Option Investor
Index Wrap

Risk for bulls has been running high

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I must admit, it is hard for me to say with a straight face, or perhaps sound like a "broken record" that today's declines in the major market indexes, which had the Dow Industrials (INDU) fall 2%, the S&P 100 (OEX.X) decline 2.4%, the broader S&P 500 Index (SPX.X) slide 2.49%, and tech-heavy NASDAQ-100 Index (NDX.X) 1,112 -3.63% was simply due to "concerns for a weakening U.S. dollar."

While Treasury Secretary John Snow's comments seemed to support a "weak dollar policy," traders may have used those comments as a "reason" to take some profits in a market that has rallied strong weak after weak, surpassing many bulls and bears expectations.

One could argue that today's release of April Leading Indicators, which met economist's forecast of +0.1% was also a good "excuse" to trigger some meaningful profit taking. The fractional gains in the leading indicators followed two months of larger declines as a post-war rebound in consumer expectations and investor optimism helped offset the negative tones of weekly jobless claims and recently released economic data that showed little pricing pressure being had by corporate America.

While Treasury Secretary Snow's comments and stance on the weak dollar may have come to a surprise by some and negatively impacted investment scenarios regarding some type of Treasury action that would have been initiated to defend the dollars weekly slide to multi-year lows, one would argue that the weaker dollar itself and lackluster economic data today is simply and "excuse" to for selling in equities, as economic data has BEEN weak, as has the dollar.

My "feel" based on OBSERVATION, is that today's action is perhaps the beginning of some risk removal from equities, as the bullish % data we discuss in each night's index trader wraps may finally have the MARKET, beginning its systematic removal of risk, that we've seen umpteen number of times over the years.

S&P 500 Bullish % ($BPSPX) - 2% box scale

While the S&P 500 Index (SPX.X) 920.77 -2.49% fell 23.5 points in today's trade, there was little internal damage done to the bullish %. Consider that today's trade saw this broader bullish % slip just 0.4%, and out of 500 point and figure charts, that comes to a net loss of 2 stocks giving to point and figure sell signal, where supply begins to outstrip demand at a level where buyers had been holding things together.

The mindset for EVERY trader or investor to get in today if not the past couple of weeks is this. The S&P 500 (along with the other bullish % charts like the INDU, OEX and NDX) are either at the 70% level, or nearing the 70% level, which is deemed to be a more "overbought" level of bullishness. While this too may sound like a "broken record," don't look now, but today's trade has the major indexes back near levels they were trading two weeks ago.

One thing that took place today with our pivot analysis matrix, was that the major indexes traded their WEEKLY R1 levels of support. This is a CHANGE worthy of note as we hadn't seen a WEEKLY S1 level of support in the MATRIX traded since the week covering 03/31-04/04. This is a change that I begin making the TIE between a HIGHER level of bullish %, not a weaker dollar, not buying in bonds (which has been one of my alerts to equity weakness) and not some lackluster economic data, which had been enough to choke a horse, but feeding a bull in recent weeks.

We can all look at the S&P 500 Bullish % ($BPSPX) chart above, and see that it is nearing the 70% bullish level. Will anyone argue that it takes some bullishness to get this indicator to that level? Hopefully your answer is "no!"

Does ANYONE know for SURE why the SPX and the major market averages have shown such bullishness from the March lows? Oh boy! I could probably list 5 reasons why, with one being that the MARKET is/was forecasting bullishness on a successful war effort in Iraq. Just as easily, a bullish % chart watcher would say... "the markets were simply too oversold, and when things reversed upward, bullishness just continued to build!"

And don't think for a moment, that the SPX will simply fall apart and be at 30% by the end of the week. I think it is always a good idea to have a plan in place for such an event (I've bough and profiled two partial bearish positions in the QQQ in recent weeks), but traders should understand it is still WAY EARLY to be getting aggressive on the bearish side. It can take a week or two, to get the ball rolling for a broader bullish % like the S&P Bullish % to reverse back down.

Bottom Line: RISK is higher for new bullish trades (bullish % are high) and for the first time in six weeks; we've seen the major indexes trade their WEEKLY S1s! Something is changing!

Let's quickly take a look at the pivot analysis matrix, but my mane points tonight are the higher levels of bullish %, and we'll take a look at some WEEKLY interval charts and point and figure charts to get a broader perspective on things.

In the "back of my mind" remains the FACT that we've seen strong buying in Treasuries in recent weeks, especially last week, and still has me alert that there may not be a lot of bullish cash available at this point to extend the major indexes much above the recent highs. It is entirely possible that the bullishness found in the major indexes the last two weeks has been a continued type of "leapfrogging" by bears that may have misinterpreted "risk" in prior weeks, where each relative high forced short-covering as losses mounted.

Pivot Analysis Matrix

This WEEK's S2-R2 range is similarly "narrow" to last weeks range and while trading curbs were put in place when the Dow Industrials fell 150 points from Friday's close of 8,678.97 (curbs in at 8,528.97). I make note of the trading curbs so that I don't use the trading at S1 as a "bull's excuse" that if computers were still allowed, then the WEEKLY S1 wouldn't have been traded. A bull "could" use the fact that trading curbs were in (no institutional computer programs) allowed for the WEEKLY S2s to be traded. I can't say for CERTAIN, but as I mentioned in today's 03:15 PM EST update, I was cognizant to the possibility that even individual traders at institutional trading desks would most likely take over some of the "levels" from the matrix in order to try and square up some prior shorting to the market, especially in the NASDAQ-100, where we would expect a larger amount of inventory risk management to take place at the market maker level.

I currently view the MONTHLY Pivots as FIRM support, especially when the bullish % are still at high levels. I think there are plenty of shorts in this market that are looking for a pullback to cover some positions, to then seek out a higher level to establish a better short-entry.

Let's not forget my INITIAL partial position bearish (1/4 position) profile in the QQQ from May 1, below the QQQ $27.50 level and the "better" bearish profile for a second partial positions (another 1/4) from May 6, near QQQ $28.50. Bullish % levels for each of these trades have been 70% and 77% for the NASDAQ-100 Bullish % ($BPNDX). If I (Jeff Bailey) were currently FULL POSITION bearish with 1/2 at QQQ $27.50 and 1/2 at QQQ $28.50, then I would certainly be contemplating getting down to 1/2 bearish in this trade, even though my profiled expiration is September!

S&P 500 Index Chart - Weekly Intervals

I can't say that I'm "overly surprised" that we would eventually see a week when the indexes dropped rather quickly. This was a partial concern of mine considering the buying in bonds, but not unlike me, I'm sure are some other bearish traders that were also looking for the indexes to decline when we found buying in Treasuries the past two weeks, yet the major indexes moved higher. Now we've perhaps "evened up" last week's divergence, but the BULLISH side of me would be guarded here. I would certainly consider a nice bullish trade on an SPX pullback into 900-905 and would view that area as a high probability bullish entry right now, for a very good rebound back near 936-940 for a good swing trade bull. From a WEEKLY S2 level trade like we saw today, I would think a short-term day-trade or two-day bullish trade is in the making for a bounce back to 940. The "mentality" behind a short-term (2 day hold) type of bullish trade would be to play long tomorrow on a move back above 923, with first test for further strength at 929 to then build a short-cover rally back near 940. Upon entry, I'd play that type of trade with May expiration, with a stop just under 918. I don't feel it necessary at this point to buy a CALL option past the current month, as I'd only be looking short-term type of bullish trade with the bullish % at these high levels. All a bull is doing at this point is trying to use some overly bearish traders "sideways position" and short covering to play some rallies after a very strong run from the March lows while current market internals remain strong!

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

Today's trade at 465 was a double-bottom "sell signal" on our unconventional 2.5-point box scale of the OEX. I would certainly use this sell signal along with the noted trade at a WEEKLY S2 as an alert to longer-term weakness! I'm currently assessing near- term weakness to the MONTHLY pivot of 454.90 to be exact, but I've market 455 on the above chart to give me perspective. We will note a similar "double bottom sell signal" in the OEX chart back in late March (just before April, red 4) at 437.50, however, in early April, the OEX bullish % was growing at just 43% and current bullish % ($BPOEX) is at 67% and closer to the 70% and mover "overbought" level of bullish %.

Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and remains at a bull cycle high of 67%. It would currently take a reversal back to 60% to have this bullish % reversing lower into "bull correction" status.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I've shown the two bars (pink 1/4 positions) where I've previously profiled bearish QQQ trades for September expiration. As you can see, my first profiled bearish trade looks to have come "way early" and just below current levels of trade. To be truthful, the NASDAQ-100 Bullish % ($BPNDX) was at 70% that day and I was wanting to have bearish exposure should the QQQ "plunge below" the $26.92 level. That didn't happen and just before I went on vacation, I profiled and took an additional 1/4 bearish position near the $28.65 level. For those that "pick tops" even that trade looks to have been "a little early." As such, my mindset based on trade review is that there's a high likelihood that we would expect a rebound in the QQQ. I'm sure there are some overly aggressive shorts at or near my first 1/4 bearish trade entry that will look to cover near current levels and look for a higher bearish trade entry back near $28.65.

I'm making note of today's volume in the QQQ at 91.8 million shares on today's rather sharp downward move, and similar to what I did back on December 4th, when the QQQ traded sharply back below $27 when the NASDAQ-100 Bullish % was high will begin making notes as QQQ $28.50 being some type of "level" where we see a volume build that may serve resistance on a rally attempt.

Today's action actually saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 1 stock to a new point and figure buy signal. This has the NASDAQ-100 Bullish % ($BPNDX) once again matching its cycle high reading of 79%, which was also found on May 12 and 13.

Dow Industrials Chart ($INDU) - 50-point box

Despite a weaker dollar that should be beneficial to some of the largest capitalized stocks and multi-national business that make up the Dow Industrials, here to we saw a strong round of profit taking. First sign of weakness for the Dow would be a trade at 8,300 and this would also coincide with the lower end of our Bollinger band (21-day SMA, 2 std. deviations). I turned off my "trend" button when I printed the above chart, so I drew in the bullish support trend, which would be at 8,000. In late February, I profiled a BULLISH trade in the DIA near 7,750 on an intra-day basis as the Dow Industrials bullish % was deeply oversold. While the Dow did fall to 7,450, some call traders may have added to that position when I profiled an additional partial position when the Dow generated a double-top buy signal at 8,000. Now that the Dow's bullish % ($BPINDU) reached 70% at the conclusion of Friday's trade, I would begin getting more cautious and looking to protect gains.

Today's action saw no net change in the VERY narrow Dow Industrials bullish % ($BPINDU) and status remains "bull confirmed" at 70%. It was in late November when the Dow's bullish % chart reached 72%, before it began reversing back lower. That would have had the Dow bullish % actually reading 73.33% as each Dow component's PnF chart is "worth" 3.33% on the bullish % scale, but once again, levels above 70% are deemed more oversold, and BULLS begin to carry the bulk of the risk.

Jeff Bailey

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