Option Investor
Index Wrap

If not stocks, what else\?

HAVING TROUBLE PRINTING?
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This is the question to ask in this market if you are scratching your head as to the sustaining nature of the current rebound. When looking at competing investments, we see low (and declining) bond yields of 3.7% and 4.7% in 10 and 30-year government bonds, respectively. Real estate, while not in a broad overall decline, is now longer way outdistancing a low inflation rate. In fact, a key story this past week was some more noises from the Fed (the Federal Reserve central bank) about concern about DE-flation. Deflation, in case you're not familiar with this rare phenomena, is when prices of goods and services are in a downward spiral.

You would think falling prices are a good thing - however, if businesses can't raise their prices, their profits gets squeezed and earnings per share decline - not exactly great for stocks.

If the overall market manages a 2003 gain of 2/3 of its historical average annual increase of 10%, this potential for gain can be more attractive than a 3.7% fixed rate and the money is liquid. Throw in some dividends that are not taxed or taxed less according to the tax plan at hand, and you have a case for stocks that money managers and many savvy individuals find compelling. So folks don't fight the tape if you can't trade the indexes the way you're used to doing - and we are habituated to seeing rallies fall apart at some point, with the larger money bets paying off in puts or short index futures.

THE BOTTOM LINE -
The tech heavy Nasdaq indices continue to lead the market higher, as traders and investors overlook the weak jobs data and recent lackluster retail sales. Continued bullish price action suggest some further upside for stocks, as business spending on computers and other tech goodies rebounds, or is expected to, later this year (and, we're almost in the second half). Investors are starting to focus on where they think earnings will be at year end, getting us back to the tendency for stocks to be priced, relative to earnings, that reflects an outlook about 6 months or so ahead of today.

In terms of trading, in the Nasdaq Composite (COMPX), 1530 is near resistance - if this level is pierced, it bodes well for yet another up leg before COMPX has a deeper correction (at least look for 1520-1530 to be retested, if not 1500). Major COMPX resistance looks to 1575, then 1600. In the S&P 500 there is near resistance in the 933-938 price zone just under 940, but more significant is 960 as it looms as major resistance - this area could still mark the top end of trading range until the next round of earning reports come in.

FRIDAY'S TRADING ACTIVITY -

Some more bargain hunting type buying came in on Friday after a prior couple days of weakness - some bullish news from Intel (INTC) helped out. By the way, tech bellwether Intel and Cisco (CSCO), as well as IBM are all acting well. This is the thing in this latest rally as a number of charts are starting to look bullish.

The Dow held its early gains, finishing up some 113 points which is a gain of 1.3%. The Nasdaq Composite was up an even more substantial 30 points or 2%, to 1520.

Dow component Intel said it sees strong demand in China and expects a recovery in the semiconductor industry this year. The news drove Intel shares up 3.7%, and technology stocks higher across the board.

Graphics-chip maker Nvidia jumped a whopping 33% after the company beat analysts' expectations for Q1 and provided the Street of Dreams with an upbeat outlook for Q2 - love that tech.

In other major news, the House passed a bill reducing taxes by $550 billion over the next 10 years. GOP legislators said this would prop up the economy. Democrats said this measure would cause a big increase in the federal deficit.

The proposal contains many of the income-tax cuts in President Bush's economic growth and jobs plan, but stocks showed little reaction as the bill falls short of the complete dividend-tax cut that was hoping for.

Traders weren't able to take direction from any economic data Friday as no government reports were released during the day.

OTHER MARKETS -
The 10-year note was up an 1/8 of a point, to close the day with a 3.7% yield. The dollar was up to 117.19 yen, from 116.84 late Thursday, while the euro closed NY trading at 1.1490, off from 1.1500. Whew! Is it time to sell my Spanish condo and take the euros and run?? Na, I'll take the rent money instead and go take a long vacation in "euroland".

MY INDEX OUTLOOKS -

Longer-term chart view

I've commented at times over prior weeks, that both the Composite and the S&P (500) had come to their long-term up trendlines. This is, so to speak, the long-term growth path or rate of change, for stocks. The price scale for prolonged big price moves has to be the semi-logrithmic chart, where equal percentage moves measure equal distances on the chart; e.g., a move from 200 to 400 (a 100% change) is equal to the distance traveled up the scale from 400 to 800.

The short-dashed (upper) trendline on the monthly SPX chart is an "internal" trendline connecting the most number of points. However, the conventional means of an up trendline construction of connecting 2-3 extreme lows (preferably 3 at a minimum) shown by the long-dashed line also is also demonstrating the very-long term uptrend as it defines where buying interest is coming in to buoy the index.

There is a common tendency for prices to come down a second time or a cluster of times to such a major trendline - so, the bottoming process if that's what it is and it's how I see it, can take some months. A transition to such a major bear market is not typically going to be a turn on a dime "V" type bottom.

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

Since the Composite is key to the overall market, I'm starting with this index. Clearing the prior closing high in the 1480 was bullish and set up a next target to at least 1520-1521, which was reached an then some. The subsequent pullback to 1480 followed immediately by another strong rebound was quite bullish action as prior resistance "became" new support.

It's still the case that with the prior top exceeded on a daily and weekly closing basis, further upside potential is to the 1600 area, which is a "measured move" objective in that it assumes that the next rally would at least be equal to the first up leg.

In case its not immediately obvious, the left chart above is daily and right is the 60-minute chart. Key support noted on the hourly chart looks to be 1480. If there was daily close under 1480, the chart turns bearish. The daily stochastic has gotten to an overbought reading so it suggests the potential for a sharp correction on news or some event that is taken bearishly.

For now, COMPX is back in its uptrend channel and looks to be heading back up to near resistance and the prior peak in the 1530 area. Resistance implied by the upper end of the channel comes in at 1570 currently, but this will rise daily.

Sometimes prices will reach the upper trend channel boundary, sometimes it only gets near it before coming back down. If there is a move to 1575 it's a better than even bet that COMPX at least comes back down to 1530.

My expected maximum price range this month for Nasdaq is 1500 on the downside, 1600 on the upside. I think we have to see Q2 earnings improve to get a sustained move to above 1600 and we won't know this for a while.

As someone else said in their OIN commentary, there is willingness to buy into perceived support areas in the indices, but not enough bullish enthusiasm to take em above or much above areas of supply or price areas where sellers are likely to offer substantial stock for sale.

QQQ charts - Daily & Hourly:

I often will say that a 1-day close under expected support does not prove a bearish reversal until there is a second consecutive close at or below the same level again to prove the reversal so to speak. As we often see, resistance once broken becomes support and vice versa (support once pierced becomes resistance). The prior closing price peaks at $28 would be expected to provide support on pullbacks once the Q's climbed above this level. There was the 1-day close under 28 on the jobs and retails sales report of Thursday, but then the rebound as the "buy dips" crowd came back in on Friday - they're the ones looking ahead.

I still think we got both a narrow and a wider trend channel going on the hourly chart so I note possible resistance in the 29 area, then again at 30-30.25. Would like to do scale up shorting in QQQ - once in the 29 area and again at 30-30.25. My downside objective is to the 27.25 area.

Conversely, if prices head down again before again heading higher to possible resistance, I lean to buying the stock in the $27 area if the hourly trendline appears to define support. Given the downside momentum showing now on the daily stochastic, we have to allow for the chance of a move back down to the daily chart (up) trendline, and to prior lows, in the 25.75-26.00 area.

Summing up - am prepared or predisposed to be a buyer around 27, but would watch this area if/when reached, as an "ideal" buy better sets up on a future oversold reading along with an ability to hold at or above prior lows around $26 - a 3rd. defining "touch" to the daily trendline on the close-only chart would build a better bullish case. Stay tuned.

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

As anticipated at least so far, the S&P 500 has not pierced 940, but it may given this renewed momentum late last week. There is room on the upside to get to 960. Certainly, on a weekly chart basis, SPX is not overbought, but it would be if there is a more or less straight line march to 960 which would offer a retest of a line of resistance there per the weekly and daily charts.

If 950 is reached at the top end of the hourly uptrend channel currently, then I look for some setback from this area although maybe not a major one - for example, SPX falls back to the 935- 938 area (from 950). The formation of an hourly bull flag on the SPX chart suggests that the index will move to a new high soon. A rally failure at or under recent highs would suggest that SPX could fall back to the 920 area however.

It seems likely that 960 would be the top end of a June price range. I am watching for whether a move to whatever new high is ALSO accompanied by a similar new high in the 14-day RSI. If, instead, a bearish divergence sets up by RSI failing to "confirm" (that new high), it will suggest a bearish play in puts is setting up.

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

The 475 level continues to look like technical resistance based on the recent rally peak. A new high is also quite possible given the pattern I see here. The series of higher relative lows and higher highs makes for a bullish trend - OEX is stalled at making a new high however. This may be just the back and forth movement needed to "throw off" the overbought condition and fake out the bearish sellers.

If OEX goes go to that new high, I anticipate the next significant technical resistance coming in around 483-485, at the top end of my projected hourly uptrend channel. If so I would at least take at least partial profits on calls in this area.

465 looks like an area for call purchases if buying interest again develops in the S&P stocks on a pullback to this area. Right now I see the hourly chart pattern suggesting a move higher first, such as to 480 at a minimum.

The most bullish aspect to the indicators I rely on is the fact that traders have either shown an overall skepticism to playing equity calls and have NOT gotten overly bullish and heavily into calls, as suggested by daily call volume levels relative to put volume as shown by my Call to Put volume indicator (lower left).

Just on a price pattern basis however, index traders may want to buy puts in the 485 area, if reached, assuming a top appears to develop at the top of the hourly channel, shorter-term or otherwise. It seems to me however, that if buying takes the OEX to 485 and a short squeeze develops into the June expiration, there may be an attempt to take the index to 500. There often seems to be a pull toward a big number like this. Hard to say now, but this is my speculation at the moment - stay tuned!

Good trading success!

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