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Index Wrap

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After some intra-day fluctuations on news that a Canadian cow was found to have been infected with mad cow disease and the Department of Homeland Security's raising of its terrorism threat level to "orange" from "yellow," the major indexes finished right near yesterday's closing values.

Treasuries found further buying in today's session, and just when anyone thought that YIELDS couldn't, make that wouldn't, go any lower, homeowners are once again calling up their mortgage loan officers, which may have become their best friend in recent years, as the longer-dated 30-year Treasury YIELD ($TYX.X) fell to 4.364%, while the benchmark 10-year Treasury bond's YIELD ($TNX.X) dropped to another multi-year low at 3.374%.

The U.S. Dollar Index (dx00y) 93.27 -0.54% also slid to multi- year lows. George Sorros, who reportedly made billions in one day back in 1992 when short the British pound, just prior to that government devaluing its currency, told reporters that he was short the U.S. dollar, and felt conviction behind his trade position after this weekend's comments out of Treasury Secretary Snow hinted the U.S. may be changing its stance on a "strong dollar policy." With both producer and consumer prices falling, some currency traders/analysts have said a U.S. policy toward a weakening dollar is an attempt at trying to stimulate some inflation into the economy with a weaker dollar policy.

After-hours earnings from Dow component Hewlett Packard (NYSE:HPQ) $17.05 +1.0% find the stock higher over the New York ECN at $18.35 when the company reported upside earnings that beat analyst's estimates by 2 cents a share. While not a NASDAQ-100 component the "tech-association" has the QQQ $27.77 +0.28% gaining a penny at $27.78.

With no trading curbs in place for equities today, we saw a slight pickup in trade volumes at both the NYSE and NASDAQ, but just moderately so when compared to yesterday's volumes.

Market internals at the NYSE show 1.48 billion shares changing hands, with advancers outnumbering decliner by a 9 to 7 margin. The NYSE reported 185 stocks having traded a new 52-week high by session's end, compared to 13 stocks trading a new 52-week low.

NASDAQ has just over 1.67 billion shares traded, with decliners getting the upper hand on advancers by a narrow 8 to 7 margin. The drop-off in new 52-week highs to just 84 in today's session is rather notable compared to yesterday's 118 and last week's 200. Still, the bottom holds steady with just 8 stocks trading a new 52-week low.

It was May 1st when the NASDAQ-100 Bullish % ($BPNDX) reached the more "overbought" 70% level of bullishness. I've taken the chance to quickly put together a spreadsheet for May, showing some of the advance/decline and new high/new low data for the month of May, and with the just mentioned fall-off in the number of new 52-week highs in the NASDAQ, this is near-term sign that recent action is indicative of profit taking and perhaps some lack of leadership. For weakness, a trader/investor begins to monitor the number of new lows, where a softening at the bottom might signal a more significant change of trend for the market's internals.

Breadth Indicators - From May 1, 2003

The "primary" internals I like to follow that tells me about the markets internal strength/weakness and more importantly "risk level" is the bullish % data. One note I'm making tonight, which I didn't see until today, was that the NASDAQ-Composite Bullish % ($BPCOMPQ) reached the 60.13% level. I looked back at www.stockcharts.com bullish % chart and note that this VERY broad bullish % reached an 8-year high level of bullishness at the 58% level and the 60% level of bullishness shows further internal strength. However, it also tells investor/traders just how "overbought" this market is on a historical basis. Can you believe it? The NASDAQ Composite bullish % has more stocks showing point and figure buy signals on their charts than the "erational exuberance" days of the late 1990's?

I've placed some "pink arrows" over the NYSE and NASDAQ new high/new lows readings. The one thing that really caught my eye today is that there were only 84 stocks that traded new highs among 4-lettered stocks today. Still, I wouldn't say the market internals were falling apart as the number of new lows held firm at 8 and perhaps hint of some short covering at the bottom as new lows rebounded from a 4-session decline.

I'm also going to mention that the number of NASDAQ new highs from May 2nd and 5th, are slightly (just slightly) above the peak May 14 number of 205 new highs. I notice this because it was May 2nd when the NASDAQ Composite (COMPX) 1,491 -0.11% broke above the 1,500 level, which set the stage for a violation of the December high of 1,521.44. As you know, the NASDAQ Composite did trade above those December highs, setting in place what I feel is a new longer-term bull market of higher highs and higher lows.

What has me now looking for a nice pullback and some bullish risk being removed in the indexes is the higher levels of bullish %, but I'm also making some notes that the number of new highs in the NASDAQ were just short of the May 2 and May 5 levels, which would be considered to be "bearish divergence."

In today's market monitor, I mentioned that I was really struggling to find anything to trade. That gave me some time to look around at things.

When I have "idle time" on my hands, I start drawing things on charts, trying to see what levels/trends the markets might be trading that I'm not aware of.

One thing I think I found today, which I'm not sure I've seen before is some interesting levels from conventional retracement in the Dow Industrials (INDU) 8,491.36 -0.2%. I've been showing the Dow chart with conventional retracement set from the October lows to December highs. Today, I thought I'd try and figure out just "why" the Dow had some trouble last week at the 8,700 level. Here's what I found.

Dow Industrials Chart - Daily Intervals

Here's a chart of the Dow Industrials (INDU), with conventional retracement and our regression channel shown. You're right! I'm "changing" things a bit, to try and figure out if there are some other levels of conventional retracement that help explain what the market is trading. Despite some of today's "news" the Dow found support very close to the 61.8% retracement (the Dow retraced 80.9% of its December high to March low range) and a break much below today's lows would become bearish technically as that would also have the Dow breaking below the lower end of our regression channel from the March low.

On Thursday night, I'm going to be giving a talk to options traders regarding the strategy of credit spreads on indexes. I like the trade setup in the Dow Industrials for a bear credit spread, whereby a trader might look to sell an at the money Dow call on a rally back to 8,600, take a portion of the premium received, and then buy a protective 8,700 out-the-money call.

Using the Dow Diamonds (AMEX:DIA) $85.07 -0.11% as the "like index" for such a trade, I'll price out some options now.

June Bear credit spread trading example:

IF DIA trade $86, then sell the June $86 call (DAVFH) (currently bid/ask $1.40 x $1.50), AND buy the June $87 call (DAVFI) (currently bid/ask $0.95 x $1.10). Now, this is a near-month credit spread and there's not a lot of time premium involved at this point.

If a credit spread trader moved out an extra month, perhaps looking to play the more "overbought" nature of the bullish % and looked for more potential bullish risk to be removed with time, then a July expiration spread could be implemented.

IF DIA trades $86, then sell the July $86 call (DAVGH) (currently bid/ask $2.10 x $2.35), AND buy the July $87 call (DAVGI) (currently bid/ask $1.75 x $1.85).

Should the Dow Industrials rise back to 8,600 or DIA rise back near $86, these options will change in price and market volatility can also impact premium change, but I also find it useful when setting up a particular combination type of trade, to price things out a bit and then see where things are at if I get to a destination. For "max gain" the bear credit spread trader needs the index to close at or below the lowest call strike on index expiration settlement!

As you can perhaps see from the outlined strategies above, I'm looking for the Dow Industrials to trade lower into June and July. "Grrrrr...," says the bear that believes bearishness would last much longer.

I'm going to "anticipate" a question that some traders might have regarding other conventional retracement bracket anchoring points. What retracement bracket is the SPX seeming to trade off of?

S&P 500 Index Chart - Daily Chart

Anticipating a question, but also wanting to see for myself, I've place two "conventional" retracement on the SPX chart. I think the "pink" retracement we've been using on a conventional basis has had some more historical significance in trading.

It is interesting how we get a little "zone" between both retracement brackets where the SPX did recover back into by today's close. It's almost as if every short just below that 918 level (that shorted this as a level of resistance and didn't stop out in late April) used today's weakness back below to buy up some of their positions and get things squared.

I received a couple of question/comments regarding my "900 level of psychological support," with some general thoughts that that might not really be a level for a good bullish trade as it is only "psychological."

My thoughts are this. You or I might not always "believe" that traders actually trade "round numbers" or "psychological" numbers like 900, or Dow 10,000, but PSYCHOLOGY is such an important part of how some traders not only "think," but also act that it isn't even funny. We might be surprised at the number of "sell 900" orders there were in the trade books when the SPX couldn't seem to get above that level from the reversal on March 21st, when the SPX first stuck its head above the 200-day SMA. Then, the "failed" rally and major reversal from 900 on an intra-day basis that got pushed right back down to 880 by the close. But look! Look what happened on April 22nd, when the SPX did hold the 900 and closed at its session high of 919! More importantly, look how that "900 level of psychological resistance" held support two-days later on the pullback. My thinking is that "sill bears" that were short/put psychological 900, turned "smart bears" on the pullback.

As noted in the above chart, I view today's break below the 918 level just enough of a break to have the bearish side of me interested in nipping away at a partial put position in the SPX near 940, say 935-940. There's still some momentum that can be holding in the SPX as the shorter-term 21-day SMA is still standing on end.

When we look at the first spreadsheet in tonight's wrap, we see the broader S&P 500 Bullish % ($BPSPX) slipped just 0.4%, so a net loss of just 2 stocks to new point and figure buy signals.

S&P 100 Index Chart - Daily Interval

In Friday evening's market monitor, I made some notes as to another WEEKLY range where we saw a rather "tight" S2-R2 range for the WEEKLY pivot analysis, and thought this might tie in with a the December highs, when the OEX bullish % was higher.

I'm trying to "understand" how the OEX traded back in December after it traded its WEEKLY S2 when the bullish % was at/near the 70% bullish level.

On the above chart, I've shown what the "old" WEEKLY pivot analysis would have been FOR the WEEK of 12/02-12/06, when the OEX found its high. I also went back and looked in my trader's logbook at the actual bullish % reading for the OEX. At the close of trading on 12/02, the OEX bullish % was at 76% and had risen 3% from its Friday level.

Not that past history is any guarantee of the future, but the OEX currently looks vulnerable near-term to conventional 38.2% retracement. While the Bullish % for the OEX has yet to reach the more overbought 70% level, with yesterday's 67% being the current bull cycle high, I'd look bearish on a break below today's low to that level for a short-term type of bearish trade to 450, and from there, I would look to play a bounce back higher near 470.

NASDAQ-100 Index Tracking Stock - Daily Intervals

As I type, the QQQ is now trading $27.85 in post market, and this is above the $27.78 level I noted earlier in the wrap after HPQ earnings. If current after-hours trade holds, this would have the QQQ opening just above the 21-day SMA and the downward trend I had drawn and was looking to play as bearish trend on first 1/4 bearish position.

While after-hours trading isn't necessarily indicative of tomorrow's open, the after-hours trade has be having to assess some strength right back up near the $28.65 level.

Today's action saw not net change in the NASDAQ-100 Bullish % ($BPNDX) and still holds a bullish cycle high of 79%.

Pivot Analysis Matrix

I'm past deadline and haven't gotten a chance to try and correlate overlapping levels. I currently look for WEEKLY Pivots to be resistance, with MONTHLY pivot as first support!

Jeff Bailey

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