Option Investor
Index Wrap

Mother of all Battle Plans

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This past week brought success to General Tommy Franks' battle plan (following the guidelines of Secretary Rumsfield no doubt) as the Iraqi regime collapsed faster than most dared hope. And, as Vice President Chaney said, it was done contrary to the advice of the retired military folks "embedded" in TV studios - who were second-guessing our relatively small number of troops in country. For battle, the numbers involved led to a brilliant execution - for keeping order it was uncertain by week's end if the generals had the right forces ready to roll. Well, if this is the worst thing to worry about currently, not so bad.

For the markets, a big uncertainty is over, which could be bullish if only now the economy and earnings revive. General Electric (GE) executed pretty brilliantly as the company recorded a 20% increase in earnings (to $3 billion, versus $2.5B a year ago) last week to 30 cents per share, versus 25 cents last year. However, consensus estimates were for 32 cents.

Nevertheless, I thought it remarkable that 8 of 13 GE business groups recorded double-digit earnings growth. Well, the house that Jack built is probably an exception to what corporate America in general is doing or will be reporting in coming weeks/months - especially out in techland. Hey, I now live near the heart of techland - Silicon Valley that is. I know traffic is well under what it was a year, or two, ago. I'll let you know when the traffic jams get as intense as they were - hopefully NOT for the sake of my sanity on the way to San Fran.

THE BOTTOM LINE -
The market remains stuck in trading range on a near to intermediate-term basis, with the major trend still down. It's still a bear market unless prior rally highs are exceeded. The sideways move going on for some weeks now could be basing action of a bottom. However, so far there's no telling if the indexes are consolidating prior to an eventual breakout above the key 200-day moving average in the S&P and Dow or to a further sustained uptrend in the Nasdaq that would take out its double top.

For index traders, there will likely be some price swings large enough to exploit profitably - however, absent the war news and before a significant economic upswing, there may be less of the bigger moves. I'll be waiting for the larger overbought/oversold extremes according to the daily charts or on the hourly charts over a 2-3 day period.

FRIDAY'S TRADING ACTIVITY -
The big news - we consumers aren't as "dead" as the pundits were thinking. I know I still like spending those pieces of paper with pictures of dead presidents on them. (I have to confess, that this is what my old PaineWebber colleague Art Cashin used to say all the time about spending money.)

There was sharp first hour run up on the news from the Commerce Dept. that said that U.S. retail sales rose 2.1% in March. The rally looked like it was driven by short-covering, because the gains quickly faded when more buyers with deeper pockets failed to step in. It was all on light volume too.

Tech stocks lost more than the Dow (off by only 2 tenths of a percent) as the Composite fell to 1358.8 - the widely followed SOX index (Semiconductors) fell the most, at off 1.5%.

March retail sales was significantly stronger than economists' estimates. A big worrisome overhang in the market was something like what if the CONSUMER stops spending because he or she is worried about something like losing their job or WAR in the oil patch. Never underestimate the propensity of Americans to spend spend spend. (Well, we do have a lot of nifty things to buy here and their all from China.)

The jump in March retail sales was the largest increase since October 2001 when people went back to spending after laying very low in Sept. 2001 - 0% financing on cars helped a lot too!

U. of M.'s consumer sentiment index which was released later in the session showed some growing confidence - the index jumped to 83.2 in April, up from 77.6 in March, versus expectations of a rise to 78. Oh, those gloomy economists. Some floor talk was that a sentiment number closer to 90 would have gotten the market more in gear to the upside. Oh, those gloomy traders.

The Labor Dept. came out with its PPI report and this report indicated that prices for finished goods rose 1.5% last month, which was up from 1% in Feb. More than the half of the increase was due to higher energy prices and any trips to the pump lately will tell you that the oil price spike is coming back down. Also, the winter from Siberia is over! Hooray!!!

On a weekly basis, the S&P 500 lost less than 1/2 of 1 percent, the Dow was off 0.89% and the Nasdaq dropped 1.8%.

EARNINGS concerns - remember those? Back on traders and investors' minds they are. Hey, we're back in earnings (reporting) season next week. I mentioned GE already and that was a biggie. Boeing fell over 2% after the company said Thursday (after the close) that is will record a big write off on the value of its assets - well, at $1.2 billion pretax it seems like a big number to me.

Microsoft, the company I love to hate - not really, I just sort of hate their software sometimes - fell 1.6% to 24.20 after being downgraded by First Albany. They went from a "strong buy" to a "buy" on concerns that the company may have more trouble renewing maintenance contracts than originally thought - all this a drag on the profit growth in their 2004 fiscal year.

Wal-Mart also drew a downgrade - to "hold" from "buy" - from some yahoo analyst. Opps, I used to be one of those analysts. Well, the stock is only trading - as he put it - at "whooping" 27 times 20003 earnings estimates. Wow, that (kind of multiple) used to be cheap!

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily & Hourly charts:

SPX continues to find resistance at the key 200-day moving average, as it's an area where traders naturally both take profits and do some shorting - and, it is a technical (one of the few) indicator that institutional money managers do watch. They have to be on a roll with stocks and possess a bullish outlook to buy up stocks enough to push the index through this area - NOT! - at least not yet and with key bellwether stocks like GE and Microsoft faltering, not tomorrow either.

Key resistance continues to be in the 880-885 area on a closing basis. While the Dow - and that average can get pushed around more - did close above its 200-day average on 2 consecutive days (my usual "acid" test), not so the S&P 500.

The 50-day moving average, now at 848 (daily chart, left-above), may provide a next level of support. SPX needs to work higher in the very near-term, like Monday, to continue to trend higher on the hourly chart (right-above) - this trendline intersects in the 867-868 area currently. Stay tuned.

The longer hourly stochastic (length: 21) is oversold enough that it could continue to climb higher at or above this line - however, I'm not banking on it and would rather wait for a next trade when the DAILY stochastic (middle chart, left-above) gets to an oversold extreme again and is digging into some prior support such as in the 860-850 area - the daily stochastic is in midrange now and showing overall downward momentum.

The 10-day TRIN is at a more or less neutral reading. We have not seen sustained selling or buying lately in any kind of extreme way.

I made a note in my past week's Trader's Corner article - see http://www.OptionInvestor.com/traderscorner/tc_041003_2.asp about how neatly the bull flag pattern seen on the hourly chart above did exactly what the TA (technical analysis) textbooks (my own included) say is a minimum upside objective when prices break out above the "flag" pattern - namely, the next move will cover a distance equal to the "flagpole" or the first spurt up. So, in the way I have marked it above, that's where a-b equals c-d. Rather neat and provided all you OIN sharp eyed traders with a good trading opportunity.

You even sharper eyed practitioners of TA will have also seen the pronounced bearish price/oscillator (in my example above, the 21- hour stochastic indicator) divergence that shaped up at the top of that upswing, as the stochastic registered a significantly LOWER low and thereby did NOT "confirm" the higher high - a sort of screaming sell.

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

450 is the key near resistance - no change there from last week. There was a minor Head & Shoulder's Top that formed on the hourly chart, and the downside objective implied by that formation has not quite been realized yet.

This thinking leads me to believe that the hourly up trendline is not going to hold as support. Both hourly stochastic models are nearly oversold readings, so it could happen that we get a bounce from the 440 area, but I would rather buy puts at 450 than calls at 440. There is the matter also of the downward momentum we still see on the Daily stochastic (not shown with OEX, but on the SPX chart above and the Dow chart below) and the absence of any extreme in my chief "sentiment" indicator (see lower left on chart) leads me to take a wait and see attitude.

Note how the last extreme (heavy PUT buying) forecasted the bottom that came 1-day later. Neat, when it works and it usually works as an indicator, but the lead time does vary from 1-5 trading days.

An ideal successful test is if buying developed again on any move back to the area of the prior 427 low when, at the same time, the daily oscillators like the 14-day RSI and Stochastic model was back at an oversold extreme. That would be a place to take put profits and purchase some of the index calls. I favor the 427- 430 area as a possible buy zone, but will want to see how it all looks if the OEX gets back into this area.

A decisive upside penetration of 450 would cause me to protectively cover (exit) long puts. It's not what I'm looking for but all long-lasting traders with any flecks of grey hair (or not) should always be prepared to be wrong. If it were easy - to profitably trade the indexes - we would all be rich or richer than we are.

Dow Industrial (Dow 30) Average Daily & Hourly:

The Dow is simple - hey, its only 30 stocks - nothing is proved on the bullish side without a breakout above 8350-8400 and there is support in the 8000-8100 price zone. Absent a close under 8000, I can't get real bearish either. Of course, I think we're in trading range basically while the market waits to see if we're going to see a pickup in business activity and earnings by spring/summer. Stay tuned.

There is also some technical support that may come in again in the 81 area in DJX. However, all this is, is the lower end of the hourly downtrend channel currently - not a lot to hang your hat on. If long puts, stay with em.

Nasdaq Composite Index (COMPX) - Daily & Hourly:

The Nasdaq presents a more bullish possibility if its 50 and 200- day moving averages provides support in the 1337 area. Of course, we're looking a double top that is bearish, so I wouldn't want to forget this either.

If there is close under the 1340 area I would look for a further move lower. Its a real mixed picture with stocks no matter whether you look at them fundamentally or technically or with a mix of both.

The hourly COMPX chart above is showing that there may be some technical support and buying interest shaping up in the 1350 area, after the upside gap got "filled in" and after the "island bottom" which I spoke about in a previous Index Trader commentary.

With the Composite the basically sideways trend is causing the stochastic to head lower and it may move back down that way to register an oversold reading. Corrections, as I've often said, are of two types - price and "time".

A price correction is where there is a move, then a retracement of half or more for example. A "time" correction is where the market goes sideways after a move, up or down, then goes sideways, which also causes the stochastic or RSI or whatever indicator of this type (also, MACD) to get back to a neutral to overbought/oversold level again.

Let me not forget to mention that the broader picture is still a bear market in Nasdaq - as if you needed any reminding! We have yet to see ONE instance of a higher rally high of any significance. However, on a trading basis I have interest in the long side (buying calls) of the Nasdaq indices plus QQQ, if COMPX appears to again find support in the 1340 area. In which case I'd exit puts. Not so if there was a break of 1340-1337, especially on a closing basis, as possible next support isn't apparent until the low-1300 area.

QQQ charts - Daily & Hourly:

Near support looks to be 24.6-25.3. A break of 24.6, especially on a closing basis, would suggest staying short and/or long puts if you got em. On the upside, without a breakout above 27.4-27.8 there is no cause to buy back any short position. This is the are to short - there have been 3 tries to get through this area - 3 strikes and you're OUT!

What keeps me mildly bullish or willing to trade the long side in the 24.7-25 area in the Q's is the fast approaching oversold condition. One more sideways to lower move may set up a bullish trade. Maybe we can just buy at 25, sell at 27.5 for the next month - or, am I dreaming. Trading range markets are ok - not as great as straight-up or straight-down, but I'll take em.

In fact, on the historical average the market is only in a definite and strong directional trend about 30% of the time. The rest of the time it is this back and forth stuff.

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