Option Investor
Index Wrap

A Fifth Term!

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That's not the President who can only re-up for one more as there is the matter of the U.S. Constitution's term limits - that would be 2 or 8 years. No, that would be Alan (king of the Fed) Greenspan. Really quite amazing, especially considering he's of an age where - well, when I'm that age I hope I am tending my rose bushes or racing cars at Indy or something else.

Since President Bush indicated that Greenspan would have his support for his fifth 4-year appointment in June 2004. Chairman Greenspan, whose life probably consists of making those ponderous speeches before Congress promptly said "I do" or some such.

Anyway, you got to admire the guy - all this was pretty darn reassuring to the country's business leaders, who mostly like Greenspan's fiscal conservatism and fierce independence. He will need that fiscal restraint and independence to be a finger in the dyke as we approach another round of tax cuts bound to cause U.S. Government debt to increase at an even faster rate. Getting back to business heads, they are still a pretty pessimistic lot and we need them to unloose the hounds and spend some bucks, buy software, new PC's, and especially NEW employees.

Well, while some "technicians" interviewed by the Wall Street Journal are getting bullish, more bullish or just less bearish (this article also means that the Journal probably couldn't find the fundamentally oriented investment advisors agreeing on much),

Technically, a bullish is case is not indicated UNTIL a prior significant rally peak is exceeded and this is not the case yet -

The S&P 500 (SPX) needs to get above its prior closing high at 929 (and the cluster of intraday highs in the 928-932 area in general) and the Nasdaq Composite (COMPX) has to close above 1461 per the right hand chart above. We got very close to this last week as you can see - but, until proven otherwise, what we got here is a potential double top.

Now, I love to short stock and/or buy puts on such patterns, ESPECIALLY when a double top occurs at an overbought reading on the 14-day day Stochastic model as shown below the price chart. Some might say that we even have a bearish price/RSI divergence on the COMPX. While the prior RSI peak was from slightly over a month ago is not as valid a signal so to speak as if it had happened a week or two ago - still, you like to see a "confirming" HIGHER high on the oscillator type indicators.

The pattern of higher (down) swing lows and higher (up) swing highs is what has some market technicians figuring the trend is looking bullish. But, it ain't over until the fat lady sings the song of a new rally high. Buy puts at the rally peaks that don't exceed the last one - this strategy is also based on a favorable risk to reward outlook.

At a prior significant top, you can stop out or exit a trade just over the prior closing high. Downside (reward) potential relative to this is usually quite favorable, such as 3 to 1 or more. Lets say you bought NDX puts or shorted QQQ when COMPX got to 1461 again - hold risk to a move of 7-8-10 Composite points above that - downside potential on a rally failure may be back to as much as to recent prior lows in the 1360 area in COMPX.

But I digress, as I want to go on to happenings on Friday and for the week.

First-quarter GDP or our attempt to gauge the output of all the goods and services produced in the U.S., rose 1.6% (after growing 1.4% during Q4), according to the Commerce Department.

The economy continued to barely maintain growth during the first 3 months of 2003 as the war in Iraq and horrible weather put a lid on growth. The White House said the weak performance adds urgency to its tax-cut plan. Now, myself, I am not filled with confidence on this - a dividend cut will not put money in the hands of individual consumers although it should allow more dividend paying corporations to retain some cash. However, the problem with business spending is what I've already mentioned - the LACK of confidence felt by CEO's. Time will tell.

Though Q1 growth is encouraging for the U.S. not being headed into a double-dip recession, the growth rate is slower than the 3% rate economists say is needed to help revive the struggling labor market. This is why the current growth rate is called a job-LESS recovery.

Since early-2001 when a recession began, there have been cuts of more than 2 million jobs. While I am not pessimistic on the economy, I can't yet be optimistic on a growth in jobs. Hey, if you have kids graduating soon, send em to grad school!

Back at the Fed - the anemic GDP number probably won't affect the Federal Reserve's decision on interest rates in a few weeks. Alan Greenspan has been sounding less than optimistic on an economic rebound so seems more likely to ease than anything.

At the close, the Dow was down about 133.69 (1.6%) to 8306.35, while the Nas Composite dropped 22.69 to 1434.54. For the week, the Industrials were down only 31 points to 8306 and COMPX finished at 1434, actually up 9 points on the week or a gain of 0.6%. The S&P 500 (SPX) was also higher week-over-week with a close just under 899 which put it up 5 points (also a +0.6%).

Earnings reporting slows down next week - last week saw Sony announce some disappointing figures due to weak demand for TV's and other core products. Starbucks fell after indicating that weak earnings from overseas took its toll although it had an overall jump of some 60% in its Q2 profits. Hey, maybe their not buying American over there. Amazon, one of my favorite online retailers rallied another 15% after reporting a lower than expected Q1 loss. Is it only in America that you can lose money and still win big in the market sweepstakes?

The 10-year T-Note rose a quarter point as its yield fell 3.88. The greenback traded at 120.19 yen to the dollar, up slightly from 119.93 and the euro gained against the buck with a close at 1.1039 versus 1.1034. The euro is holding well above parity or 1 to 1 which, given our trade deficit, is not surprising I guess.


S&P 500 Index (SPX) - Weekly & Hourly charts:

SPX's daily chart started off my "bottom line" commentary above, so what is a new view here is of the weekly and daily chart. The weekly chart suggests that SPX has come right up to significant technical resistance at the top of the broad downtrend channel that it has been in for some time.

The Index could break out above this trendline, but it remains to be seen. The market is not that oversold yet on a 13-week basis. A weekly close over 900 is what is needed to suggest a bullish breakout - if this developed the index would need to hold this area on subsequent pullbacks.

The hourly chart is of interest too. Looks like a bearish flag has formed, projecting a further move to around 885 even though the longer hourly stochastic is oversold. Pattern trumps indicator so to speak.

If long puts stay with them with an objective to the 890-885 zone. I would be a call buyer on a further drop to 875.

S&P 100 Index (OEX) - Daily & Hourly charts:

The same hourly bear flag as on the 500 chart is outlined on the S&P 100 (OEX) hourly chart below (right). The last extreme in "sentiment", according to my call/put indicator (see lower left on the daily chart below) was a bullish one and I think that will start to have its common contrary bearish effect. The bear flag implies possible downside to as low as 450-452.

Oversold on both hourly stochastic models implies normally some potential to rally, but the bigger picture daily chart RSI which I discussed earlier on in my Index Trader wrap will work against the shorter-term oversold. There is some near support in the 454-455 area suggested by the prior hourly highs - this will be a key area to watch. Strong buying interest there would suggest some rally potential, say to resistance at 460 where I suggest put purchases again. On balance I think OEX is headed lower before there is much of a near-term rebound.

Nasdaq Composite Index (COMPX) - Weekly & Hourly:

The weekly chart (the daily chart has already been shown above) is of interest in terms of the Composite putting in the possible "V" bottom that is outlined. This secondary bottom developed of course after the earlier lower low.

Near-term the Composite maintains a bullish chart if it can find support and buying interest comes in at the prior highs - if prior resistance in the 1427-1430 "becomes" support, the bulls more or less look like they have the control. The oversold hourly stochastics would support the idea of some rally potential from this area.

The chart and technical picture for Nasdaq looks like this sector continues to outperform the S&P for a while. If there is another dip into the 1375 area, I want to look at calls or stock to buy that are key Nasdaq components. But that's ahead of the game - if in puts, stay with unless COMPX closes above 1450 again.

QQQ charts - Daily & Hourly:

I suggest buying QQQ on pullbacks to the lower trendline intersecting around 25.5 currently. However, I don't have major bullish conviction due to the continued low volume and the fact that the Q's got pushed back right where anticipated in the mid- 27 area. Look for lower prices in the short-term on QQQ.

Note that from a daily to hourly time frame, there is downward momentum showing. The daily stochastic (left, above) is looking like it can and will generate a crossover downside sell "signal" on a further sideways to lower trend. If short (or long puts) stay with that - if not in, but wanting to be, I suggest new or added shorting in the 27.25 area.

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