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Index Wrap

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Weaker than forecasted jobless data looked to be just enough "bad news" to have the major indexes posting gains in what seems to be some recent duplication of "bad news" finding buyers after a pullback.

Just ahead of the three-day weekend (markets are closed on Monday in observance of Labor Day) volumes were steady that the NYSE with just over 1.4 million shares changing hands. Advancers lead decliners by a 2 to 1 margin at the big board, and the number of new 52-week highs grew to yearly highs with 302 stocks making new highs compared to 15 stocks setting new lows.

NASDAQ volume was the highest this week and matched Friday's 1.74 billion shares with advancers outnumber decliner by a 19 to 12 margin. New 52-week highs for the NASDAQ rebounded to 143 after holding at an equal 84 the past two sessions, while 13 stocks traded new lows.

I think some of today's volume advance in the NASDAQ may certainly have been due to a pickup in short covering, especially by some traders looking to get flat, perhaps looking to take tomorrow off and get a head start on the extended weekend.

I would be a bit surprised if we were to see volume levels on either exchange much above the 1.1 billion mark tomorrow.

Here's a quick look at some of the volume, advance/decline and new high/new low data for May. Traders have asked to see this data in tabular form, so that some references to potential trends can be made. I've also fielded several e-mail questions from subscribers regarding a point and figure charting technique for charting an indicator often referenced by Dorsey/Wright and Associates regarding the new high/new low indications for both the broad NYSE and NASDAQ composites.

Market Internals - Since May 1

In last night's market monitor, I tried to quickly discuss how the new high/new low chart. I've talked before about how the markets tend to move like an "inchworm" or "snake." If he "head" is leading (52-week highs) compared to the tail (52-week lows) then it is thought that the market has leadership and stands a higher probability of advancing. As noted the past couple of sessions, we did see a rather marked drop-off in new 52-week highs in the NASDAQ.

In this weekends "Ask the Analyst" column, I'm going to go into further detail on how traders can monitor internals using the point and figure charting system and perhaps better track how the market internals are moving. After a strong move up from the bottom and what appears to have been a "rest" for the indexes earlier in the week, what we will want to monitor for right now in the new high/new low category is leadership. What a BEAR wants to see is a growing number of new lows and a lesser number of new highs to show that bulls are becoming less aggressive. Conversely, BULLS want to see what has been taking place since March. A growing number of new highs vs. new lows. To measure this, we'll build a ratio, then chart that ratio based on a 10- day moving average. I've added my own "twist" to things, and added a 5-day moving average of this ratio. Here's a quick look at this type of market internal analysis.

NYSE and NASDAQ new high/new low rations - 5 & 10-day MA's

Traders will associate moving averages with momentum. We'll hear floor traders and market analysts discussing "healthy" or "unhealthy" internals as it relates to the number of 52-week highs and 52-week lows. On a day-to-day basis it can be difficult to interpret and should be followed over time. One way to do it is to build a ration where we simply take the number of new highs and divide that number by the total of new highs and new lows. Again.. I'll go into greater detail in this weekend's column, but one thing that has gotten some subscriber attention in recent weeks is the higher "ratios." Similar to the bullish %, the highest the ratio can go is 100% and not unlike the bullish %, and perhaps the VIX.X can be used as a contrarion indicator.

I've marked in pink, the dates where the 5-day average would have crossed below the 10-day average. If anything, we would only interpret this type of "cross-over" as a near-term slowing in the pace of momentum. The 10-day average itself for both the NYSE and NASDAQ look to remain constant and still show impressive leadership.

Now, this type of technique may help some of us better understand the daily new high/new low readings and bring together the day- to-day data.

My interpretation would only be this. Bullish leadership continues to be present in the markets (buyers willing to pay the price for a 52-week high), but a slight waning in momentum is observed.

Sector action was broadly positive today, with the Gold/Silver Index (XAU.X) 73.83 -2.31% the only sector to fall more than 1%. Financials lagged the gains found in the major indexes with the S&P Banks Index (BIX.X) 292.79 +0.06% finishing just above unchanged, with the KBW Bank Index (BKX.X) 798.49 -0.04% and Securities Broker/Dealer Index (XBD.X) 461 -0.17% trading fractionally lower. Insurance stocks as depicted by the S&P Insurance Index (IUX.X) 257.49 +0.44% were the better-performers of the financials, but still lagged the 0.9% gains of the S&P 100 and S&P 500. Perhaps I'm looking for reasons to be cautious, but I would have looked for better performance from the financials in today's more bullish session.

The Dow Jones US Home Construction Index (DJUSHB) 400.95 +4.57% traded and closed at an all-time high today as lower interest rates spurred by continued buying in Treasuries fall to multi- decade lows.

The Biotechnology Index (BTK.X) 422.27 +4.12% added the bullish spice necessary for the NASDAQ-100 Index (NDX.X) 1,131.45 +1.59% and NASDAQ-100 Tracking Stock (AMEX:QQQ) $28.09 +1.44%

Dow Industrials Chart - 50-point box

Today's trade at 8,600 had me profiling a "bear credit spread" in the Dow Diamonds (AMEX:DIA) $86.04 +0.98%. It's my thought that by June or July expiration, the Dow will close below the 8,600 level due to the higher levels of bullish% and thinking that the market will eventually have some bullish risk being removed. The buying of a June $87 call "hedges" the selling of the $86 call above $87, for 8,700 on the above chart.

Dow bulls still holding bullish positions can raise bullish stops to the 8,400 level as today's 3-box reversal up builds a higher low.

I had a question as it relates to a potential "triangle" forming in the Dow's chart. While we can perhaps see a triangle type of formation, it takes 5 columns of alternating X's and O's to truly form a "triangle" that a point and figure chartist would then look to trigger either the "bullish" or "bearish" triangle pattern. Since it would be impossible for the Dow PnF chart to set a pattern of lower highs and higher lows and manage to build 5 columns in the process, we aren't really looking for the triangle pattern in the Dow Industrials.

The basic premise behind a bear credit spread is to generate "income" for the account, where the traders looks to sell some premium at higher bullish risk levels. This is the market condition I think we're in right now.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Status remains "bull confirmed" at 73.33% bullish (22 of the 30 stocks currently show a PnF chart buy signal on their chart.)

Here is the option montage of the Dow Diamonds. The DIA was trading $85.90 bid at time of screen capture.

Dow Diamonds Options Montage -

I profiled a conventional "bear credit spread" for June. Another option would have been to establish a calendar spread where a trader might look to sell the July $86 calls ($2.40 credit), but then buy the June $87 calls ($1.30). This strategy would generate a credit of $1.10, but have the trader thinking he/she might want near-term protection under a more bullish market environment, but still looking for the Dow to trade below the $86 level by July expiration. At JUNE expiration, should the Dow be trading above the $86-$87 level, then the entire trade would most likely be closed as June $87 call protection would be lost.

S&P 500 Index Chart - Daily Interval

Short-term bulls got the rebound they were looking for, despite a weaker than forecasted weekly jobless report. I'm going to STRONGLY suggest that traders raise stops in yesterday's short- term bullish trade to break even and stick with the PLAN of taking profits should the 940 level be traded tomorrow.

I do think a bearish trader looking a MINIMUM 3-months expiration out can establish 1/4 bearish position in the SPX, using Tuesday's double-bottom sell signal as reason to be somewhat bearish. I'm profiling only partial positions bearish as I haven't seen much of a slip in the bullish %.

Today's trade saw a net gain of 0.2% in the S&P 500 Bullish % ($BPSPX), so a net gain of 1 stock to a new buy signal was seen. This has the bullish % edging up to 67.8%. It was on Friday, May 16th that this indicator reached it highest reading of the current bull cycle at 68.6%, so we can see that right now, there has NOT been any meaningful damage done.

The 8.4-point gain in the SPX after a break above an "inside day" still hints to me there are quite a few jittery BEARS that are willing to cover positions on the slightest bit of renewed bullishness. This is what I think SHORT-TERM bulls can try and take advantage of, but with a shorter-term bullish view only.

S&P 100 Index Chart - 5-point box

Both the SPX and OEX look almost identical. I wanted to show the OEX PnF chart on its conventional 5-point box scale (we usually look at the 2.5 point box). What I think this does is give a slightly "different" look to things and keeps a trader "honest." It would also show that an OEX decline back to 450 (while a significant decline from 475) might be an area where the pattern of higher lows continues to hold.

If you're trading the SPX (bullish or bearish) you might get a 50/50 type of feel about things. At least I do, and why I don't think traders can be overly bullish or bearish in their trade management right now.

Today's action saw no net change in the narrower S&P 100 Bullish % ($BPOEX) and status remains "bull confirmed" at 67%, which is still the high reading for this bullish cycle. No sign of internal weakness and should keep a bear on their toes/claws!

NASDAQ-100 Index Chart - Daily Interval

Today's high in the NDX of 1,137.68 was right at the WEEKLY S1 of 1,137. As a bear in the QQQ, I would want to see the NDX/QQQ trade back lower tomorrow, then take out the recent lows for a series of lower lows and now higher highs. Bears are going to be much more jittery with the QQQ/NDX on a move much above today's highs after the strong rebound today.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and status remains "bull confirmed" at 78%. This is just off the current bullish high reading of 79% and still shows internals holding together, though at a very high level of bullish risk.

Jeff Bailey

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