Option Investor
Index Wrap

Little volume, little change

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The major indexes traded in a tight range today and volumes were light despite the Conference Board reporting that its leading indicator index for March fell 0.2%, which was inline with economists forecast.

Similar to last week, economic data that gave little hint of a resurgence in economic activity found little reaction from market participants as the NYSE Composite (NYA.X) 5,004.98 -0.02% fell just 1.34 points on light volume of 1.1 billion shares, while the NASDAQ Composite (COMPX) 1,424.37 -0.07% edged down 1 point on 1.24 billion shares traded.

Breadth indicators for both the NYSE and NASDAQ finished modestly positive with advancers outnumbering declines by a 9 to 7 margin on the big board, while breadth at the NASDAQ showed 8 stocks advancing for every 7 stocks declining. The NYSE reported 136 stocks trading a new 52-week high (highest for the year) compared to 14 stocks having traded a new 52-week low. NASDAQ also reported a new yearly high for 52-weekers at 147 compared to 31 stocks at new lows.

Potential bargaining by the Bush administration on proposed tax cuts along with the government set to conduct its regular monthly 2-year note sale of roughly $27 billion had Treasuries along with precious metals stocks seeing the bulk of today's action.

After a sharp round of selling at the opening of their trade, Treasuries recouped nearly 1/2 of the day's losses by their close with the 10-year June futures contract (ty03m) $114'005 -0.17% finishing down just 6/32 after falling to as low as $113'205 earlier in the day, with the benchmark bond's YIELD ($TNX.X) finishing up just 2 basis points to YIELD 3.979% at its close.

On April 10th, Dorsey/Wright and Associates' "precious metals bullish %" (BPPREC) reversed back up into "bear correction" status to 41.93% (needed 40% for reversal up from 34%) and today's trade did have the Gold/Silver Index (XAU.X) 68.85 +2.74% closing back above its 50-day SMA of 67.74 for the first time since slipping below this intermediate-term 50-day SMA on February 7th at 74.91. Despite the strength in gold stocks, the U.S. Dollar Index (dx00y) 99.55 +0.25% showed fractional gains as the dollar gained ground against a basket of 7 major foreign currencies, but still closed below its intermediate-term 50-day SMA of 99.80 after a brief peak above this simple moving average at 99.86, which came just minute prior to today's release of the March leading indicators index.

In the coming sessions, trader may want to keep an eye on the combined Treasury YIELD action, Dollar and Gold. While the XAU.X action can be correlated with a "defensive" market posture, an "in unison" move higher in Gold/Dollar/Treasury YIELDS would most likely be that of a market factoring in renewed economic growth being somewhat "inflationary." Conversely, negative action for the major indexes may be coupled with LOWER YIELDS, LOWER dollar and HIGHER gold/silver stocks.

Gold/Silver Index Chart - Daily Interval

Internals for precious metals stocks look to be improving with the reversal up in the sector's bullish %, and outward appearance also begins to show some signs of renewed bullishness. Index traders may once again add the Gold/Silver Index (XAU.X) to their list of observations as it relates to the economy and perhaps "inflation." As you can see from the October-January time periods, the XAU.X isn't necessarily a "contrarian" stock sector that moves INVERSE the broader markets. From October-December the dollar firmed and edged higher, while the XAU.X along with Treasury YEILDS moved higher. So did the major equity indexes. Our thoughts were that the MARKET was looking for some type of "inflation" perhaps on the heels of a jump in economic growth!

I do think that Friday's monthly budget data issued by the federal government that it remains on trace to record a fiscal- year budget shortfall topping the $300 billion mark, brought some buyer into gold stocks today and had the Gold/Silver Index (XAU.X) winning today's sector gainer award. If doom and gloom is on the horizon, then the dollar should get crushed and perhaps banks. Both traded relatively unchanged with the dollar showing fractional gains, while banks edged lower.

A key level of technical support for the U.S. Dollar Index (dx00y) 99.59 +0.29% looks to be the 98.65 level, which served support in January and February, was violated to the downside in March, but has once again been serving support in March and April.

Remember, the term "inflation" isn't necessarily a "dirty word" if used at what may be the END of a recession.

In today's 01:00 AM EST update, I discussed some of the news hitting the wires regarding this week's Treasury auctions. We now understand that there will most likely be a LARGE $27 billion auction (supply) of 2-year Notes for roughly $27 billion. Analysts also predicted that the Treasury's regular sale (supply) of 5-year and 10-year notes could reach $54 billion, which would exceed a quarterly record of $44.5 billion set in 1996.

While it is difficult to say the price action in precious metals stocks like gold is "doom and gloom" we can use that observation along with the understanding that there is a lot of SUPPLY of Treasuries coming to the market to understand this! If Treasuries continue to find buying after all of this supply comes to the markets, then STOCKS become vulnerable. My thinking here would be "why is the market so attracted to such low YIELDS?"

Before traders begin yelling "the sky is falling for equities," we should note that the junk bond market (highest risk market among bonds) has our Pacholder High Yield (AMEX:PHF) $8.25 +0.6% closed-end fund (trades like a stock, but a basket of junk bonds) at 10-month highs after today's trade.

I saw a "note" at Briefing.com discussing today's action in JP Morgan's global high yield index (I'm trying to find the symbol for this index), which at the time was up 0.9%. This index currently has a YIELD of about 10.3%, which compared to money markets at approximately 1.15% and Treasuries along with stocks is attracting capital. Notes regarding a "positive tone" toward junk bonds is limited SUPPLY and default rates look like they're coming down.

Most of today's action looks to have been in the bond markets and Gold/Silver Index (XAU.X). In Friday evening's market monitor, I made some notes regarding the "pinching" or narrowing of this week's WEEKLY pivot analysis levels as our S2-R2 range narrows to just 57 SPX points, compared to last week's 84 points. Only the 10-year YIELD ($TNX.X) showed any type of "volatility" in the matrix as it traded to its WEEKLY R1 after seeing a lower YIELD trade last week.

Pivot Analysis Matrix

After Friday's observation regarding the "pinching" or compressing of a range from WEEKLY S2-R2 (made some notes in Friday's market monitor) I was/am looking for the major indexes to trade their WEEKLY R1s in somewhat of a follow through higher from last week's trade. Things were looking good for the WEEKLY R1s to be tested today as this morning's session began as the 10- year YIELD, which finished Thursday's trade at 3.957%, jumped above its WEEKLY pivot of 3.965% and "sprinted" to its WEEKLY R1 of 4.030% with a session high YIELD of 4.034%. To be honest, I do thing the 10-year YIELD is perhaps a little "out of whack" with the major indexes in that YIELD was lower last week, while equities were fractionally higher. In essence, I think the 10- year YIELD may have to reach the WEEKLY R2 level of 4.102% to have the major indexes challenging, if not slightly above their WEEKLY R1s.

While major market index traders keep an eye on the Gold/Silver Index (XAU.X) and its relationship with Treasuries and the Dollar, the S&P Banks Index (BIX.X) 281.18 -0.23%, which traded a tight 2-point range all day today remains interesting that this index finds a correlative SUPPORT level still at its MONTHLY R1 as the BIX.X hovers at its still trending lower longer-term 200- day SMA of 281.25 for a 4th consecutive session. Today was the first day the BIX.X did NOT break back below its "neckline" from a reverse head/shoulder pattern discussed in last Monday's Index Trader Wrap.

We find quite a bit of correlative support/resistance levels in tomorrow's DAILY and WEEKLY levels, which still looks to have the WEEKLY R1s in play.

S&P 500 Index Chart - 5-point box

Today's trade at 895 quickly reversed Thursday's 3-box reversal lower to 880. This sets the stage for a potential "bullish triangle" with a trade at 900 and I would think that a trade at 900 brings in some jittery bears and short-covering, which would most likely see a test at our WEEKLY R1 of 904.10.

Market internals continue to improve as Thursday's action saw the broader S&P 500 Bullish % ($BPSPX) find a net gain of 2 stocks to new point and figure buy signals, while today's action saw a net gain of 5 stocks to new point and figure buy signals. This has the S&P 500 Bullish % still in "bull confirmed" status at 49.8% and at a bullish cycle high reading of 49.8%. Still some room to the December high reading of 68% bullish.

Supply/demand traders can raise their stops from "Stop #2" of 860 to 875, which would be just under the WEEKLY S1 of 875.70.

Here's a quick look at the bar chart of the SPX with this WEEK's retracement overlaid, along with CONVENTIONAL (pink) retracement from the October lows to December highs. I've also "turned on" the Bollinger bands (21-day SMA, 2 std. deviations) as it allows us to see how the upper Bollinger band has tended to serve bullish resistance.

S&P 500 Index Chart - Daily Interval

The SPX has tended to show consolidation when the bullish % are rising as the index itself tests the upper-end of the Bollinger band with setting of 21-day and 2-std deviations. This may have some short-term bears looking to scalp a decline back near the WEEKLY S1 of 875.70 and even the bullish side of me doesn't see a real good risk/reward bullish entry point at current levels.

Stochastics are starting to turn down from the "overbought" level on the daily chart, and here too, may have some bulls hesitant on new entries. However, a "gradual" pullback in the SPX into the WEEKLY S1 of 875.7 with stochastics then "oversold" provides a much more attractive bullish entry. Especially if the bullish % continues to show internal strength as it has in recent weeks.

Lets take a look at the very similar bar chart of the S&P 100 Index (OEX.X) 453.06 -0.14%. Instead of looking at the Conventional retracement, lets look at its chart with the MONTHLY pivot analysis retracmement, which gives us some good "zones" of support and resistance to be looking at.

S&P 100 Index Chart - Daily Interval

The MONTHLY R1 of 456.90 has served resistance on a closing basis for certain, and looks to have come into play this morning. Simialr to the SPX, stochastics on the OEX are rolling lower from the "oversold" level. Whey Stochastics can still mover "overbought" from here, I'm thinking WEEKLY R1 would be good bullish target. I'm just not overly excited on a new bullish position here with the upper Bollinger band so near and would prefer a pullback near the WEEKLY S1 with the "zone of support" of 441 as a springboard back higher to test upper Bollinger Band, which should move higher as time passes.

Thursday's trade saw the narrower S&P 100 Bullish % ($BPOEX) see a net gain of 2 stock to new point and figure buy signals and today's trade saw a net gain of 1 stock to a new point and figure buy signal. This had/has the bullish % building to 48%, and a new bullish cycle high for this indicator of market internals. Still "bull alert" and it would now take a reversal low of 42% to reverse back into "bear confirmed" status, while a reading of 62% is needed for "bull confirmed" status.

Dow Industrials Chart - Daily Interval

The Dow Industrials (INDU) closed right at its WEEKLY pivot and that's perhaps "smack dab" in the middle of what I'd consider to be a "maximum" weekly range. This is a very tough trade for new entries here, as well as those holding positions as I really see a 50/50 trade from current levels. I like a bullish trade in the Dow, but would want to get bullish entry from here as close to 8,200 as possible and play that as a bullish entry area. I would lean toward weakness from here. While I'm not a "big fan" of stochastics, this is about the only oscillator that hints of some BEARISH divergence as this oscillator didn't see as high of a trade when the Dow had matching 8,520 trades in late March and early April. The lower lows in the Stochastics is also considered BEARISH divergence as the Dow Industrials themselves saw a higher high.

Today's action saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull alert" at 43.33% and this indicator has been stuck at this reading for 10 sessions now.

NASDAQ-100 Index Chart - Daily Interval

Two weeks ago, the NASDAQ-100 and the QQQ "lagged" in the WEEKLY pivots, and just like that they "lead" strength as the Dow Industrials seems to soften a bit. Bulls have had better success in trading bullish by buying dips and selling rallies. With stochastics now "oversold" and starting to roll a bit, bulls may look to trade for profits.

I'm still keeping an eye on PeopleSoft (NASDAQ:PSFT) $15.79 +0.38%, which is holding a $1.00 gain since its gap down on April 4th after warning on earnings the evening of April 3rd. This is slight hint perhaps that bears have been more eager to "buy the bad news." Either that, or bulls are really looking 6-months ahead and better economic data.

Jeff Bailey

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