Option Investor
Index Wrap

Climbing a Wall of Worry

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The market, especially in a transition out of a full-blown bear market will sometimes seem to be climbing a "wall of worry" - and investors have plenty to be concerned about: record high unemployment, less available work for those who are working and economic policies that lack a bold new prescription for change.

The public has seen the winning effects of a daring foreign policy, not seemingly matched on the home front by an administration banking mostly on cutting federal taxes still further as an engine of renewed economic growth. The states are strapped and may take the money back. Time will tell - hope they're right cause there is no back up plan as far as I know.

THE BOTTOM LINE -
Tech stocks, which have lost the most have had the best rebound off their March lows. With stocks like eBay nearly doubling off it's recent bottom - and, with substantial gains in share prices of the likes of Amazon and Yahoo, it's not surprising that investors have some enthusiasm for tech heck. The key test of demonstrating an actual up trend is still ahead however, as the Composite (COMPS) approaches its prior (Dec.'02) peak of 1520. The S&P 500 or SPX will need to manage to a weekly close over 960 to suggest a turnaround in the major bear trend.

Fortunately, to make money in options (and not having a crystal ball showing where the economy is going), us trader types don't need to bank on a sustained trend of months' duration. The current advance has had some legs and momentum. There was no excess of bullish sentiment last week - had there been it would have suggested more danger for a further bull trend. The market IS overbought, so is vulnerable to reversals - to overstay on the long side as we approach old highs is not the best bet. If you have call profits, you could start taking them off the table. An opportunity in puts is coming, maybe at the top of the uptrend channels we can see on most of the hourly index charts below.

FRIDAY'S TRADING ACTIVITY -
A bit of an early damper was provided by the Labor Department report on jobs - our economy lost 48,000 of them in April after 124,000 of them were lost in March, along with a decline of some 350,000 in February. Still, stock enthusiasts could see a declining trend - maybe the next month will go into plus territory and new job CREATION due to the resolution of uncertain economic fallout from the Iraqi conflict.

Total hours worked in April fell by 0.7%, with the average workweek falling 34 hours, matching the lowest level since the recession began. Economists had forecasted the average hourly workweek at 34.2 hours. As Jeff Bailey pointed out in a Friday mail, the 18-minute loss in hours worked is equivalent to losing more than 1 million jobs in terms of output.

The average weekly paycheck fell by 0.7% (to $513.74). As I noted, those that are working are getting less money. But hey, they got a job and the growing unemployed ranks probably would take less money and at least reverse money flows from out to in.

An upgrade from mother Merrill (Lynch) on the airlines gave a boost to this very depressed sector. The Merrill Lynch analyst speculated that the worst may be over - how bad can it get ahead with what has already been - SARS, war with Iraq and recession. The Dow Transportation Index popped to a multimonth high, although this is from very depressed levels, not seen in its sister index, the Dow 30 Industrials.

Stocks upgraded from neutral to buy included Alaska Air (ALK), Continental (CAL), Delta (DAL), and Frontier Airlines (FRNT). As it happens these are still ones I tend to fly (Alaska, when I can get up to visit Brother Jeff in Talkeetna) and think have their "act" together in one way or another. These guys and Southwest Airlines of course.

More economic data came along midmorning to give the bulls still more encouragement - March factory orders came in at nearly DOUBLE the consensus forecast. The U.S. Commerce Dept. reported that manufacturing orders rose 2.2%, the biggest increase since last summer and well above an anticipated 1.2% rebound.

For the day, the Dow climbed 128.43 points, or 1.5%, to 8582.68, the Nasdaq Composite 30.3 points (2.1%) to 1502.88, which was its first climb above the 1500 mark since last June. The S&P 500 Index (SPX) was also up 1.5 percent. The Russell 2000 (RUT) small-cap index was up even more, with a closing gain of 2.2%.

The Nasdaq Composite has advanced a bit over 15% since its March low, while the Dow has tacked on some 12%. During the past week, COMPX was up nearly 5%, with SPX and the Dow up a little over 3 percentage points. NOT BAD! Record oil profits announced by the big multinationals have boosted the oil sector and the S&P also.

Investors are banking on lower oil prices, an accommodative FED policy, improved corporate cash flow, some improvement in capital expenditures, some inventory accumulation and some added tax relief to lead to a better year end economy - better than the economy being on its rear end! Oh, this all and some pretty decent earnings seen in the last quarterly reports too.

OTHER MARKETS -
The 10-year T-bond fell a substantial 22/32, as money came out of bonds and into equities. The 10-year yield rose to 3.925%. It may not complete much with stocks until it's back at or above 4%. The dollar was up a bit against the Yen and flat against the Euro, which continues to advance - it ended the week at a buck 12 (1.12). Better take that trip to Spain or Italy - not to politically incorrect France or Germany - sooner rather than later folks!

MY INDEX OUTLOOKS -

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

A downswing I thought might have taken SPX to around 885, based on a possible bear flag pattern on the hourly chart, was not to be - the oversold stochastic trumped "pattern" this time. The key technical event was the ability for SPX to pierce resistance in the 920 area - (prior) resistance now "becomes" near support. 935 is the current top end of the rising hourly uptrend channel.

The 935-940 area if reached, is where I would look for a lid on the current rally and do some put buying for an objective to 920, as I think it's likely that that area will be re-tested at least once.

You can see on the weekly chart above (left), the key trading range and suggesting 960 as both resistance and a possible "breakout" point for SPX. If the S&P gets to the 960 area it will likely be registering a longer-term overbought on the 13- week RSI. Meanwhile on the daily chart, the RSI is registering that kind of extreme (overbought) already. This usually if not always suggests that the market is vulnerable to downdrafts and shocks, which is not to say just WHEN they may happen.

No excess is seen in the 10-day TRIN measuring buying and selling activity in the NYSE. Lack of a fever pitch of buying or selling or a quiet market is common in turnarounds in bear markets, if that's what this is (and that I have been suspecting that it is, based on the long-term up trendlines). There is usually not a lot of bullish conviction prior to when the economy starts growing again.

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

This past week saw no extreme readings in my Call to Put indicator, so the extreme in call buying seen the week before was not "confirmed" so to speak. Rallies tend to go further when there is disbelief in the climb out of the pits.

475-477 looms as important potential technical resistance based on the hourly uptrend channel and an approach to the March top - I would bet on the selling to be in this area and look to buy OEX puts if sellers take charge and overwhelm buying interest.

The oversold hourly stochastic readings that existed coming into this past week was more telling than the overbought daily readings on these type indicators.

OEX is now approaching my upper trading band or envelope line and provides another indication that the market is getting extended on the upside - this does not have to indicate a reversal - it does suggest that the further potential for extending gains is limited without a pause, meaning at least a slow down in upside momentum.

The top end of the OEX price range will likely be in the 475 to 480 area. The downside of the expected range is to 458-460 in the coming week. A close under the last hourly low in the 458 area, which is also the approximate low end of the hourly uptrend channel suggests a deeper correction, such as back down to the low 450's.

Dow Industrials - Daily & Hourly:

While a retest of the March top around 8800 is a key longer range target, important near resistance is at 8600 at the top end of the hourly uptrend channel in DJX. I anticipate a 8600 to 8400 range in the Dow.

If the Average holds at or above the prior tops around 8530-8550 - (prior) resistance "becoming" support - a strong buying interest is being demonstrated and more of a sideways correction may be in the offing. This is a tricky market to call - our "usual" expectation for the rally to go to expected zones of resistance then fall apart, has not been happening at least yet.

Nasdaq Composite Index (COMPX) - Weekly, Daily & Hourly:

I mentioned 1520 before as an area of technical importance, which can be seen by this area being both the top of the hourly uptrend channel and especially by it being the prior weekly high - dating back to December (2002). If the prior peak is pierced, especially on a daily and weekly closing basis, the potential implied by the "V" weekly bottom begins to be more fully realized. If so, an eventual upside "measured move" objective, assuming rally potential equal to the first move up, is to around 1660.

A objective for a second up "leg" that was 1.6 times the first, which is not uncommon, would be closer to 1900 in the Composite. This is a second longer-term objective as a possibility assuming a decisive move above the prior top - an uptrend only being established when the prior upswing high is passed.

Last week, the Composite did maintain its bullish chart per my comments, by finding support at and above the prior highs at the low-1430 area, as the line of prior resistance "became" a new support. As well, the oversold hourly stochastic model lent support for an assumption for rally potential from this area.

The use of the 6% trading envelopes on the COMPX chart above, relative to its 21-day moving average (middle line), gives an idea of where the COMPX reaches an overbought or extended price area. It does not tell how soon that will happen, which is of almost the same importance to trading the index options. However, its a better than even bet that if a move to 1520 develops, there is significant likelihood of a pullback again to the low end of the hourly channel around 1475.

Nasdaq 100 (NDX) Index - Daily & Hourly charts:

Since we can't trade the Composite directly, we move on to the Nas 100 chart that we can buy/sell. 1160 is resistance and 1110 near support, implied by the hourly trend channel. A break of 1100 suggests a move back to 1080 at least and a close below 1080 in turn suggests possible downside back to as low as a retest of support in the 1020 area but this is probably too bearish a view.

QQQ charts - Daily & Hourly:

Near QQQ support looks to be 26-26.50 or a bit higher, judging by the relevant trendlines. The rally this past week came before any next dip and my suggestion to buy the Q's if they got back to the 25.5 area was something that was not to be. Right idea, WRONG price!

I haven't had a lot of bullish conviction due to the relatively low volume, but then again this is not uncommon in this kind of market. If there is a turnaround developing that is more than another bear market rally, there is not a lot of initial bullish enthusiasm. I can find this in myself certainly as its hard to get enthused about stocks in such an uncertain economy. If the market is starting to account for or "discount" better times ahead, a common characteristic of stocks, then that's another thing. Hey, if it (the market) was easy to figure, we'd all be rich(er)!

As with NDX, the tracking stock exceeded both its March high and early-December closing high, which is bullish action. (NDX would have to get above 1155 to take out its early-December intraday peak and QQQ would need to top 28.79 for this same hat trick.)

At this juncture, there are a couple of possible hourly uptrend channels that can be drawn - one narrower, one wider, as I have drawn them above. One resistance point intersects around 28.5 as shown - the other, comes in around 29.75. There is near-term upside momentum suggested by the hourly stochastic mode, but with the daily stochastic up at an overbought extreme.

Being at an extreme does not suggest that the rally is going to stop just yet, so we have to see. If QQQ falters in the 28.50 area it's a good indication for shorting. If the stock goes though this implied resistance and upside momentum continues AND if 29.50-29.70 is seen, shorting/put buying in this area becomes a good opportunity in my estimation.

Good trading success!

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