Option Investor
Index Wrap

Bulls say... "let'er rip!"

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The major indexes closed at their sessions highs and bullishness built in extended hours as trader bid stock futures and tracking stocks like the NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $26.28 as high as $26.72 in extended hours, SPDRS (AMEX:SPY) $89.78 added 56 cents, or 0.6%, while the DIAMONDS (AMEX:DIA) $84.40 +0.66% jumped to $85.00 on upbeat earnings, or at least lack of downside surprise, from Intel (NASDAQ:INTC), Texas Instruments (NYSE:TXN) and Microsoft (NASDAQ:MSFT) after the closing bell.

It was somewhat of a "day of divergence" for the markets as both stocks and bonds found buying. From the most "conservative" Treasury issues, to the "junkiest" of junk bonds, the bullishness in financials just seemed to have the major indexes building gains toward the close.

Volumes picked up toward the close with the NYSE adding 400 million shares in the final hour of trade to reach the 1.4 billion mark (highest since Monday 04/07), while NASDAQ volume was more anemic at just over 1.24 billion.

The NYSE reported positive breadth with gainers outnumbering decliners by 2 to 1, while NASDAQ breadth was positive at 17:13.

Leadership was found at the NYSE with 114 stocks trading a new 52-week high (matching the 118 of 04/02) compared to just 15 stocks trading new 52-week lows (yes... AT&T (T) $13.73 -2.27% traded another 52-week low). NASDAQ reported 113 stocks having traded a new 52-week high (still off the 127 and 130 found on 04/02 and 04/07), while 34 stocks traded new 52-week lows.

In this morning's market monitor, I decided (and posted at 09:32:08) to sell my 1/2 bullish position in the QQQ from at $25.98 from Friday's bullish profile of $25.52. While I feel a bit dismayed with tonight's after-hours trade of $26.87 (yes... gains are building from my first paragraph), the bond market action has treated me well as an "indicator" in recent weeks and I just didn't "like" this morning's buying in Treasuries. While I pulled the plug on the trade before it hit my profiled stop from last night of $25.86, with a session low trade of $26.84, I would have been stopped out at that level anyway.

So... am I too bearish? Or just cautious? Or... is today's trade in the bond market some type of "cautionary" flag that we should be concerned with?

I don't think that one-days trade is a reason for bulls to get all up in arms over things and expect a strong round of selling tomorrow morning. And I certainly hope that bears aren't raising stops in their trades on the "hopes" that the stock market is wrong and that the bullishness that continues to build in the bullish % data is only a fragment of the imagination.

Buuuuuut! Traders might want to keep an eye on the Market Volatility Index (VIX.X) tomorrow. Why? While at age 40, my mind may be slipping, but there are those "trades" or observations that when they pan out, really stick in my mind and I follow them as time passes.

On March 12th, in the 01:00 PM EST update http://members.OptionInvestor.com/archive/intraday/2003/inupd_3122003_774.asp
and again in that evening's Index Trader Wrap http://members.OptionInvestor.com/Itrader/marketwrap/iw_031203_01.ASP

I had made note that the Market Volatility Index (VIX.X) 26.04 -1.62% had traded the 40.00 level intra-day and had made comment that that might just be a level where stock/index traders look for some institutional selling of puts as they garnished the higher put premiums with the bullish % charts at "oversold" or approaching oversold levels.

Lets quickly review the SAME exact chart of the VIX.X and see what's going on. Remember here, that we're right at the WEEKLY R1 levels of resistance in the pivot matrix. However, the bullish % charts are NOWHERE near "overbought" levels.

Still, I think its "interesting" and notable tonight to once again review the VIX.X tonight and get in a "mindset" that may match our WEEKLY R1s in the pivot matrix.

Market Volatility Index (VIX.X) - Weekly Intervals

Here we are, just about 5-week to the date since the last time we looked at the Market Volatility Index (VIX.X). I will confess to NOT being a big "volatility" VIX.X follower, but I certainly feel this indicator has its uses at "inflection" points or "levels" as I like to call them.

The reason I bring up the chart of the VIX.X in tonight's wrap and haven't discussed it since March 12th, for one simple reason. As an index BULL, today's DIVERGENCE and buying in Treasuries has me on the alert for potential selling into strength in equities. That's it! I'm on the alert!

Since Treasuries and equities DIVERGED, I'm looking for some "help" from the VIX.X at a LEVEL where the VIX.X has reversed back higher from.

For tomorrow's trade, tonight's after-hours response (not a true market as all market participants, especially institutions) aren't here to cast their votes on the INTC, MSFT and TXN earnings news.

Maybe... just maybe the bond market had it all wrong today. As an equity index bull, I certainly hope so! But you know what I've said about hope. It has no place in trading stocks/indexes.

As such, it could well be that Treasuries get "flushed" tomorrow and a stock rally of "biblical proportions" takes place. If that's the case, then the VIX.X should have no problem breaking lower should it? Right when the major indexes get shoved above their WEEKLY R1s and onto R2.

All I'm doing tonight is getting adding the VIX.X to my "watch list" near-term, at a level where we've seen reversals in the past. I've marked these "dates" on the chart, and we can check to see if the VIX.X would have been any help in at those dates when the VIX.X has been at similar levels.

Let's take a quick look at the Pivot Matrix. Take special note of the S&P Banks Index (BIX.X) and levels traded today. Monthly R1? Are you kidding me!

Think about "cash flows" when you consider that bonds saw buying today as well as stocks. Add to this, that the U.S. Dollar showed marginal losses against a basket of 7 major foreign currencies as the U.S. Dollar Index (dx00y) 99.87 -0.09% slipped back below the 100.00 mark, but managed to hold its trying to round out 50-day SMA. In supply/demand terms, there wasn't a lot of cash coming into the U.S. dollar today, and cash that was available to buy things, bought both bonds and stocks! In my mind, this is a rubber band (cash) being stretched between stocks and bond. Something has to "snap" eventually.

I would have been pounding my fist on the table saying "buy Mortimer buy! Get in there and Buy!" had Treasuries been seeing selling today as the S&P Bank Index (BIX.X) 281.93 +1.31% did just about everything a major index bull wanted it to do. Look at tomorrow's support! MONTHLY R1 and DAILY S1? Are you kidding me? A correlative support level at a MONTHLY R1? Impressive! The BIX.X also has correlative support at WEEKLY R1 and its DAILY Pivot. Guess who was doing some buying in the banks today? B..E..A...R...S!

True... there may have been some mutual funds buying up stocks ahead of tax-filing deadline too. April 15th is a historically bullish day for equities.

OK! From the MONTHLY pivot matrix and ability for the BIX.X to hold a close above it MONTHLY R1, we can now begin assessing further upside to the MONTHLY R1s. To get there, what do the indexes need? More cash, or further bearish short-covering. Note that the DIA, SPY and QQQ are all trading right near their WEEKLY R1s in late-session trade.

Let's take a look at the S&P 500 Index (SPX.X) 890.81 +0.63%. As I type here... S&P futures (sp03m) currently trade 902.20, which at this level of trade, would have the cash market (SPX.X) above its WEEKLY R1. Tonight's first exercise is to make some ties with the VIX.X as discussed above.

S&P 500 (SPX.X) Chart- Weekly Interval

I'm not going to say tomorrow's trade is going to be "easy," but I've got two-eyes and two ears. One eye will be on the VIX and the other focused on Treasuries. I'll "listen" the March Housing Starts and Building permits, but it will be the MARKET response in the early going that traders should pay attention to. Bulls want to see SELLING in Treasuries and it would be nice to get some confirmation from a further falling VIX.X.

A word of caution with the VIX.X. Traders will note that the VIX.X has been moving LOWER since the March 24th SPX reversal from 895, despite some SPX weakness to 844 during that time. Don't put all of your BULLISH faith in the VIX.X action by itself, but use it as one tool in the near-term to help guide your trading.

I think it VERY IMPORTANT to UNDERSTAND that in early December (11/24 to 12/01) the S&P 500 Bullish % ($BPSPX) was nearing the 70% "overbought" level at 68% when the VIX.X was at current levels. By January, when the VIX.X was once again at current levels, the S&P 500 Bullish % had reversed lower to 62% bullish.

By comparing the Bullish % and VIX, we better UNDERSTAND that the SPX Bullish % was near "overbought" in December and had started reversing lower!

Today's action saw a net gain of 4 stocks to reversing upward point and figure buy signals. This has the S&P 500 Bullish % ($BPSPX) back at 48%, which matches the recent April 7 and 8 readings.

I'm thinking if we see selling in Treasuries tomorrow and the VIX.X falls below 25.66, then there becomes a high-odds chance that the S&P 500 Bullish % ($BPSPX) could well work its way back to the 70% level this cycle. If so, then I could forecast an SPX at the December highs of 950, which does tie in with the MONTHLY R2 of 951.

S&P 100 Index Chart - Daily Interval

Call it "crazy trend" or "crazy train," but one has to think the bullishness in the financials helped get the S&P 100 Index more "firmly" back on our aggressive upward trend. With each level broken back to the upside, look for bears to begin contemplating this trend, perhaps as they have been doing in the BIX.X itself where our aggressive trend there was NOT violated even for a day!

Don't underestimate what some selling in Treasuries could do along with some further short-covering. I say it now, and monitor for it tomorrow!

Today's action saw a net loss of 1 stock to a reversing lower point and figure sell signal. Gulp! This has the S&P 100 Bullish % ($BPOEX) slipping another 1% to 44%. This is some slight internal weakness compared to the broader S&P 500 Bullish % ($BPSPX) and while it would take a reversal reading of 40%, this is something that I will want to monitor closely as it depicts some internal weakness in the larger-caps. I'm not sure what "stock" it was and it may have been a "healthcare" stock, as the Morgan Stanley Healthcare Provider Index (RXH.X) 256.85 -5.59% got hit hard today.

Dow Industrials Chart - Daily Interval

A positive after-hours response to Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT) had the DIAMONDS (AMEX:DIA) last trading at $85.23. While the Dow and the DIA aren't an exact match, it would have the Dow trading right at our 19.1% retracement from WEEKLY analysis. A move above the MONTHLY on further bullish response to tomorrow's economic data and a trade at 8,550 could really step up some short-covering. Still, selling in Treasuries will be key.

Again... don't underestimate the power a triple-top buy signal could bring. Dow bulls did well on the "spread-triple" from 8,200, which built a column of X to 8,500 over the course of 3- days.

Today's action so no net gain in the very narrow Dow Industrials Bullish % ($BPINDU). Status remains "bull alert" at 43.33%. I spent too much time on the VIX.X to get to the NASDAQ-100 Index (NDX.X) and QQQ.

However, one thing I really saw in today's intra-day charts in the latter 1/2 of the session, is that as Dow, SPX and OEX bullishness built during the session, the QQQ would be trading at a relative low, and as if traders were watching the INDU, SPX and OEX build new bullishness, the QQQ would lag the move higher by about 10-15 minutes.

The after-hours action from INTC and MSFT is going to have a rather large gap taking place in the NDX/QQQ. Aggressive bulls can play long, but any new positions would be partials in my mind. In last night's index trader wrap, the 26.29 level showed up in the DAILY retracement. I see that same $26.29 level from a MONTHLY pivot analysis retracement if taken from $29.23-$21.55. I'll show this chart in tomorrow morning's 09:00 Update, but a level to assess downside risk to on a "hot open."

Jeff Bailey

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