank Index (BKX.X). Home Depot (NYSE:HD) $26.43 +0.37% and Wal-Mart (NYSE:WMT) $54.56 +0.44% are "heavyweights" in the S&P Retail Index (RLX.X) as well as the Retail HOLDRS (AMEX:RTH) $74.05 -0.06%, which is trying to hold a close for the second-consecutive session above its 200-day SMA of $73.99. Dow, SPX and OEX traders may want to keep an eye on the retailing indexes for the next week or so. Based on the 200-day SMA they are showing some longer-term hints of trying to get bullish and "consumer discretionary" groups like retailing can have impact on these three major indexes.

On Monday, shares of Alcoa (NYSE:AA) $21.57 -0.27% traded a reversing upward "double-top" buy signal at $22. This was the one stock that added a net gain to the Dow Industrials Bullish % ($BPINDU) of 1 stock on Monday, which has now reached 43.33%. I had put together a very simplistic "inchworm" scenario in Friday's market monitor at 01:10:29 PM EST, where I characterized AA as the "tail" of the inchworm that a Dow Industrials bull wanted to monitor for some type of "anchoring" type of activity, as it was a "weak" component, that still hadn't violated its October lows nor its March lows when the various bullish % indicators had reversed up.

One reason I mentioned the stock is that institutional bulls looking for further exposure to a market where some of their stronger stocks have really moved higher, will start picking away at some of the "weaker" stocks that are still holding above some longer-term support levels. While AA had very few "positive" comments, the news from this very economically sensitive and cyclical stock did find some buyers on Monday.

The "ability" for the stock to find some buyers is encouraging for Dow/SPX and OEX bulls as this is perhaps "one of those stocks" that is a "deep cyclical" that would be expected to be an early benefactor of an economic upturn. Please don't take this as a "buy recommendation" on AA, but an observation of a "weaker" cyclical that may be garnishing some longer-term bull's attention on thoughts of economic recovery.

Jeff Bailey

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