How's that for a headline? After careful deliberation, I think index traders should be looking to turn technically bearish if the major indexes break below today's lows.
While I did like today's intra-day action for a short-term bullish trade in the S&P 500 Index (SPX.X) 923.42 +0.4% at current levels, and still see potential for a rebound, tomorrow morning's release of weekly initial jobless claims, where economists look for a 3,000 rise to 420,000 from last week's previously reported 417,000 may become the "swing vote" or economic report that pushes the button on the indexes direction in over the next 7 days.
Next 7 days? Yes! Let's start out "small" and understand that there is still a rather great deal of bullishness from the market internals at this point in time, but tomorrow's WEEKLY jobless data is the last "spat" of economic data until May 27th, the Conference Board will report its May Consumer Confidence (consensus is 82.0 compared to April's 81.0) and existing along with new homes sales for April are to be reported.
My "revelation" tonight is this. If the major indexes take out today's lows on tomorrow morning's weekly jobless data, then I do think the current bull run highs were found last week and a trader that finds any break of today's lows, looks for further weakness below Tuesday's lows to set a test of the MONTHLY pivots. This is what I'd look for from the downside.
While I can't say that I can read a bear's mind, I do think there were some bearish equity traders that have felt Mr. Greenspan and other Fed constituents that have had their "heads in the clouds" on the possibility of deflation being present in the U.S. economy.
Conversely, I am/was comfortable with profiling a bullish trade in the SPX based on today's trade and general response to Fed Chairman Alan Greenspan's testimony, that the Fed is now AWARE of potential deflationary pressures and willing, ready and able to take action based on this awareness.
As it relates to tomorrow's trade, lets quickly look inside the DAILY/WEEKLY/MONTLY matrix and build from there for action points. Since time is limited, I will use the S&P 500 Index (SPX.X) to outline my thoughts.
Pivot Analysis Matrix
SPX: I monitored the SPX rather closely in today's trade and as discussed in today's 03:15 PM EST update, I thought I saw enough "bullishness" to warrant a short-term bullish trade, with potential upside back to the WEEKLY pivot of 940. I doubt seriously that that SPX will trade the 940 level tomorrow as I do believe (based on past experience) that in a more "overbought" market environment, there will be an institutional tendency to feed stock out into strength at higher MARKET risk levels.
I was pleased that the SPX was able to close back above its WEEKLY S2 level. However, the narrower OEX did NOT close back above its WEEKLY S2 and was NOT even able to trade that level today. As such, I think a short-term bull like myself needs to be cognizant of these technical within the matrix, and not take a complacent attitude.
For the SPX, I've basically marked 4-boxes in the DAILY matrix. Let's start from the DAILY S2 (dashed pink). If this level were traded, this would mark a level BELOW Tuesday's low of 912.05. If broken, then this is the level within the matrix that has the SPX vulnerable to its MONTHLY Pivot. Daily S1 (bold pink) is a level within the DAILY matrix, that would be very correlative with our CONVENTIONAL (October low - December high) retracement. After 2 sessions of intra-day violations of the 918.82 level, the SPX has REFUSED to close below this level. Why? At this point, there are more buyers than willing sellers is my observation (that's pretty straight forward too isn't it?) Daily pivot (dashed greed) is a tie to the WEEKLY S2. I'm dashing this level to signify tentative support as this level was violated to the downside in today's session. As discussed recently, it has been WEEKS since we've seen a WEEKLY S1 traded, let alone a WEEKLY S2 as we've seen traded this week. If I were to use the pivot analysis data at all, I would have to think (and I do) that there would be some type of computer "buy bias" at this level. DAILY R1 (solid pink) is a level of DAILY pivot analysis that would correlate with the 21-day SMA (926.24 at today's close) and also very close to the mid-point of our regression channel. My thinking here is the same thinking discussed for profiling a bullish trade in the SPX today. I'm trying to "take advantage" of a jittery bear mentality and think a technical break above the 21-day SMA might have some bears below the 918 level looking to cover as Stochastics on the daily interval bar chart have approached "oversold" levels. Should the SPX trade back near the 940 level over the course of the next several trading sessions and Stochastics reach "oversold" then a quick check of bullish % conditions will be taken, understood, and bullish profits can be captured.
Do NOT think for a second, that a trailing profit stop in a short-term bullish trade won't be used on a break higher. Right now, an SPX bull has to clear the WEEKLY S1 as a level of support that has been broken, is deemed a level of resistance.
Not to linger with the matrix too much longer, but also look at the Dow Industrials (INDU) and tentative support (dashed green) that develops similar to the SPX in the matrix.
NDX/QQQ is similar to OEX, which did NOT test resistance back to their WEEKLY S2. This is a sign to me that bullishness is waining a bit and perhaps a sign of tentativeness from bulls. Note the correlative resistance showing up tomorrow at the WEEKLY S2 and DAILY R1. These levels look to reflect today's highs in these indexes VERY WELL! Short-term bull in the SPX should understand that if the NDX/QQQ and OEX can break above these levels, then higher probability for a rebound to at least the WEEKLY S1 of SPX 932.9. If so, then SPX bull can immediately remove some risk from their bullish SPX trade to break-even!
S&P 500 Index Chart (SPX) - Daily Interval
I felt "compelled" to use some of last night's Index Trader Wrap commentary and work we did with two different conventional retracement brackets. My thinking today was this. If computers were selling the 80.9% level from "blue" retracement (March low to December high) then why was the SPX able to trade just above that level. For a shorter-term bullish trader, I felt this was an opportunity to trade long and look for a bounce on some jittery bear's short-covering.
With WEEKLY S2 of 921.4 being violated this week, and such a sharp move below WEEKLY S1 (not enough programs buying at that level, which makes some sense based on higher bullish % and risk for bulls) I do feel that a break below tomorrow's lows stands a good chance of downside trade to the "psychological" 900 level. I don't see any levels other than the 918 (which the SPX can't seem to close below) to offer any support on a negative market reaction to tomorrow's weekly jobless data.
I would think.. and "upside surprise" to the economic data, may suddenly plant a seed in some bearish trader's minds that indeed the resolution on Iraq, may have employers staffing up a bit on renewed economic optimism. If so, then a short-term bullish trader would certainly have some stock for sale back near my 940 target (but SPX has to get through 933 first, so one step/level at a time).
Today's action saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 0.2%, so a net loss of 1 stock to a reversing PnF sell signal and has the bullish % slipping to 67.6%. This is "just" 1% below the bullish % high reading of 68.6% and gives trader's investors the sense that while there is some internal weakening being found (a net loss of 5 stocks since the 05/16/03 bullish % high reading) there's not an overly concerning amount of internal damage being done at this point.
I would be remiss if I did not make note that the conventional 5-point box of the SPX point and figure chart from www.stockcharts.com did give a double-bottom sell signal yesterday at 915. This is a sign that longer-term bulls should now be more defensive in their accounts and marks the first sell signal in the SPX chart since it gave the triple-top buy signal at 855 on March 17th. There's an "old" point and figure chartist saying that "often times, the first sell signal in the upward trend is a buying opportunity." That saying will most likely be put to the test tomorrow!
The S&P 100 bullish % ($BPOEX) saw a net GAIN of 1 stock to a new point and figure buy signal (I believe MO was the one stock) and has the OEX bullish % back at the 67% level, which has been the bull cycle high for this index bullish %.
NASDAQ-100 Tracking Stock (QQQ) - Daily Interval
I haven't been following the most heavily weighted NASDAQ-100 Stock Microsoft (NASDAQ:MSFT) $24.03 -2.43% like I should be, but that stock has really gotten hit lower the past three sessions and now trades at a level ($24.00) where the stock has found buyers back to the $26.00 level since March 31. Near-term QQQ/NDX traders should keep an eye on MSFT. While HPQ is not a NDX component, last night's earnings surprise didn't give the QQQ and broader tech the lift some may have thought (me included) and a downgrade of networking giant Cisco Systems (CSCO) $15.70 -1.81% based on "valuation" may have had some tech-bulls cautious.
The NASDAQ-100 Volatility Index (VXN.X) 30.81 -4.37% actually fell today, and to me, hints there may have been some short-term bulls buying calls, looking for a pop, perhaps not unlike my thoughts with the SPX.
However, if there's an index that may be more longer-term "overbought" based on the bullish % readings, then the action in the Q's and NDX and some lagging as it relates to the SPX/OEX and even the Dow, hints that the "risk management" trade by institutions is starting to be seen. I'm "tempted" to round to 3/4 bearish position in the previously profiled "legging in" on a September $27 or $28 put, on a break of tomorrow's lows, but with 1/2 bearish at this point, I think traders that are trading that type of trade can afford the luxury of sitting tight for the time being.
Today's action saw a net loss of 1 stock to a new "sell signal" in the NASDAQ-100 Bullish % ($BPNDX) as this bullish % slips back to 78%. The Q's do appear to be short-term "oversold" if I benchmark back to my first bearish profile for 1/4 bearish in the QQQ from approximately QQQ $27.39 on May 1st. On May 1, the NASDAQ-100 bullish % had just grown to 70%, so my thinking here is that the internals are still stronger at this point, than when I first initiated a bearish trade. The second bearish profile for an additional 1/4 position was on May 6th, near what would now be the WEEKLY pivot of $28.62, when the bullish % reading at that day's close was 77%. We've now seen the QQQ close below the WEEKLY R2 for three straight sessions, and I would have thought an overly bullish market environment would have seen a rebound today. That didn't happen and has me feeling better about firming resistance of $28.62 with the bullish % so high.
Dow Industrials Chart - 50-point box
WWW.stockcharts.com will often times print the alert "High pole warning" at the upper left corner of a point and figure chart. This is a computer generated alert based on a column of "O" retracing more than 50% of a prior column of "X." In March, after the Dow had rallied strong from 7,500 to 8,500, the reversal into "O" from 8,450 to 7,950 had the Dow's PnF chart from www.stockcharts.com issuing the "high pole warning" alert. A trader/investor did ask me about that, and I believe I commented on it in an update, but my thoughts, based on the bullish %, was that the pullback taking place was "just" a retracement of a very strong rally and some profit taking from the bottom as the bullish % at that time was "just" 47% and still improving.
However, I will now give the "high pole warning" a little more credence and alert to distribution at a potential "top" as RISK, as depicted by the bullish %, does match a time where we might look for distribution and removal of bullish risk to be taking place.
I've run out of time to try and discuss some comments and work I started in today's market monitor and last night's index trader wrap regarding a shorter-term indicator of point and figure charting that will chart the ratio between new highs and new lows of the NYSE and NASDAQ Composite. The charting of these values is simply to take a ratio of the new high/new lows and than average the last 10 trading sessions observations (a 10-day average). This is a more "volatile" and faster changing chart than the bullish %, and right now (tonight) there is little indication of a reversal back lower.
Market internals today for the NYSE saw the NYSE turn just over 1.4 billion share, with advancers outnumbering decliners by a 19 to 13 margin. The number of new 52-week highs is impressive at 250 compared to just 7 new lows.
The NASDAQ Composite saw 1.56 billion shares traded, with advancers outnumbering decliners by session's end at 16 to 14 (8 to 7). The number of new highs and new lows was almost identical to yesterday at 84 to 9. Again... some "lack of leadership," but the low number of new lows by no means has the bottom falling out of things at this point.