Option Investor
Index Wrap

It was the worst of times, it was the best...

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While somewhat backwards to Charles Dickens' "A Tale of Two Cities" and opening line "it was the best of times, it was the worst of times..." which is thought by many literary scholars as one of the best known opening lines in Western Literature, traders have seen something similar in 2003 as the major indexes suffered the "worst of times" in January and February, but have recently experienced the "best of times" as fractional bullishness in March, swelled to an tidal wave of enthusiasm in April.

While the major indexes dilly-dallied around the unchanged level for a second straight session, the month of April marks the end of the "best six months" period. At least for the Dow Industrials. According to the Stock Trader's Almanac, from 1950- 2001 a trader that systematically invested $10,000 on November 1 and sold those shares on April 30th, then reinvested the proceeds the following November, would have seen his/her account grow to $457,103 with a win/loss record of 40:12 over those 52 years.

Conversely, the months from May to October have been more unsettling for bulls as a $10,000 investment in the Dow Industrials on May 1 and sold on October 31 on a systematic basis the past 52-years, would find that trader/investor having shown a $77 loss in his/her account and questioning that a bull market ever existed. The win/loss ratio over the past 52 years still showed a positive batting average of 31:20, it's just that some years were more bearish than others.

While the index option's trader most likely discards this little bit of trivia, it builds a "larger picture" around past market history and potentially the next six months.

How did the Dow Industrials do this past 6-months? From November 1, 2002 to April 30, 2003, the Dow gained just 83-points or 0.98%.

Now... you shake your head in disgust? For those subscribers that received their "free gifts" for this year's special OI offers and chose one of the packages that included the Stock Trader's Almanac, you're reading on (page 52 of the Almanac).

In his book "Riding The Bear", Sy Harding took The Stock Trader Almanac's November-through-April strategy and enhanced it by simply using the MACD indicator. In brief, Mr. Harding found that in a trending higher market (November-May), the bull run often extended itself by a month.

Time will tell on this one won't it? Ah, but what a wonderful time to recalculate the forward MONTH (May) pivot analysis points. Are the "best of times" over, or is there some upside still to be had? In April, the Dow traded its MONTHLY R1, can it do it again with the trend being higher?

Gosh darn it! There are so many interesting things I want to discuss and show with the charts, but I know I won't get the wrap done in time. So... some real quick things I want to say.

The first is, there are 2 major things I don't like for bulls. One is we saw a tremendous round of buying in Treasuries today. I continue to keep a bullish outlook on the major indexes as "somehow" demand continues to be in control. The second thing I don't like is that the NASDAQ-100 Bullish % ($BPNDX) has reached the more "overbought" 70% level of bullishness. After listening to some "perma bears" say the market have been too bullish and overbought for the past couple of weeks, I'm more willing to listen to them as it relates to the NASDAQ-100.

I need to show the pivot analysis matrix here, as it may give some insight as to "why" a trader still keeps a "bullish bias" into May (per above discussion of an extra month of bullishness with trend higher). However, the buying in Treasuries doesn't have me necessarily looking through "rose colored" glasses, despite our thinking that April showers will bring May flowers! Get it? ROSE colored glasses, May flowers?

Pivot Analysis Matrix

Quickly... Red arrows at the 10-year YIELD ($TNX.X). I don't like the buying in Treasuries. Why buy 3.9% when the markets are on the move? Bears will say, "because you idiot, the market has overpriced equities based on the weak economy... it won't last." As I try and think "both sides" of the market, I can't come up with a bullish reply to this trade.

Pink... today's range for the NASDAQ-100 Tracking Stock (AMEX:QQQ) $27.45 -1%. I profiled a bullish trade intra-day for the QQQ from $27.53 for day trader's today (underlying QQQ) based on the way the QQQ had held our "zone of support" from $27.40- $27.51 after having traded a late-morning high back into the "zone of resistance" at $27.74-$27.76. On the intra-day pullback, I thought good chance of another scalp move back into the $27.74-$27.76 area. However, a rally back fell short at $27.73 and at 15:17:43, when the QQQ was trading $27.65, decided to "stick out my QQQ trade at $27.70 for exit. QQQ traded $27.71 three-minutes later and that was the end of that. QQQ settled right back in its zone of support.

Market Monitor Observations

I've mentioned in Index Trader Wraps and intra-day updates certain things I've said, or other analysts have said in the market monitor. True, these are intra-day observations, but in a way, by trading my own account (profits and losses) I get a feel for things, make comments, read some other analyst's comments in the monitor and weigh against my own observations. For ANY subscriber that thinks OI's commentary is "too bullish" you haven't visited the market monitor. Bearish sentiment was running so thick in there this morning, you couldn't have stirred it with a CAT tractor. I think I gave Jonathan an uptick to a short at $27.53. If he's still holding then he's up at session's end. Day trader's cut out with a small gain perhaps.

I'll show an intra-day chart of the QQQ a little later, but take note of the QQQ correlative support at DAILY S2 and WEEKLY Pivot for tomorrow. A break below $27.40 most likely sees the Q's there at some point in tomorrow's session.

I've seen some crazy things over the years with the bullish %. Institutions use this indicator more than anything when assessing inventory risk. More times than not, when this indicator reaches 70% or higher, there is usually some type of "risk management" taking place and the QQQ is an excellent type of "hedge" security for NASDAQ market makers. While I can't show you anything "in stone" that the QQQ would be immediately shorted as a hedge, I plant the seed in the back of my mind and begin to make some observations. My mindset for the QQQ now is short-term bullish trading opportunities, but begin to understand that this "market" (NASDAQ-100/QQQ) is now riskier for bullish trades. My mindset right now for bullish trades is that I'm looking for pullback areas where an "uncertain bear" is going to try and cover, offer a little support for a pop. The best I could have "hoped" for today (figure of speech, I don't "hope" for anything) was a move into the $27.74-$27.76 area and get some type of "surge" in volume for a spike to $28.00. That would have been a lot to ask for considering today's Treasury trade, but there's no fury like a bear that wants to cover.

The other "pink" boxes in the Dow Industrials (INDU) 8,480.09 - 0.26% play more into this MONTH's trade. The Dow levels are very interesting (I think), and if the BIX.X new MONTHLY Pivot of 281.50 doesn't grab your eye, then we need some review there. Past observation/thought was that the financials would lead an advance. With Treasuries seeing buying, then I view RISK to the downside in equities. This 281.50 level is important in the BIX.X.

S&P Banks Index (BIX.X) - Daily Interval

The BIX.X really helped give the SPX and OEX a boost the last couple of weeks, and after a strong move higher, has been consolidating around the 287.57 level. I quickly looked at the new MONTHLY levels and the BIX.X 281.50 caught my eye. A decline from current levels to 281 would be a 2.9% decline. Not certain, but this might equate to a 4 or 5% decline in the SPX and OEX. Remember, they've got some higher beta technology stocks in them.

So let's do this real quick with the SPX. In this weekend's "Ask the Analyst" column, we did some "interesting" things with a chart of the Rydex URSA (RYURX) $12.05 +0.33% mutual fund, which is a bear fund set up to trade the INVERSE of the S&P 500 Index (SPX.X) 916.92 -0.1%. In today's market monitor (I'm going to change the name of it to "the bear's den") I showed an updated chart of the RYURX using the 1% box scale. What would a 3 or 4% decline in the SPX look like, if I plotted the SPX on 1% box scales?

S&P 500 (SPX.X) Chart - 1% box scale

I'm "intrigued" with the BIX.X Monthly Pivot so I'm a little intrigued with the SPX and OEX monthly pivots. One thing we noted in today's market monitor and SPX chart is that the recent pullback was 3 "O's" and not 5 "O's." I thought it must be because the MARKET thought the economy was going into the tank. Right? This 1% box scale tells a "similar story" that the conventional 5-point box scale told in last night's Index Trader Wrap doesn't it?

Holy Cow! I'm just seeing this. I looked at last night's Index Trader Wrap and SPX chart http://members.OptionInvestor.com/Itrader/marketwrap/iw_042903_1.ASP and see I had posted "stop!" at 895. That's pretty close to this MONTH's new Pivot of 896.3 and may also tie in nicely with a BIX.X at 281.50.

Dow Industrials Chart - Daily Intervals

Thinking... is it possible that we might see a rotation OUT of the NDX/QQQ stocks near-term and back into some of the stodgy Dow stocks? Remember how we've seen the Dow and the QQQ seem to "switch places" within the matrix. For a week or two, the Dow seemed to trade a little stronger within the matrix, while the NDX/QQQ traded their WEEKLY S2s? Then, suddenly, the QQQ/NDX shot higher and traded their WEEKLY R2s, while the Dow only managed a WEEKLY R1?

There's something about these MONTHLY Pivots that needs monitoring, especially as they tie in with CONVENTIONAL retracement levels.

OK, running way late. I'm going to show some intra-day charts of the NDX and OEX here that I posted in the market monitor. It takes some time to get my MONTHLY retracement brackets on the various indexes, and make any type of proper observations.

NASDAQ-100 Tracking Stock (QQQ) - 5-minute intervals

The QQQ closed today's trade at $27.45. The above chart is what I was looking at at approximately 11:55 AM EST, when I profiled a bullish day trade long in the QQQ. The QQQ closed back in the "zone of support," but with buying in Treasuries and selling at our "zone of resistance" from $27.74-$27.76 and "failure to test" later in the day at $27.71, I'm thinking WEEKLY Pivot test tomorrow. The higher 70% bullish % further that thinking right now.

S&P 100 Index (OEX.X) Chart - 5-minute intervals

The OEX did indeed "pop" from this level of trade at 02:00 and "jumped" to an afternoon high of 468.25 at approximately 02:40 PM EST (02:00 is 14:00). See the "zone of support" from WEEKLY (blue) retracement and our "old" MONTHLY (red) retracement. The OEX closed at 464.83 and ABOVE this zone of support.

If I compare this observation and that of the QQQ, then perhaps an "equity asset shift" might be taking place away from the QQQ/NDX and not as much from the OEX/SPX and perhaps Dow INDU.

I'll work on my other charts and get the new monthly retracement on them for tomorrow.

Quick bullish % updates.

The very narrow Dow Industrials Bullish % ($BPINDU) saw no net change in today's trade. Still "bull alert" at 50%.

The narrow NASDAQ-100 Bullish % ($BPNDX) saw no net change in its bullish % today. Still "bull confirmed" at 70%.

The narrow S&P 100 Bullish % ($BPOEX) saw a net gain of 1 stock to a new point and figure buy signal today. This has the bullish % growing to a cycle high 58% bullish. Still needs a reading of 62% for "bull confirmed," but then like the NASDAQ-100, gets closer to 70%.

The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 1.4%, so an additional 7 new point and figure buy signals were generated. This had the S&P 500 Bullish % growing to a cycle high 57.8% bullish. December's high reading for this indicator was 68%.

Jeff Bailey

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