Option Investor
Index Wrap

Resolution came to the upside

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Whether you're a bull or a bear, or somewhere in between, anyone would be hard pressed to try and make sense of today's trade where both "fact" along with "good rumor" and "bad rumor" seemed to have little "sensical" impact on how today's trade panned out as a plethora of rather significant morning upside earnings reports found early selling, while a late morning rumor that Saddam Hussein had been captured sparked a rebound.

Bears may have screamed "foul play" with the Saddam Rumor, and bulls may have countered with a similar accusation of foul play as reports surfaced that a white powder found at a Tacoma, WA mail distribution center had initial tests revealing it being some type of biotoxin. Suddenly those "tests" that were supposedly performed had traders further bidding stocks higher when the Tacoma fire department said that its tests of the powdery substance showed negative results for biotoxins.

Two triangle patterns we had been monitoring in the major index point and figure charts both found upside resolution in today's trade with the S&P 500 Index (SPX.X) 911.37 +2.17% triggering a "bullish triangle" at the 900.00 level just before the 11:00 AM EST mark, while the Dow Industrials (INDU) 8,484.99 +1.87% triggered a "bullish triangle" at the 8,450 level with just 2- hours left in the trading session.

While Treasury prices held gains for the bulk of their session, it took a report from the National Journal that President Bush would reappoint Alan Greenspan as Fed Chairman to get bond bulls to sell and have Treasuries finishing relatively unchanged on their session, after a strong round of buying at the open.

As I was typing this morning's 09:00 Update, the pre-market action made little sense as earnings reports looked to have upside reports handily outnumbering downside reports (reported versus consensus). Other than SARS news, I can't, nor can I at this hour, figure out just what type of trade was underway in the first hours of today's session.

While I felt SPX bulls should look to lock in some gains just prior to the SPX trading hitting its WEEKLY R1 of 904, the continued strength above that level had me and perhaps other bulls looking to play the upside found in the Dow as it triggered its bullish triangle pattern.

To be honest. The only thing that seems to make any sense to me is that demand continues to build for stocks, and more and more supply/demand (point and figure) buy signals are being generated as market internals continue to improve. At some point it will run its course until risk levels become too great, but until that happens, I'm finding it difficult to hold a bearish thought for more than a day or two.

Volumes reached their best levels of the month at the NYSE as shares traded rose to 1.62 billion. The big board ended the day with advancers outnumbering decliners by a 3 to 1 margin, while 202 stocks traded new 52-week highs (easily above yesterday's 136 level) compared to 20 stocks trading a new 52-week lows. Yes... Dow component AT&T (NYSE:T) $13.81 -0.71% traded a new 52-week low this morning with a trade at $13.48 and session low of $13.45.

NASDAQ volumes weren't quite as heavy, but challenged Thursday's 1.58 billion with today's 1.55 billion shares traded. Advancers outnumbered decliners by a 2 to 1 margin, with 139 stocks trading new 52-week highs versus 30 stocks trading new 52-week lows.

Call buyers, put sellers or both were out in droves again today as the Market Volatility Index (VIX.X) 23.51 -3.13% fell to an 11-month low, while the NASDAQ-100 Volatility Index (VXN.X) 33.65 -5.18%, which has been in existence for just over 2-years fell to an all-time low.

I thought Jonathan Levinson made an interesting comment in today's market monitor at 01:25 PM EST when talking about the VIX.X and the VXN .... "I'm full of doubt currently on today's market action. The thing about oscillators, moving averages, and statistical models, is that the future is still the future. Nothing stops the VIX from breaking new ground, or the MacD from diverging to an unprecedented degree, or the NDX:VXN ratio from setting a new record......"

S&P 500 Index (SPX) - Daily Chart

Today's trade at 900 triggered the "bullish triangle" pattern while further bullishness at 905 gives the SPX another higher high. The apex of the now bullish triangle builds support at the apex of 875. Today's trade sends the SPX well above the upper Bollinger band, which is 903.93 on the bar chart. The 21-day SMA (Avg on the p/f chart) is rising at 876.22.

In last night's wrap we noted that the S&P 500 Bullish % ($BPSPX) had edged higher to a cycle high of 49.8%, so today's action from the SPX itself confirms the internals and rules out any type of BEARISH divergence from this indicator. Bulls are happy with today's action, which finds an additional 2% gain, or net gain of 10 stocks to new point and figure buy signals as the bullish % grows to 51.8%.

S&P SPDRS (AMEX:SPY) Chart - Daily Interval

I thought I'd show a p/f chart of the S&P SPDRS (AMEX:SPY) $91.34 +1.88% as it allows us to look at some volume patterns. Today's trade has the SPY the 5th most actively traded security in the market. The QQQ was the most actively traded security. I've put green and red arrows on the cumulative demand (X) columns and supply (O) columns. The big move off the bottom from "oversold" levels of bullish % at 28% saw total volume of more that 5.2 billion shares, with a lighter volume pullback of roughly 1.7 billion shares. The recent pullback of just 896 million shares gives the impression that there just wasn't a lot of willing sellers from $89 to $86 and the recent upward reversal has seen equal volume of 1.759 billion shares. True, volume doesn't tell you EVERYTHING about price action, but bulls at least want to see the recent reversal higher find as much INTEREST as the reversal from $86 to $90.

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

The Dow's p/f chart shows a more "symmetrical" triangle than the SPX chart, but the 5 columns needed with a pattern of higher lows and lower highs was still in play. If this were a stock, point and figure bulls would be all over it with a stop at 8,200.

When comparing the SPX and INDU p/f charts, it's apparent that the Dow is lagging the SPX bullishness on a technical basis. The reason I say this is that the Dow shows two equivalent highs at 8,500, while the SPX has built three consecutive relative highs. As such, and SPX/OEX trader wants to see bullishness build in the Dow. Dow bulls want to see the SPX/OEX continue it pattern of higher highs and higher lows. Still, honor the index you trade, but play each of them "against" each other for signs that demand continues to build.

It will also be noted later in this Index Wrap that the Dow is the only equity index that has yet to trade its MONTHLY R1. Similar to what we've seen in the S&P Banks Index (BIX.X) 288.06 +2.4% when it traded its MONTHLY R1 at 278.30 and managed to close that level on April 15th and find support there, the SPX, SPY, OEX, NDX, QQQ have done the same at today's close. While the Dow and the DIA don't HAVE to trade their MONTHLY R1s (8,537 : $85.35), I'm thinking there's a pretty good chance they will.

Today's action saw a net gain of 1 stock to a point and figure buy signal in the very narrow Dow Industrials Bullish % ($BPINDU). This has the bullish % rising to a cycle high of 46.67%. Walt Disney (NYSE:DIS) $18.87 +2.27% was today's "new buy signal" when the stock traded a triple-top buy signal at $19.00. This may be a stock for traders to monitor near-term as the stock hasn't been able to trade $19.00 since late November.

S&P 100 Index Chart - Daily Interval

Did bulls pull a fast one and start the "Saddam rumor" right at the OEX's WEEKLY pivot of 450.10 to spark a rally? Boom! That's just about where the OEX had fallen to in its first 10-minutes of trade and sideway action for the next 40-minutes before the "rumors" began circulating. While fellow analyst Jonathan Levinson was making some interesting observations regarding the Oscillators, bears looked to be running for cover as the losses began to build. We've seen the indexes trade their WEEKLY R2s, only to find reversals back lower. Bulls should look to protect gains and look to reload (raise some cash) and get ready for pullback entry. Short of a nuclear type of disaster, I'd be a buyer back near the WEEKLY R1 of 444.60 (thick green) for 1/2 positions and 1/4 bullish at the WEEKLY pivot. When you look at tomorrow's pivot matrix, make note that the DAILY S2-R2 ranges are nearly identical in range as the WEEKLY S2-R2 ranges.

Today's action saw the S&P 100 Bullish % ($BPOEX) see a net gain of 2 stocks to new point and figure buy signals. This has the bullish % growing to 50% and a new cycle high.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I'm not certain of what kind of short position there may be in the QQQ or overall NASDAQ stocks and while Stochastics are "overbought", MACD has kicked above its Signal and begins to trend higher from zero. Today's trade take the QQQ and NDX firmly above downward trend and I see little reason for a bear to try and "pick a top." The apex of the triangle in the bar chart points to the WEEKLY pivot. If I were to simply follow the progression of the QQQ during its advance from the $25.34-$25.50 "zone of support," each time the QQQ violated a level of WEEKLY retracement (blue) to the upside, it has NOT fallen back below the next level lower. As such, a trader playing that type of "level" observation can trade long $27.35 with a stop below 38.2% retracement of $26.78. Risk adverse bulls would follow with a tighter stop just under the $27.35 level.

Today's trade saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 1 stock to a new point and figure buy signal. This has the bullish % growing to 61%. As a benchmark, the NASDAQ-100 Bullish % reached 82% bullish in December, which is where our conventional "pink" retracement of $28.79 is anchored from.

Pivot Analysis Matrix

I'm running late on the Index Wrap, but traders should note that tomorrow's DAILY S2-R2 ranges are similar in range to this WEEKs. I would have to go back and see if this hints of more extreme volatility on an intra-day session.

Since the QQQ and NDX look to be breaking above recent consolidation, I will make quick note that tomorrow's DAILY R2 and WEEKLY R2s are very correlative. Under a "short-squeeze" type of scenario that looks to be in play, these might be levels of "euphoric" short-covering that NASDAQ market makers might simply keep light offers in place, until these levels are traded.

It sounds a little crazy, but considering today's action, who's to argue?

Jeff Bailey

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