Option Investor
Index Wrap

Weak enough to choke a horse. But feed a bull\?

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Part of my weeklong vacation was spent in western Kansas, and while that may sound as if it's an obscure place to take a vacation, but there was some excitement to be had.

Tornado warnings and high winds kept me indoors one afternoon, and when I got back from Kansan, I was wondering if I actually got caught up in never-never-land as today's economic news looked weak enough to choke a horse, but as has been the case in recent weeks, not weak enough to unsettle a bull's appetite for stocks as the major indexes all finished in positive territory.

The closing values of the indexes looked to me as if I hadn't missed much, with the major exception being Treasury bond YIELDS, which have continued to fall with the weaker dollar. On the surface, there was little change in the equity indexes, but the market internals continue to strengthen as depicted by the bullish % readings, which have all moved higher.

While I didn't see any other Turkey hunters (note the difference between hunters, not getters) on the western plains of Kansas, market volumes have tapered off notably in the past week as if other traders took the week off in a last chance effort to bag a tom turkey before season's close.

While volumes have been tapering off from last week's levels, today's plethora of economic reports did have NYSE volume back above the 1.4 billion market a 1.43 billion shares. After two session of breakeven and fractionally negative breadth, advancers outnumbered decliners by a 5 to 3 margin. After Monday's 290 52- week highs, today's 254 new 52-week highs is the second highest total of new highs so far this year, and many months. Only 4 stocks hit new lows on the NYSE.

NASDAQ volume came in at 1.95 billion in today's session and after two sessions of unchanged breadth (16:16 and 15:16) advancers outnumbered decliners by a wider 3 to 2 margin in today's trade. New highs/versus new lows were nearly identical to yesterday (205:8) at 200 to 10 by session's end.

Weakness in European GDP quarterly data gave a boost to the dollar in today's session with the U.S. Dollar Index (dx00y) 95.31 +0.77% gaining 0.73 points and action here hints that some assets flowed back toward the U.S. on what looked to be thoughts that as weak as the economic data is in the U.S. there has at least been some modest quarterly GDP growth compared to European areas.

Today's economic data, which raised concerns regarding "deflation" as prices at the producer level fell got a mixed reaction from bond traders. The shorter-dated June 5-year Treasury Futures contract (fv03m) 115'055 -0.16% fell 6/32 with YIELD ($FVX.X) 2.533% rising 4.3 basis points to 2.533%, while the longer-dated June 30-year Treasury futures contract (us03m) 118'13 did trade a new contract high at 119'05 before edging back into its close, but still finishing up a full point with YIELD ($TYX.X) 4.492% spiking to another multi-year low of 4.43% during today's session and closing out with a 4.492% YIELD. If you're in the market for a refinancing of a mortgage or looking to lock in a rate, now would be a good time to pick up the phone and call your mortgage broker. The benchmark 10-year YIELD ($TNX.X) finished unchanged at 3.537%. In all, today's action had a flattening effect on the YIELD curve, and helped keep stocks in the green for the bulk of today's session.

I must admit, for a supply/demand trader, this past week's dollar/bond action has be scratching my head. I received several e-mails while I was out regarding just why the major indexes were not falling apart with such strong buying in the Treasuries and selling in the Dollar. The ONLY explanation from the supply/demand side that I can come up with is that with money market rates now at just over 1%, there has got to be some money coming in from shorter-term cash accounts that is looking to play the momentum that not only bears can't explain, but many longer- term bulls as well as some company's CEO's seem to be having trouble confirming with their own internal business trends.

I spent yesterday afternoon trying to get my WEEKLY pivot analysis matrix updated and see just what type of levels had been traded, as well as the prior week's matrix. As noted in previous commentary, it has been several weeks since a WEEKLY S1 has been traded in the equity indexes and that holds true into today's close, with buyers lurking at the WEEKLY pivots (last week and this week).

Pivot Analysis Matrix

The day before I left on vacation, I profiled and added in my own account another partial position put in the QQQ and continue to hold 1/2 bearish position. I monitored the QQQ today's at its MONTHLY R1 of $28.59 and while the QQQ did trade a low of $28.56 (highlighted in pink) all be darned if you could get a 5-minute bar close below that level as each 5-minute closed on three separate intra-day tests didn't find enough buying to hold the QQQ above that level. As we will note later today, the WEEKLY pivot analysis retracement has a zone of support from $28.62- $28.65 from combination MONTHLY and WEEKLY pivot retracement. I'm also noting that the WEEKLY pivot of $28.36 was tested to the penny on yesterday at its session low. The intra-day chart of the QQQ shows the WEEKLY pivot and WEEKLY R1 definitely in play as support/resistance levels being traded.

The S&P 100 Index (OEX.X) 477.68 +0.78% is the only equity index yet to trade its MONTHLY R1 and I perhaps can see a tie with the S&P Banks Index (BIX.X) 296.93 +0.59% not able to trade its MONTHLY R1. I can't say that I see this as being bearish at this point, but make some notes here. If the BIX.X can make the break above 299-300 (correlative resistance in WEEKLY R1 and MONTHLY R1) and tomorrow's DAILY R2, then that action should have a bullish impact on both the SPX and OEX.

One thing I made note of last night while I was updating the WEEKLY pivot analysis matrix was the narrow range from S2-R2. I went back to when I first started "saving" these weekly pivots and the equity index ranges are very narrow. I do need to go back and see if this really means anything at this point and after I get done with tonight's wrap, I'm going to go back and put together some WEEKLY pivot levels. With the bullish % charts nearing more "overbought" historical levels, I want to see if there may be a tie with a "tight range" and the higher bullish%, as if computers are starting to "narrow down" some type of range before a reversal lower, which the higher levels of bullish % might be alerting us to some type of "risk management" trade where some type of profit selling would be expected and removal of risk being had in the major indexes. Again.... I need to go back, see if there was a tight range developed, and if so, what "level" (was it a WEEKLY S1 or S2 that was traded) to then perhaps signal a more meaningful pullback.

NASDAQ-100 Tracking Stock (QQQ) - 10-minute intervals

The NASDAQ-100 Bullish % ($BPNDX) is at 77% and unchanged after today's trade. This is the same level of bullish % as when I took off for vacation, yet the QQQ is up $0.31 from its May 6th close. The 10-minute interval chart allows us to look at the QQQ and see how the WEEKLY range is being "defined" by the WEEKLY pivot of $28.36 and WEEKLY R1 of $28.95. As "awful" as today's economic reports were, the QQQ wouldn't break its MONTHLY R1 (dashed pink). While I'm more "bearish" the QQQ based on the higher level of bullish % and risk runs high for bullish traders, the still forming pattern of higher lows and equal highs at WEEKLY R2 of $28.95 builds some pressure, that an upside break at $29.06 could have further unraveling to the upside with targets of $29.50 and MONTHLY R2 of $29.73.

For traders holding a QQQ Sept. $27 or $28 put, I would not be opposed to holding those puts, but creating a bit of a near-term "hedge" and a bullish position in the underlying QQQ itself on a break above $29.06, with the idea of selling the underlying QQQ bullish position up near $29.50-$29.73. With the bullish % at 77%, my thinking is we're closer to a near-term "top" on the QQQ than we are a bottom, but the Q's are susceptible to good short- covering rallies and I think momentum bulls are playing the moves higher and will continue to do so until some type of loss is experienced.

S&P 500 Index Chart (SPX.X) - 5-point box

A pattern of 3-box reversals (3 O's) after a new relative high has been developing over the last month and after a 15-point pullback, demand (X) has outstripped supply. Just as the narrower and more volatile NASDAQ-100 Bullish $ ($BPNDX) has reached well above the 70% level, the same could be true for the S&P 500 Bullish % ($BPSPX), which today saw the bullish % grow to 67.6% and see a net gain of 1.2% (6 new PnF buy signals). I'd be more tempted to play the SPX bullish on a pullback to 930 as bullish, follow with a stop at 915, which would be a double- bottom sell signal, and with internals still strong and adding new buy signals, look for a new relative high. I would use the higher levels of bullish % to begin limiting new bullish positions to partial and not full positions.

S&P 100 Index (OEX.X) Chart - 2.5-point box

Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and this indicator for internal breadth on a PnF basis has been stuck at 65%, since Friday's close. We've noted in the past that the OEX has tended to trade back off of our "bullish resistance" trend (upward trending pink trend). It is somewhat "rare" to see the broader S&P 500 bullish % exceeding the narrower S&P 100 Bullish % ($BPOEX) and this is a sign of near- term caution, but also a point to look for the larger capped OEX to try and play some catch up. A pullback to 470 or 467.50 offers a bull a good risk/reward entry with a stop at 465 on the PnF chart, which would be a double-bottom sell signal, which is also just under this WEEK's S1, which we haven't seen a test of a WEEKLY S1 in several weeks. My thinking right now is if the NASDAQ Composite and NASDAQ-100 Index can trade their December highs, then if the MARKET truly is discounting the weak economic data as a lagging indicator on the "war with Iraq" still working itself off, then the OEX should have a shot at its December highs of 487.94.

Dow Industrials (INDU) Chart - Daily Intervals

While the Dow Industrials did trade its WEEKLY R2 on Monday, I should note that this WEEKLY R2 is just below the prior WEEK's R2 of 8,781.9, and I'm noting that the WEEKLY R2's have been moving up, then down, then up, then down in recent weeks. I point this out so that I don't get the "false impression" that the Dow is trading stronger within its WEEKLY pivot. Still, the Dow has been able to "eat through" many levels of resistance, including its 19.1% retracement from conventional retracement. In my last Index Trader's wrap before I went on vacation, I discussed the possibility that we might see some type of "rotational benefit" of bullishness toward the Dow Industrials.

Well... the QQQ has tacked on an additional 1.27% gain since last Tuesday, but the Diamonds Trust (DIA) $87.32 hasn't done too bad with a 1.59% gain since last Tuesday.

My thinking here, based on observation is that new money being put to work, may indeed be playing a bit of risk/reward and looking for some Dow catch up.

While I was gone, the Dow Industrials Bullish % ($BPINDU) saw a net gain of 3 stocks to new point and figure buy signals to 66.66% and has been stuck at this level of bullish % for the past 5 sessions (including today).

In late November, the Dow Bullish % ($BPINDU) rose to 72% before reversing lower, so here too, we're getting to a higher risk level for new bullish entries. There are less "2003 profits" to roll out of the Dow at this point, compared to the other indexes, and would still be my "preferred" index to trade bullish at this point on thoughts of an economic recovery.

Jeff Bailey

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