Option Investor
Index Wrap

Like a carrot in a juicer

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Traders that have been with us awhile may recognize the above headline as it relates to the infomercial you may have seen where some guy named "Dr. Juice" with big bushy eyebrows touts the health benefits of drinking the juices from various vegetables that only HIS blender is capable of producing.

As you watch the commercial, Dr. Juice's voice builds to a crescendo so you can hear him over the noise of the juicer as he frantically feeds carrots, celery and tomatoes (yes I know that a tomato is actually a fruit) into the juicer.

As Dr. Juice feeds the vegetables and select fruit into the blender, you can hear the blender's motor bog down as too much pressure is being applied to the rotating blades. In order for the blender's motor to come back up to speed, Dr. Juice releases some hand pressure from the vegetables he's cramming into the blender so the motor will come back up to speed.

Is pressure building in the markets? I'd say so. The major indexes inched higher today, but did you see the volume?

We've seen much bigger moves up and down on volume of just over 1 billion shares. Today, the NYSE turned 1.61 billion shares, which rivaled yesterday's 1.62 billion. The NASDAQ churned 1.76 billion, which is the highest since March 17's 1.83 billion and comes close to the 1.77 billion found on March 13th.

In my mind, PRESSURE built today as VOLUME levels reached some relative highs, but price action was modest.

With some important and closely monitored economic data due out tomorrow (March Durable Goods Orders, 04/19 Initial Jobless Claims) and Friday (Advanced Q1 GDP, Revised April Michigan Sentiment, March Existing Home Sales and March New Home Sales) today's volume and marginal price action hints of some MAJOR disagreement taking place in today's trade between bulls and bears.

Of those economic reports listed above, the Revised April Michigan Sentiment (preliminary was 83.2 and revised consensus for 83.2) will be looked at, but the largest part of the proverbial cat was already out of the bag when the preliminary data was released. Existing home sales don't get quite as much attention as New Home Sales, simply because existing homes don't have near the level of economic impact as existing home sales do.

I'm a FIRM believer that volume by itself tells a trader little, but it shows INTEREST and MAJOR DISAGREEMENT, especially when relatively little price action is found.

Market internals built to the bullish side as the session progressed and had the NYSE ending the day with advancers outnumbering decliners by a 5 to 3 margin. 194 stocks on the big board traded new 52-week highs (yesterday 202 was highest of the year) and 20 stocks traded new 52-week lows. No.... Dow components AT&T (NYSE:T) $17.01 +23% didn't trade a new 52-week low today. Starting at 10:00 AM and each hour after that, new highs were 45, 108, 124, 146, 161, 172 and 194 at the 04:00 PM EST close.

NASDAQ ended its session with advancers outnumbering decliners by a 19 to 11 margin and found 162 stocks trading new 52-week highs (highest number of 52-week highs this year) compared to 24 stocks trading new 52-week lows. Starting at 10:00 AM and each hour after that, new highs were 49, 86, 100, 116, 125, 137 and 162 at the 04:00 PM EST close.

Maybe its just me, but from 11:00 AM (second number in the chain of 52-week highs) new highs showed a somewhat consistent build, and then kind of "spiked" a bit in the final hour. Some towel throwing by bears that have been trying to pick tops? Or simply aggressive bulls looking to play momentum and lack of supply?

Evidently I'm not the only stock/index trader keeping an eye on the bond market. Head floor trader on the NYSE for UBS Paine Webber made note today that while he's seeing some tentative buyers for stocks, "tentative" is the word as traders are looking for some type of "sell off" in Treasuries to really confirm the gains in the indexes.

Treasuries did see some modest selling today in the 5 and 10-year maturities, but the longer-dated and "riskiest" 30-year bond finished unchanged. The benchmark 10-year YIELD ($TNX.X) rose 1.2 basis points to 3.995%.

This leads us into the Pivot Matrix. In a past Index Trader Wrap, I was trying to show a relative strength chart of the major equity indexes and the 10-year bond's PRICE ($UST) from www.stockcharts.com (a combined price of all 10-year Treasuries still yet to mature) and look for "relative strength" buy signals that would further give signal of asset allocations away from Treasuries and into stocks. Unfortunately, something is "wrong" with www.stockcharts.com updating the price of the $UST and it hasn't been updated since Monday, April 21st.

This $UST isn't a tradable security, but I learned from conversations with Chip Anderson at Stockcharts.com that this "index" of 10-year bond PRICE was established for the purpose of relative strength comparisons against other debt and equity instruments as a "benchmark."

A bit "frustrated" with stockcharts.com regarding the $UST, I've looked at the June 10-year futures contract on a p/f chart from Dorsey (tym3) for the 10-year, and this p/f chart is building a larger "triangle" pattern that I might describe as being that of BIBLICAL proportions!

While the Dow, SPX and the NYSE Composite ($NYA) have recently triggered "bullish triangle" patterns, the bond market just doesn't seem to have enough information at this point to make any type of decision.

Lets take a look at the matrix firs, then I'll try and show a 10- year YIELD chart, and tie in some things that show up in tomorrow's matrix.

Pivot Analysis Matrix

The 10-year YIELD ($TNX.X) traded its WEEKLY R1 early on Monday morning, and after a drop lower in YIELD early Tuesday, has been hovering around its WEEKLY pivot. When I look at the 5, 10 and 30-year bonds, these buggers are trading a range right now as if buyers and sellers want some type of further information. Information and a reaction to that information which may begin tomorrow, and build further on Friday.

The reason I say this is I see correlative YIELD resistance at 4.03% in the WEEKLY R1 (so I say tomorrow) and then in the MONTHLY R1 and WEEKLY R2 (so I say on Friday).

The "key" number tomorrow morning I think is going to be Durable Goods Orders for March. February showed a very weak -1.6% decline and current consensus for March is a -0.6%. You see, still WEAK, but economists are looking for the weakness to "abate" somewhat. I don't care as much about the number, but if we see anything above 0% I'd look for selling in Treasuries.

Traders are probably not certain how the MARKET will react after some of the economic data we've seen in recent weeks and reactions to those data.

Now.... some things I've highlighted in the pivot Matrix had the NDX and QQQ finding support today at their MONTHLY R1s. This is something we may have wanted to monitor for as it relates to how the S&P Banks Index (BIX.X) traded earlier and observations made at that time.

In the MONTHLY matrix, I didn't catch it until after I and "squared" various correlations, but the Dow DIAMONDS (AMEX:DIA) did trade its MONTHLY R1 of $85.35 on an intra-day basis.

When we look at the DAILY S2's for the SPX, OEX and BIX.X, their DAILY S2's are now above the MONTHLY R1s.

Look at the "sudden" narrow DAILY range for the indexes. Last night we noted the DAILY ranges were as wide as the weekly and I expected some potential volatility. We didn't get it today and suddenly the ranges really get narrow. I feel the volatility coming and today's volume and little price action have me "sensing" disagreement.

If treasuries find selling and that cash goes into stocks, then hold onto your hats! Compared to bonds, stocks look like they've gotten ahead of themselves and are trying to anticipate and perhaps front-run some better-than expected economic data.

Let's quickly look at the 10-year YIELD Chart ($TNX.X) 3.995%. Remember those "bullish triangles" we've seen unfold in the SPX, Dow Industrials, and the NYSE Composite ($NYA)?

10-year YIELD Chart - 0.5 box scale

The 10-year YIELD ($TNX.X) shows a similar "triangle" pattern forming. Currently, we have 4 columns to work with, and this is EXACTLY what we were looking at a couple of days ago in the SPX and Dow p/f charts. They both gave the "bullish triangle" pattern yesterday. Still, the 10-year YIELD chart, or the bond itself hasn't found the selling to send YIELD higher and trigger a bullish triangle.

I've said that the "bond market" is smarter than the stock market and based on pattern recognition, stocks may be a little ahead of themselves. My caution the past couple of weeks and "pulling the plug" a little early on bullish trades is largely due to bonds not confirming. Maybe tomorrow and Friday's data will "convince" the bond market like stocks seem to be convinced of "good news."

Dow Industrials Chart - 50-point box

By benchmarking from early February (red 2) on the point and figure charts, we can perhaps see how the 10-year YIELD was saying "one thing" while the Dow Industrials were actually giving a little "double-top" buy signal at 8,150 at its "red 2." Eventually, the Dow's point and figure chart triggered a triple- bottom sell signal at 7,900 then formed a "triangle," which turned bearish at 7,700.

Do you remember "my" first bullish trade profile in the Dow DIAMONDS just before the "bearish triangle" unfolded? The reason I profiled 1/4 bullish positions back then was that the DIA was very near its bearish vertical count of $75 (7,500 Dow equivalent) and the Dow Industrials Bullish % ($BPINDU) was deeply "oversold" and BEARS had the BULK of the risk. We took a little "heat" on that option trade, but it wasn't for long.

Do you see why I have been advising caution for bulls in recent sessions? By golly, if Treasuries get flushed, I would think bulls are going to see the Dow break this 8,550 resistance, but I still think that bears are getting "squeezed" a bit I don't want our bullish index traders that have been honoring the bullish charts to get complacent.

Speaking of bullish %, today's trade saw a net gain of 2-stocks to new "buy signals" as the Dow Industrials Bullish % ($BPINDU) rises to 53.33%. This is a cycle high after March's low reading of 9.99%! It would still take a reading of 62% to achieve "bull confirmed" status. Watch those bond YIELDS!

S&P 500 Index Chart - Daily Interval

I've basically run out of "levels of resistance as it relates to a bar chart and pivot analysis. The only two levels that would be left for resistance in the SPX would be the CONVENTIONAL retracement anchored from the December high at 954 and the current MONTHLY R2 of 951. Another tool not shown would be a regression channel (derived from the close, with 2 Std. Deviations) and the bullish resistance of that channel would be 930.

The only worse position a bear can be in under a "short-covering rally" is a "short-covering rally" combined with bullish buying. Watch those bond YIELDS as selling in Treasuries is most likely going to bring a new round of bulls to the party.

Today's action saw the S&P 500 Bullish % see a net gain of 9 stocks to new point and figure buy signals as the bullish % rises another 1.8%. Internals continue to show strength and bullishness grows to 54.6%. Watch those bonds if the bullish % is going to make it to 70%!

S&P 100 Index Chart - Daily Interval

While the broader SPX closed above its conventional 19.1% retracement of 918.43, the OEX shows its 19.1% retracement as a "last level" of inter-retracement that would still be in play. However, the reason for this is that the OEX did NOT break below its July lows like the SPX did. So.. don't necessarily thing that the OEX is more "bearish" than the SPX just because it is below its 19.1% retracement. After all, the OEX did NOT violated its July lows in October and that was a HIGHER low. Still, the 19.1% retracement gives us a level to monitor against for further bullishness that we don't have in the SPX at this point.

I've added an upward regression channel to the OEX chart and a horizontal trend from the mid-January relative highs of 475. Please remember that by January, the OEX bullish % ($BPOEX) had reached 76% in early December, and had fallen to 60% (lost 16 stocks to point and figure sell signals) by mid-January and was showing internal weakening at that point.

Today's action saw the narrower S&P 100 Bullish % ($BPOEX) find a net gain of 3 stock to new point and figure buy signals. This has the bullish % growing to 52% and still "bull alert" status. It will still take a reading of 62% to achieve bull confirmed, but bulls are getting closer now than when this indicator first reversed up to "bull alert" status at 28% on March 19th.

NASDAQ-100 Index Tracking Stock (QQQ) - Daily Interval

The NDX and the QQQ both had a decent session today and while they both "wavered" either side of their WEEKLY R1s in the first hour's of trade, their MONTHLY R1s served similar support as found in the BIX.X.

Stochastics are "overbought" and one only knows how long this can last. Tomorrow or the next couple of weeks? Bulls will use it as a sign of caution and use today's observation of morning support at MONTHLY R1 as a stop.

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 4 stocks to new point and figure buy signals. This has the bullish % rising to 65%! A reading of 68% is needed to achieve "bull confirmed" status, but then we're reaching more RISKIER levels for bullish trades. Remember, this bullish % reached 82% in December and it can always go to 100%. Just understand that levels at or above 70% bullish are deemed HIGHER RISK for new bull entries.

Jeff Bailey

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