Option Investor
Index Wrap

Mach .97

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Daily Pivots (generated with a pivot algorithm and unverified):

Figures rounded to the nearest point:

           R2     R1    Pivot   S1     S2
DJIA      8854   8790   8680   8616   8506
COMPX     1565   1553   1533   1521   1501
SPX        958    952    940    934    923
OEX        484    481    476    473    468
QQQ      29.45  29.15  28.66  28.36  27.87
The bulls hesitated for a moment this morning, and drove the indices to new rally and year highs, and then held them to within a hair of those levels for the entire afternoon. It was reminiscent of the famous scene in "The Right Stuff", in which Yeager, busted rib and all, pushes the 'Glamorous Glinnis' to just below the sound barrier, not knowing if it was even possible to push through.

The fed added a moderate $1.5B net with a $4B in three day repurchase agreement against the expiring $2.5B in weekend repos.

There were some interesting divergences in volatility across the indices, with the VIX dropping 0.62 to a new rally low, closing at 21.42, QQV +1.72 to 28.50 and VXN +0.49 to 32.58. Overall volume was strong with 1.71B NYSE shares and 1.77B COMPX shares traded.

The US Dollar Index spent the day recovering from its nightly selloff, touching 94.11 before rebounding to above 94.50. Gold spent the day above the 350/oz level, with the Commodities Index (CRB) breaking and holding above 240.

On to the charts:

Daily chart of the INDU

Today's action brought the INDU to, if not through the top trendline on the ascending wedge. In fact, if viewed as a wedge, the pattern still looks intact, but as a flag, today challenged some of the symmetry on the formation. The stochastic reversed before even touching the midpoint of its run from overbought, printing another buy signal. The shallowness of the pullback followed by a renewed bullish cross is a very bullish signal. If tomorrow can give the bulls a further confirming advance, 9000 on the Dow will begin to look like a reasonable destination.

Weekly chart of the INDU

Daily Chart of the SPX

The SPX tells the same story as INDU. There's a fresh stochastic buy signal, and no hint of a sell on the trending MacD. Whether the SPX can hold today's gains or returns to the lower trendline (or the rising 5 day SMA) will have to be seen tomorrow.

Daily chart of the OEX

The OEX looks weaker than either the INDU or the SPX, having not yet violated its upper trendline. Is it trying to tell us something about the conviction behind today's rally? The OEX (and NDX / QQQ) are generally thought to "lead" the broader indices, being comprised of the favorites within those indices. Once again, tomorrow will tell us.

In the interest of variety, and hopefully insight, I've attached daily and weekly chart of the OEX:VIX ratio (and equivalent for the QQQ:QQV). As we've been seeing with the put to call ratio, the relative level of an indicator is of greater significance than its absolute level. Particularly for the QQV, which broke to alltime lows last week, its position relative to the QQQ is instructive. The thinking is that a reversal in the OEX relative to the VIX will signal a change in trend. On the charts below, the moving averages are useful to smooth out the choppy candle patterns:

Daily chart of OEX:VIX

As the OEX rises and the VIX decreases, the OEX:VIX ratio increases, and vice versa. Note that on the daily candles, the ratio is far beyond its January peak level.

Weekly chart of the OEX:VIX

On the weekly view, note that the OEX:VIX has not yet attained levels comparable to those reached at the March 2002 peak. However, the stochastic is very toppy and not yet trending. The OEX:VIX will reverse when the VIX begins to rise, relative to the OEX, presumably by the OEX turning back down. The weekly stochastic tells us that this could come soon, while the slower MacD is still on a bullish "buy" signal.

Daily chart of the COMPX

The COMPX, like the OEX, set a new rally and yearly high, but has yet to violate the upper trendline. There's no hint of a sell signal on the oscillators, and we'll have to watch the upper trendline tomorrow. I see nothing bearish here other than the well-described and over-discussed bear wedge.

Chart of the QQQ

Like the OEX, the QQQ chart looks weaker than that of its broader index. Note that the stochastic went below the 50 level, whereas that of the COMPX did not, signaling less strength in QQQ than in the COMPX.

I've included the QQQ:QQV charts below:

Daily chart of the QQQ:QQV

Note that today's spike in the QQV gave a strong "sell" on the stochastic and the MacD, despite QQQ advancing today. Does this portend a change of trend, and a top this rally? Again, tomorrow will have to tell. But we have the first bearish cross on the MacD in one month, and the strongest sell signal in several months on the 10,1,5 stochastic if tomorrow does not reverse it.

Weekly chart of the QQQ:QQV

Tomorrow will be a critical day with respect to what was a very bullish day for equities. While bears have a very long list of very convincing intermarket, macroeconomic and fundamental arguments, the tape is the final arbiter for traders, and it's been giving some bullish showings during the past month. Whether you're bullish or bearish, trade what you see. In every case, let your stops protect you. There's no question that this rally has produced some extreme overbought readers on different indicators, but the price is the price. See you tomorrow at the bell.

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