Option Investor
Index Wrap

Markets look roiled with fear and greed

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Was today's report that the ISM Services Index showed expansion at 54.5 reason enough for 1.3% rise for the Dow Industrials (INDU) 9,038.98 +1.3% and a late session piercing of its December highs of 9,043.37 with today's session high of 9,057.40?

Was this the "good news" the market knew about on March 12, 2003 when it reversed from a session low of 7,416.64 to close at 7,552.07?

I'm thinking.... NOT!

However, today's ISM Services news certainly was enough to once again send the markets into a more "euphoric" level of bullishness and completes the systematic pattern of major U.S. indices now having broken above a relative high after setting a higher low.

I would think even the most bullish of bulls is looking at things with some amazement. I know the bears are. Heck, I've got some bearish trades in my account, that have the underlying security trading at levels I certainly didn't think would be traded. I've got a couple of bullish positions too that seem to exhibit trade levels that I deem somewhat "overbought."

One comment I heard today, which I fully agree with, came from CNBC commentator Bob Pisani as he reported one floor trader's comments regarding the stock market's rise.

The jest of the trader's comments were that the current market conditions are extremely overbought and fundamentals along with economic data don't support current price levels and that the bullish momentum, when it ends, will have the equity markets turning ugly.

And that my fellow trader/investor pretty much sums things up as it relates to today's trade, if not the past couple of weeks, as far as FEAR and GREED help explain this markets action.

Fear? Who's afraid right now? Shorts/put holders, or BEARS. Who else can we think of that's FEARful right now? What about the fundamental-based investor (not just the individual investor, but the mutual fund manager) that has been holding back his/her cash and now becomes FEARful that they've missed the move and may still be missing the move higher?

Who's probably greedy right now? Bulls! Bulls that sense overhead resistance is being cleared and there may not be a lot of stock available from higher levels.

The two combined, fear and greed, act like fire and gasoline when brought together. The main question asked by EVERY trader/investor is how long will it last? If you know the answer, or someone who does, please have them e-mail me immediately!

I (Jeff Bailey) am AMAZED, but not SURPISED, with the amount of bullishness the major indexes are showing, but right now, a bears FEAR and perhaps a "sitting on the sidelines" bull's fear, seems to be equally matched by a bull's GREED, and this rather extreme unbalancing of excessive demand for stocks compared to supply gives the market a more "euphoric" look.

The ONLY way I know how to trade these markets at such high levels of BULLISH RISK, is to try and mitigate that risk with protective stops, until we see some sign of internal weakening.

This may sound "ludicrous" to some traders and perhaps preposterous to investors. But if any trader/investor really NEEDS and explanation to what is taking place, it's the only explanation I can possible come up with at this moment.

So what can an index trader do at this point, if wanting to try and take advantage of this "bear fear" and "bull greed" type of momentum trade?

Limit your bullish capital exposure with position size, and either sell your bullish targets, or continue to raise a stop under your trade to PROFITABILITY if your bullish target is achieved, but you feel/sense that further upside presents itself.

Tonight, I'm going to switch things up a bit, and I'm going to set up my charts to reflect how I think a bullish trader, can look to trade these markets using retracement and the point and figure charting system and the bullish vertical counts.

I must admit, I'm somewhat hesitant to even discuss the bullish vertical counts that the indexes have, but with FEAR and GREED looking to be in play, then the charts I show tonight may help a DISCIPLINED trader/investor MANAGE risk in their accounts and play the MOMENTUM.

The current bullish vertical count of the S&P Depository Receipts (AMEX:SPY) $99.16 +1.44% is $108, while the S&P 500 Index (SPX.X) 986.24 +1.51% is currently building a bullish vertical count of 1,130 as it further extends a "blow off" type move discussed from last Thursday's wrap

(I'm AMAZED, but not surprised by the SPX's move).

We get the "disconnect" in the bullish vertical count as the SPX had given the double-bottom sell signal on its point and figure chart at 915, while the SPY's $1-box chart hasn't given a sell signal at this point. As such, I'm going to use the more "conservative" bullish count of $108.

Before I go on, today's trade saw the S&P 500 Bullish % ($BPSPX) rise 1.4% to 78.2% and now marks the highest level of bullish % for this indicator since November 1998's reading of 80%.

S&P 500 Index Chart - Daily Interval

The SPX is now firmly above its December highs and looks set to trade the "round number resistance" of 1,000 as a preliminary bull's target. I've discussed the technique of using the point and figure chart's bullish and bearish vertical count to set up retracement brackets, which allows a trader to establish levels of potential trade. However, I always want to see if the LEVELS from this technique make SENSE! I do see some tie in HISTORICALLY with the SPX chart.

I've outline three different STOPS, based on levels that a bullish trader, looking to play the momentum could use and can be measured against YOUR tolerance for RISK.

Note: If you've been trading the PIVOT levels and assessing your RISK and establishing TARGETS with them and have been having SUCCESS, then DO NOT CHANGE A THING! Keep trading that system.

Tonight's Index Trader wrap is designed to try and understand/comprehend the MOMENTUM and though of what types of emotions (FEAR and GREED) that look to be in play, and then establish a LEVEL of downside risk that a bullish trader might be "comfortable" with where a stop can be placed.

Moving on... the Diamonds Trust (AMEX:DIA) $90.71 +1.29% bullish vertical count is $106, while the Dow Industrials' (INDU) 9,038.98 +1.3% bullish vertical count is 10,650. I would be AMAZED if both of these bullish objectives were achieved before the either gave a point and figure sell signal. However, I would not be SURPRISED if they traded their bullish objectives if unemployment rates were to fall, starting with tomorrow's weekly jobless claims report.

Note that both the DIA bullish vertical count of 106 (10,600 INDU equivalent) and the Dow Industrials (INDU) bullish vertical count of 10,650 are similar. This is because neither of their PnF charts have given a PnF sell signal.

Dow Diamonds (AMEX:DIA) Chart - Daily Interval

I'm "attaching" the base (0% retracement" at $75.00 in the DIA as that was the prior BEARISH vertical count we actually used back on March 5th to set up a bullish 1/4 position in the DIA Sept. $80 calls. All be darned if the DIA didn't eventually trade $74.31 on March 12 before reversing back higher to close above $75.

One thing I see tonight that I haven't noticed before is what I call a "tweezer top" (looks like a pair of tweezers that you'd pull a sliver of wood from your finger), which I think candle stick charts (which I'm not) will often times draw attention to as potentially signaling a top.

To help remove the potential RISK of a "tweezer top" I've set up a momentum trade in the DIA, but it HAS to trade $91.05 to prove itself to me. It was on August 22 and 23 of 2002 that the "tweezer top" had both session highs of $91.00.

ANY INDEX TRADER should probably be using this OBSERVATION tonight. The simple question of "why did the MARKET sell the DIA at $91.00?" can be asked. But all we really care about is that it did, and if the MARKET doesn't sell it this time, then perhaps something has CHANGED compared to the past. For a momentum BULL, all you're thinking about is "what if BEARS have been shorting, with the thought that $91.00 will hold resistance, but that's their covering point for an extended move higher!

Now... a bull can also "back test" the levels and see that it has been BEARISH for the DIA to trade $90.50, if it then falls back below $86.84. As when it has fallen back below $86.84 it didn't come back to trade $90.50. Except when the BULLISH % ($BPINDU) cycled back to 30% bullish or lower. Like it did in October and March!

Today's trade saw the very narrow Dow Industrials Bullish % ($BPINDU) see a net gain of 3.33%, so one stock (XOM $37) generated a new PnF buy signal and has the Dow Industrials Bullish % ($BPINDU) back up at 76.67% bullish.

As I was looking for the stock that gave today's point and figure buy signal, I also see that Caterpillar (NYSE:CAT) $53.92 +1.83% is close to giving a "triple-top" buy signal at $55. This would not be a "new" point and figure buy signal as CAT gave its first buy signal back in March at $48. A momentum stock trader might look at a bullish trade in CAT at $55.00, but to protect against a "bull trap," which we would often be on the alert for at higher levels of bullish %, only partial positions would be established. The bullish vertical count on CAT is $72. This bullish vertical count would be negated if CAT were to trade $50 and generate a triple-bottom "sell signal."

The NASDAQ-100 Trust (AMEX:QQQ) $30.42 +1.87% has had a bullish vertical count of $45 associated with its PnF chart since giving a double top "buy signal" at $27 back in November of 2002. To negate this bullish vertical count, the QQQ would currently have to trade $23.00.

NASDAQ-100 Tracking Trust (QQQ) - Daily Interval

The QQQ trades at a much lower value than the other indexes/tracking stocks discussed so far. Late yesterday afternoon I thought momentum bulls could play a QQQ trade bullish from $29.85 with a stop just below $29.50 and my bullish target of $29.30 was achieved, as was the WEEKLY R1 of $30.47. Again... with the bullish % at 84% at tonight's close, RISK for bulls is high, but its FEAR and GREED that will attract a MOMENTUM bull. You can play this psychology, but stay DISCIPLINED with a stop.

Today's trade saw a net gain of 1% in the narrower NASDAQ-100 Bullish % ($BPNDX) and back at its bull cycle high reading of 84% bullish.

I will make note. I still hold 1/2 bearish position in the QQQ September $27 puts with original target of $25 still as a target. However, I'm still waiting for some type of internal weakening to take place before any further additions to that trade.

And here's the index that, using the technique above, gives index traders a very good level to measure against near-term. Introducing the S&P 100 Index (OEX.X) 495.03 +1.41%. Oh that 481 entry from last week.

S&P 100 Index (OEX.X) - Daily Interval

I'm not sure if anyone traded the "inside day" technique after the OEX traded "inside" of Monday's range yesterday, which would have a trader trading that technique having traded BULLISH on today' break above yesterday's high.

This technique is discussed in the Bailey's Basics section of the site title "The inside day trading technique"

The reason I say a MOMENTUM bull could "pretend" they traded this technique is that it simply plays into the hands of looking for an "inside day" which hints of indecision, and when the break up (bullish) or down (bearish) from the "inside day" takes place, the trader looks to benefit from the break of momentum and shorter-term shift in supply/demand. As such, a simply follows each days low (for a bullish trade) with a stop just under that low, and lets the MARKET decide when it is time to sell.

I'm running late again and want to quickly post the pivot matrix.

Pivot Analysis Matrix

The S&P Banks Index (BIX.X) 311.53 +1.61% achieved our reverse head/shoulder pattern objective at WEEKLY R2.

Jeff Bailey

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