Option Investor
Index Wrap

Beautiful car, but it had no gas

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There is an old saying "a picture paints a thousand words," and while OI subscribers know I will type for extending periods of time, bringing in multiple observations and scenarios of what "needs to happen, last night's after-hours trade had bulls sitting pretty in a fire-engine red, built for speed, super turbo, high-octane, asphalt burning, dating machine, with a young bull behind the wheel.

The problem? The silly car had no gas as bonds found buying (Treasuries, corporate and junk all found buyers today), the major indexes "popped" to their WEEKLY R1s, that was about it for equities as bullishness faded as the session progressed.

As a teenager, Mom always asked me what good it would do to buy an expensive car that I would have make payments on, if I couldn't afford the gas (after making the car payment) to get the car out of the driveway.

Long story short, I listened to mom, bought the neighbor's four-door Plymouth Fury from him (his wife used to drive it to the grocery store) at a bargain price for $500.00 and had plenty of money left over for gas. Of course, any teenager driving a four-door Plymouth Fury wasn't necessarily the ideal "dating machine," as ample seating room with excessive trunk space wasn't necessarily what attracted some of the girls I wanted to date in high school.

However, the gas I could afford (approximately $0.60 per gallon back then) was able to fuel the car and haul me and my friends (who would still make fun of my car) to parties and sporting events.

Oh my... here I go. Getting a little long winded.

The point here is the point made in last night's Index Wrap and again in this morning's 09:00 Intra-day update. While bulls were set to "let'er rip," in last night's post-market and today, what started taking place in the bond market before stocks opened for trade (bond selling that began reversing into buying), just didn't bring any "gas" into equities.

A quick review of today's internals had the NYSE seeing a pickup in volume at 1.54 billion shares. This come close to matching the 1.56 billion shares of April 2nd (what happened that day and what happened the next?). NYSE breadth was negative, with decliners outnumber advancers by a 14:17 margin and had 126 stocks trading new 52-week highs compared to 26 stocks trading new 52-week lows. The VERY broad NYSE Bullish % ($BPNYA) showed a net gain of 0.59%, or roughly a net gain of 17 stock reversing up on their point and figure charts and generating new buy signals. This is still something that shows the market internals are strengthening, an not weakening at this point.

The NASDAQ turned just over 1.49 billion shares, and the most volume we've seen from the NASDAQ in 9 sessions (04/02 was 1.6, 04/03 was 1.43 and 04/07 was 1.47). NASDAQ breadth was negative at 7:8. 107 stocks traded new 52-week highs compared to 30 stocks trading new 52-week lows. Similar to the NYSE Bullish %, the VERY broad NASDAQ Composite Bullish % ($BPCOMPQ) saw a net gain of new buy signals as its bullish % rose 0.15% to 44.33%, or roughly saw a net gain of 5 new buy signals.

True. Most of these reversing buy signals probably came in the first couple of hours of trade. Still there's some type of demand in place (maybe jittery bears) that are willing to buy some stocks that break above a previous level of resistance. Both of these VERY broad bullish % are at their upward reversal highs right now.

I have to "confess" something here. Actually, I don't know why I feel like I'm confessing anything, but I put on a bearish trade in the Dow Industrials (INDU) yesterday afternoon at around the 8,350 level. The MAIN reason I did was that I felt a little "too long" in my account and am still holding a bullish trade in Intel (NASDAQ:INTC), and I "thought" that the buying in Treasuries yesterday, and a "failure" of a Dow intra-day support level of at 8,381, might have had the Dow vulnerable to its WEEKLY pivot before its session's close.

Since I'm "confessing" this to you, I will also tell you that I was not "overly comfortable" with this bearish trade in last night's after-hours (I was actually shaking my head with about an hour left to go in the session) and felt the only saving grace for the trade today would be buying in Treasuries this morning. I will also confess that I closed out this bearish trade before the close, for the MAIN reason being that Intel (INTC) held tough today, and I'm not overly convinced that the bull's car has run out of gas. Mind you, it's running out of gas, but not necessarily out of gas at this point.

Oh... I hear/see some "clunkety, clunkety, clunk" sounds developing and I know from the bond market action that stocks are going to be on a starvation diet soon if things don't reverse in Treasuries.

Tonight I want to review the bearish Dow trade, but I also want to review my bullish QQQ Trade from Thursday afternoon. The reason I want to do this, is so that you can perhaps see where I'm coming from in my somewhat "neutral" type of thinking here. I think my "neutral" type of thinking also comes from today's intra-day commentary regarding the potential formation of a triangle pattern in the Dow's point and figure chart.

The Dow has really traded "nicely" and from the 11:00 Intra Day update, the Dow shed about 70-point and in that time, built a 3- box reversal lower. Remember, this is a NORMAL pullback from the institutional perspective and we can perhaps really begin seeing the impact of "lack of selling in Treasuries" that's beginning to take place. Still, the triangle forms, disagreement and uncertainty builds among MARKET participant and pressure builds.

Dow Industrials ($INDU) Chart - 50-point box

The Dow's trade at 8,250 was enough to get a 3-box reversal back lower. In past commentary I've discussed how I will quickly look at some of the Dows stocks and think of them in the context of how an inchworm moves. For strength, I look for the "head" to lead in an advance. When an index pulls back, I want to see the "tail" or the weaker stock has a "buy signal" associated with it p/f chart try and anchor when the index pull back. Why? There are a lot of profits in MMM, but very few in AA. 3M (NYSE:MMM) 129 -3.47% got downgraded today and may have spurred some profit taking. It would take a trade at $126 for MMM to generate a sell signal, and I could "tie" that in with a Dow trade at 8,100, where it would give a "sell signal."

Now that we've got a "big" picture of the Dow again, lets look at the intra-day chart of the Dow. Remember, tomorrow is the last day of the trade week, so the WEEKLY levels will most likely change after tomorrow's trade, but don't forget about those monthly level. I can't for the life of me figure out why the Dow Industrials didn't trade 8,200 and play "catch up" with the 10- year YIELD by today's close. Can you?

Dow Industrials Chart - 60-minute chart

While I was a "happy camper" that Intel (INTC) got a bullish response to their earnings report, I was not a "happy camper" after I traded bearish in the Dow yesterday afternoon on a little break below the 8,338 level when the Dow didn't follow the 10- year YIELD down to its WEEKLY pivot of 8,290 like I thought it would. However... I felt a little better in the trade this morning when Treasuries reversed some of their early selling, the Dow and other major indexes sort of stalled at their WEEKLY R1s (no gas for the fuel tank from bonds) and progressed lower as the session played itself out.

While we're going to adjust our WEEKLY retracement (BLUE) after tomorrow's close, the MONTHLY (RED) is going to stay the same. The Dow found a "bid" right at our MONTHLY 38.2% retracement level, and I decided to close out my bearish play (MAINLY for a hedge against my INTC long).

As noted in today's market monitor the 10-year YIELD closed right in its "zone" of YIELD support. The Market Volatility Index (VIX.X) 26.09 +0.19% really didn't budge all that much today.

Now, I point out this bearish Dow trade, as I think I got a break from the bond market this morning. The bond market wasn't as enthused with INTC and MSFT earnings, and seems more concerned or focused on the economic data and stock seemed to follow. This is BEARISH in my book, especially if it continues.

Please not that I erased the right portion of the CONVENTIONAL (50% retracement) of 8,120. I did this for some "clarity" and my real focus is at 8,100 from the p/f chart. If Treasuries continue lower again tomorrow, you can count on 8,200 coming into play and perhaps this 8,120 level.

Now... I may "regret" not holding this trade (actually, I never regret taking a profit), but there's another trade that I "sold to soon" for a small gain that still has me thinking this market may be stronger than I think, or at lest thought.

NASDAQ-100 Tracking Stock (QQQ) Chart - 60-minute interval

Market monitor traders may have gotten a good entry point on Friday afternoon in our "zone of support," (remember, Treasuries found selling on Friday, but stocks were weak) but all be darned if on Tuesday morning, I pulled the plug in the market monitor just below $26.00 as buying in Treasuries had me not wanting to give up a short-term gain back into the "zone of support." As discussed in Monday evening's wrap, I was also going to follow the trade with a "hard stop" at $25.86, which would also have been triggered Tuesday morning with a QQQ trade at $25.84, which marked the daily low.

So.. either I have to do some type of "fine tuning" with my bullish stops (I think my bullish targets are working) or the QQQ/NDX might be a little stronger than I thought that early Tuesday morning.

The bullish side of me is NOT liking that downward trend right now and today's selling at WEEKLY R1 once again hints that there are probably a lot of computer programs set up for selling at that level. This makes sense doesn't it? If you're busy buying Treasuries, corporate and junk bonds, you've got to sell something! And right now, this leaves equities somewhat vulnerable.

While the QQQ/NDX traded stronger on a relative basis compared to the Dow, SPX and OEX, these buggers are "out of whack" in their WEEKLY pivot. Remember they were "out of whack" and lagging in the WEEKLY pivot last week, played major catch up, and now the QQQ/NDX is ABOVE its WEEKLY pivot, when the 10-year YIELD and major indexes are right at, or below their WEEKLY pivots.

Today's action saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bull alert" at 58%.

Today's trade in stocks, especially as it relates to Intel (INTC), is hint that there has got to be a lot of shorts that shorting on expectations of disappointment on earnings or outlook and when they don't get it, they're having to either pay up at the open. In my mind, there was little "reason" to sell INTC down to $16.00 after their mid-quarter update when all they did was narrow their quarterly revenue range (evening of March 6) as visibility for this quarter became more clear. Yesterday the company reports basically what they said they were going to do and the stock jumps from $17.13 to close at $18.16? That has to be short-covering related doesn't it? Bears betting on some type of disappointment, not getting it, and having to pay up?

Shorts may have to cover in some situations like we see in Intel, but they'll only do it for so long. If they begin to see from the bond market that there isn't a whole lot of cash available for a broader index, they'll start selling resistance. I think this is what happened in the major indexes today. Bulls and bears probably saw there wasn't going to be much cash at the open to extend broader market gains and the sellers (bulls and bears) showed up in force.

S&P 500 Index Chart - Daily Interval

After making a pretty strong move for 4 sessions, the S&P Banks Index (BIX.X) 278.25 -1.3% took a rest and try and they might, just couldn't make the clean break from their 200-day SMA. Just as the SPX finds closing support at its WEEKLY pivot of 878, the BIX.X finds closing support at its 38.2% WEEKLY retracement of 277.30.

Remember, the BIX.X now has in play a reverse head/shoulder pattern, as the "neckline" of 281 was broken to the upside yesterday. The BIX.X will be vulnerable to a pullback into the 274 area if Treasuries don't find sellers tomorrow, an that type of decline could easily have the SPX falling back to the 869 level.

As noted in the above chart, the S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to new point and figure buy signals and this broader bullish % grows to 48.4%, which is a new cycle high. In essence, the internals (engine) looks to be fine, but to make it go, it's going to need some gas.

S&P 100 Index Chart - 2.5 point box

We can perhaps see, or begin to envision a "triangle pattern" in the OEX, which would be similar to that discussed above and in today's intra-day commentary. I've made a note that the CONVENTIONAL retracement at 50% is 437.87 and ties in rather nicely with the p/f chart and recent reversal fro 440. Tomorrow, I would look for the little tight "zone of support" from the combined WEEKLY and MONTHLY retracement of 441.33-441.88 as downside support if the WEEKLY pivot is broken and the 200-day SMA of 445 is violated. There's one heck of a lot of techncicals in play as support from 440 to 445.

For instance... rising 21-day SMA is at 444, trending lower, but trying to round out 200-day SMA is at 445. I really don't see anything all that bearish in the supply/demand charts, but right now, bulls need some cash.

Today's trade saw a net gain of 1 stock to a new point and figure buy signal. This has the bullish % edging back up to 45%, but still off its cycle high of 47% from April 7 and 8.

Here's a quick look at the Pivot matrix for tomorrow. I'm running very close to missing my deadline, but I've highlighted some of the correlative levels I see.

Pivot Analysis Matrix

The BIX.X closed just back below its MONTHLY R1. This isn't a sign of doom and gloom in my opinion. Even in last night's wrap I was impressed that we'd see any type of a correlative SUPPORT at a MONTHLY R1. Still, I think it shows that why BEARS were definately getting some "squeeze" action on Tuesday, they aren't as willing to chase when Treasuries are seeing buying.

I've noted in the WEEKLY "point from pivot" the effect the 10- year YIELD action (lower from buying on bonds) begins to show up in the Dow.

Why might we look for a rebound or selling in Treasuries tomorrow or Monday? I made note in today's market monitor that our "junk bond" Pacholder High Yield (NYSE:PHF) $8.11 +1.24% broke to a new 9-month high today. This is a closed-end fund that trades like a stock, but represents a basket of "junk grade" bonds. Who in their right mind is buying "junk bonds" if the economy were going in the tank?

If anything, its the "fundamental" side of me that has me thinking that stocks may have gotten a little ahead of themselves, but the buying of "junk bonds" and buying in Treasuries doesn't make a lot of sense. The only "sense" I can make of it is that some money is looking for higher YIELD, but the thought has to be that the economy is going to strengthen and why not get 12% coupon and some capital appreciation. Still, to think that way, one part of the bond market has to be thinking the economy is going to improve.

I'm still going to set an "upside alert" on the 10-year YIELD for tomorrow at its correlative WEEKLY Pivot of 3.983% and DAILY R1 of 3.98%.

Jeff Bailey

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