Option Investor
Index Wrap

How many floors does this house have\?

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Stocks surged in today's session and has to have traders wondering just how many floors this "house of bull" will build as housing data showed its resiliency in April with new home and existing home sales surpassing economist's forecast.

The term "house of bull" is not slang for a market that didn't show some healthy internals either. NYSE volume rose to just over 1.5 billion shares (shows interest), its heaviest volume of the month, with advancers outnumbering decliners by a 23 to 9 margin. 417 stocks reached a new 52-week high and highest levels this year, compared to just 9 stocks trading new 52-week lows.

NASDAQ volume reached the 1.9 billion-share mark, the third highest level of the month, with advancers outnumbering decliners by a healthy 23 to 9 margin. 284 stocks managed a new 52-week high compared to just 6 stocks trading new 52-week lows. The 284 new highs in the NASDAQ were the highest levels found so far this year.

While I was battling with my cable modem in the early morning session, the morning trade that started out weak began hammering out gains after the release of the housing data.

While May consumer confidence rose marginally, but fell short of economist's expectations, stocks rose more inline with the expectations index, which jumped to 94.4 from April's 84.8 reading.

By session's end, the major equity indexes all finished at new CLOSING highs with the NASDAQ-100 Index (NDX.X) 1,172.58 +3.76% jumping 42.5 points, its Tracking Stock (AMEX:QQQ) $29.10 +3.55% gaining $1.00, the Dow Industrials (INDU) 8,781.35 +2.09% surging 179.97 points, the S&P 100 Index (OEX.X) 478.99 +1.96% climbing 9.24 points, and broader S&P 500 Index (SPX.X) 951.48 +1.95% gaining 18.26 points and easily surpassing my bullish target of 944 rather easily in today's trade.

Here's a quick look at tomorrow's Pivot Analysis Matrix.

Pivot Analysis Matrix

In last week's Market Monitor, I mentioned that according to the Stock Trader's Almanac, the week after Memorial Day has tended to be bullish, with the Dow Industrials posting gains 14 of the last 19 years. While there's still three sessions left to go, the odds of a 15 out of 20 record look good with a test of the WEEKLY R1 and an additional 50-points to boot.

NASDAQ-100 Tracking Stock (QQQ) - Daily Chart

One could say today's trade saw BEARS getting hit square between the eyes with a 2x4. It isn't funny for either and with one eye left open tomorrow's release of April durable goods orders (consensus of -1.0%) is perhaps the only economic news that stands between QQQ $29.10 and MONTHLY R2 of $29.73. The reason I "discount" WEEKLY R2 at this point is today's spike in volume, which most likely leaves a market maker's inventory once again a little bit light and has me thinking there isn't going to be a lot of computer selling at the $29.33 level, especially if durable goods data gives any type of upside surprise.

Despite today's gains in the QQQ and NASDAQ-100, the NASDAQ-100 Bullish % ($BPNDX) was no net gain in stocks giving new point and figure buy signals. RISK remains high at 78%, but an aggressive bull that will honor a stop below $28.65 will use the growing number of new NASDAQ Composite (COMPX) 1,556.69 +3.08% new 52- week highs as a sign that bullish leadership holds and shows momentum from the bullish camp.

As the NASDAQ-100 breaks to new relative highs once again, I'm going to turn my/our attention to the S&P 100 Index (OEX.X) 478.99 +1.96%, which is the only major index that has yet to trade its MONTHLY R1 (480.60). For those pivot matrix traders, this is perhaps "the level" that has yet to be broken to the upside in the major indexes and may be the only level right now that would have had a bear "holding on" yet another day.

I think this is perhaps the index for bulls to be looking to play long tomorrow on a stronger-than-expected April durables number. The reason I say this, is that many of the stocks here have some dividend yield, that may also be in play on the scenario of benefiting from President Bush's tax cut bill that was signed.

S&P 100 Index Chart - Daily Interval

With risk high for bullish trades in the major indexes, I'm looking for trade setups tomorrow where I can try and control the downside risk with a "level" that makes sense. The OEX closed above some significant resistance today and a move above the 481 level should bring in some good short-covering. I'm also playing a bullish scenario that the S&P-100 group of stocks will see some benefit of "dividend buyers" that may be in play after President Bush signed his tax bill.

As for any new bearish positions? No thank you. Not at this point. I'm once again coming to the conclusion that bears are better-off looking for some type of internal weakening to take place. At this point, I don't think we'd find too many bears disagreeing with this observation or thought process as another relative high gets violated today.

Today's trade saw no net change in the S&P 100 Bullish % ($BPOEX). Still "bull confirmed" at 66% and just 1% off of last week's high reading and bull cycle high reading of 67%. I am cognizant that the OEX hitting a new relative high isn't necessarily being "confirmed" from the bullish %, but there's a lot of stocks pushing to new 52-week highs as overhead supply of stock becomes limited in those issues.

While the narrower S&P 100 Bullish % ($BPOEX) didn't find a net gain of new point and figure buy signals today, the broader S&P 500 Bullish % ($BPSPX) did. The S&P 500 saw a net gain of 1.6%, so a net gain of 8 stock to new point and figure buy signals has this broader bullish % growing to a bullish cycle high of 69.2%.

S&P 500 Index Chart - Daily Interval

When comparing the OEX chart to the SPX chart above, one thing stand out to me and probably to you too. The SPX is much closer to its December highs. The only reason I can hope to explain is the BROADER amount of bullishness that is being found in the SPX, as some bullish investors that begin to feel like they would be chasing some of the more "overextended" stocks that have had BIG moves, commit capital to other stocks in the market that look to have upside potential, where downside risk to a stopping point is more limited or readily defined. From a point and figure charting standpoint, this would be thought of as "risk to a sell signal."

One reason an index trader might "prefer" an OEX trade from the bullish side compared to an SPX trade is the "psychology" of a BEAR's mentality toward assessing risk to the December highs. While I would give an educated guess that the SPX and OEX move rather similar in percentage terms, playing the OEX as bullish plays on the BEAR's shaken mental state as they may be eyeballing risk to the December highs. While I can't say for certain, I would also venture a guess that the 100 stocks in the OEX basket offer a higher dividends when compared to the broader SPX on average.

While it is true that an OEX or SPX bull isn't getting a dividend, my thinking for the dividend strategy is that when a level of upside resistance is broken, and buy programs kick in, some OEX stocks that pay higher dividends may find a more heavily weighted buy influence near-term.

Dow Industrials (INDU) Chart - Daily Interval

The Dow Industrials broke some major near-term resistance in today's trade. Resistance I felt would be FIRM when I profiled a BEAR Credit Spread on Thursday, felt good about on Friday when the Dow closed right at/near the 8,600 level.

I want to discuss this trade right now, and make certain that traders do NOT close out the long call portion, without closing out the short call position! This is IMPERATIVE in my book as it relates to risk management.

Option Montage for DIA - June 86/87 BEAR Credit Spread

In Thursday evening's Index Wrap, I displayed the DIA option montage with $86-$88 strikes. In the above montage, I've signified the "short" call in red (DAVFH) and "long" call in green (DAVFI).

As a comparison, the trader that established a BEAR credit spread may have sold the DAVFH for $1.65, and that portion of the trade currently runs at a loss of $1.30 per contract (at aks), while the long portion bought at $1.30 would currently show a gain of $0.75 (at bid), so position runs at negative $0.55 (excluding 2 commissions).

The ONLY part of the trade I would take off at this point would be to CLOSE the JUNE $86 call (DAVFH) should the DOW break above today's high after tomorrow morning's economic data is released BEFORE the opening bell.

While RISK is HIGH for bulls right now, DO NOT take off your INSURANCE in the DAVFI without FIRST closing out the $86 call sold short.

Today's action saw no net change in the Dow Industrials Bullish % ($BPINDU) and status remains "bull confirmed" at 70%.

Jeff Bailey

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