Option Investor
Index Wrap

A bull in bear's clothing\?

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I have mixed emotions as I write this evening's Index Trader wrap as I feel like a bull that was wearing bearish clothing into yesterday's close.

I hate losing trades. While I take a losing trade rather hard and personal, I've learned to not dwell on it, and try and get back on trend.

Just how the MARKETS were able to simply shrug off another warning from the wireless handset sector in Texas Instruments (NYSE:TXN) $18.86 -7.5%, when I would have thought market participants might have been much more eager to sell profits at these higher levels of market and sector risk, the major indexes pushed back higher and once again look to challenge yet another "top," or in this case, Friday's highs.

I thought for a moment I was developing arthritis in my right index finger as the S&P 500 Index (SPX.X) 997.48 +1.28% made its way above our WEEKLY pivot of 986.35, as it was difficult to pull the trigger, or click the mouse and close a bearish trade. But when the SPX came back to test the 986 level and rebound from there to then take out the morning highs of 990, the rush was on as many bears turned bullish with Friday's highs back in play.

With failure, perhaps comes success for those that were willing to take a shot at a bullish trade in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $30.55 +1.12% from today's profile of $30.12. I should have stuck with my original $30.04 profile, but the ability for the QQQ to trade its WEEKLY Pivot early in the morning, had me getting a little more aggressive. Had I known some guy in Israel was going to blow himself up along with others on a bus, I might have left my entry point at $30.04.

Here's a snapshot of my "mindset" and observations from this morning's market monitor.

Market Monitor - 10:23 to 10:50 AM EST

To save some room, I just clicked on my posts (Jeff Bailey) to look back on my mindset and observations. Here's the chart of the SPX that I was drawing up just minutes before the 10:23:26 post.

S&P 500 Index Chart (SPX.X) - 5-minute bars

Computers may have been "smarter than me" after reading last night's Index Trader Wrap, as the morning pull back stopped dead in its tracks at today's DAILY Pivot of 981.87. Hey! That's right where I had profiled the bearish trade on break below 982. There was still a shot at downside as long as the WEEKLY pivot held resistance. Wasn't there?

Let's stay focused on the S&P 500 (SPX.X) a little bit longer tonight. Here I'm going to show a chart of the SPX on 30-minute intervals. This allows us to still focus on some of the intra- day action, see what took place, but also incorporate what took place on Friday, that we as traders might want to be alert to tomorrow.

S&P 500 Index Chart - 30-minute intervals

I've placed tomorrow DAILY pivot retracement (gold/brown) on the SPX 30-minute chart as there are two levels that I think traders need to be cognizant of.

The first level is right at 1,002 (thinking psychological 1,000 also). My thinking here is this. Last week, we thought the SPX might be set to see a "blow off move higher" and Friday's move to 1,006 might tie in with that analysis. At some point, when I don't know, we would expect, or look for a lower high for some type of sign of more prolonged "profit taking." If so, then I still want to monitor and at least understand that such a technical pattern could be found if the SPX trades the upper-end of our regression channel, but finds resistance there and begins to weaken. This type of trade then may make sense as to the "blow off" move we looked for earlier last week.

From there, the second level. On Friday's reversal, there is only ONE explanation I can come up with for the reversal Friday, when the SPX surged from 990 to roughly 1,006 and quickly reversed those gains. Remember! Program trading curbs were in that day, but SOMEBODY had the 1,006 or even 1,005 level in mind as a level they were going to sell "come heck or high water!"

Yes! You are darned right I'm looking for resistance and areas where a bull could get their head handed to them.

As I review the above chart, I'd put myself in the position of being long going into Friday's open. If I didn't sell strength at MONTHLY R2, then HOW COULD I AS A BULL HAVE PROTECTED MYSELF?

How about a stop just under 992? Which is tomorrow's DAILY Pivot.

Now, do you see that little "break" below the 975 level? Doesn't that look like a little "trap?" I still feel the SPX is closer to a top than a bottom at these higher levels of bullish %, and I'd be cognizant of a "trap" for bullish on a move above 1,008, that quickly gets reversed back below 1,001.99.

Today's action saw a net gain of 0.2% for the S&P 500 Bullish % ($BPSPX), so a net gain of 1 stock to a reversing point and figure buy signal. This has the bullish % back at 82%.

Now... lets back off the intra-day stuff for a minute and use the S&P 100 Index (OEX.X) 501.95 +1.18% daily interval chart to take in a bigger picture of things. One sign of trouble for my bearish trade in the SPX presented itself last night when the OEX closed above its WEEKLY pivot and was perhaps further present this morning when the OEX pullback at the open found support right near the WEEKLY pivot. Once again... when the little "intra-day" head/shoulder top pattern failed to hold at the "right shoulder" the race was on for bears to cover. Bulls will keep making bears pay on this "false pattern" until bulls see a losing trade.

S&P 100 Index Chart - Daily Interval

The OEX was the only index that did NOT have an "inside day" associated with its bar chart, as yesterday's high exceeded Monday's high. Still, a bullish trader could "pretend" that it was and at higher levels of bullish %, follow with a stop just below today's low, which would tie in nicely with the WEEKLY pivot.

One thing I want to discuss was a question sent to me from a trader regarding my comments on the Stochastics oscillator from last night in the SPX. The question was.... "should we look for a two day move higher, then consolidation for 5-days and a break back lower?"

I've said before, that I'm not a big "Stochastics trader," and will only use this oscillator as a partial weighting in my analysis (about 10%). I'm more of a supply/demand trader (60% weighting).

Due to horizontal space limitations, I can show the January relative highs, but when the OEX was trading sideways around the 475 level as Stochastics were turning back up from similar levels as they are now, that 475 level was right at the January relative highs and I would imagine, that just like you and I were monitoring that as a key level of resistance on the strong rebound from the lows, other technicians and traders were doing the same thing.

Two things are "different now." One is... overhead supply of stock is VERY limited (one reason we see some impressive moves on breaks higher) and this is the MAIN reason I think there's a shot at WEEKLY R2 and Stochastics to return to "oversold." However, to advise caution of over exuberance, the "second thing," which I'm concerned most about as a bullish traders is that RISK is much higher now as depicted by the bullish %, than it was in mid- May.

So, do I "expect" the OEX to trade sideways based on similar Stochastics pointed to above? No! But should they reach "overbought" and the OEX has either traded WEEKLY R2 or has been trading sideways at MONTHLY R2 for several sessions, then I'll weigh risk/reward at that point. I think a bull is encouraged by the Stochastics action, but its price action and profits that put food on the table, not Stochastics!

Today's trade saw a net gain of 1 stock to a new point and figure buy signal in the S&P 100 Bullish % ($BPOEX). This has the bullish % for this index rising to 79% and a new high reading for this bull cycle.

Looking back at last night's wrap, I only used Stochastics as one "reason" to really focus on the WEEKLY pivot as my stopping point to manage risk and keep a loss minimal.

Dow Industrials Chart - 50-point box

Will the Dow ever give a PnF sell signal? Today's trade at 9,100 now gives PnF traders a new level to snug a stop up under at 8,900. With a bunch of economic data due out tomorrow, I see correlative levels at the DAILY R1 of 9,231.6 and WEEKLY R1 of 9,235. If the Dow were to break further higher and generate another PnF buy signal at 9,250, then I can't rule out another higher target of 9,400, which would tie in nicely with our "bullish resistance trend" and WEEKLY R2 of 9,407.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull confirmed" at 80%.

I showed an intra-day chart of the NASDAQ-100 Tracking Stock (QQQ) $30.52 +1.12% in today's 03:15 intra-day commentary and discussed my interpretation of volume on the break at today's highs. It is that type of action, which really wants me to COMPLETELY IGNORE tomorrow's economic data from a trading standpoints. The ONLY thing I impact I think that today's Beige Book had on trading is that BULLS pulled their offers (didn't sell as much) and made BEARS pay the price, which they were willing to do on the break to an intra-day high.

Yes, volume picked up a little bit at the 02:00 PM EST release (14) on the 10-minute chart, but by golly, that VOLUME SPIKE was found on the break at the session high.

Now, I will admit, that my bullish profile in the QQQ from $30.12 was simply a trade to try and TAKE ADVANTAGE OF JITTERY BEARS, when I saw the SPX trading bullish. I also profiled the QQQ trade to "get back a loss" in the SPX.

For those traders that TOOK my SPX loss, my/your MAIN GOAL right now, is to set stops at a level in the QQQ, where the SPX and QQQ trade then becomes a WASH! Yes... we're here to MAKE money, not just trade break-even. However, when I see a loss taken, and get an opportunity to now get back at "break-even" I don't want that opportunity to slip by.

Since I have no way of knowing what put options everyone may have traded, I'll use the SPY as an example. Let's say I shorted $9,850 of SPY (100 shares at $98.50) on Monday, and stopped out today above WEEKLY Pivot of $99.11, say at $99.25. I've suffered a $75.00 loss (plus commissions).

Now, if a trader than took similar $9,850, amount and bought equal dollar in the QQQ at $30.12, say 300 shares (300 x $30.12 = $9,036) then my main GOAL is to exit the QQQ with a $75.00 gain (plus commission for both SPY and QQQ trade). Let's say my break-even including commissions right now has me needing to make back $120. That $0.40 per QQQ right? ($0.40 x 300 = $120). If so, then a trader with a MINIMUM break-even goal in mind would place a stop at "gulp" $30.52.

Now... this is rather "extreme" account management, but one way to view things. As I type, the QQQ are ticking $30.59 at 07:58 PM EST).

Here's a 60-minute interval chart of the QQQ, which is more of a "swing-trader's" time interval. If I'm on the lookout of some type of sharp reversal tomorrow morning after strength, then it will be at the DAILY R1 of $30.84.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

I didn't "know" that a bullish profile of $30.12, would be the 61.8% retracement in tomorrows DAILY pivot analysis retracement, but gives me a good look at where some bulls might own some QQQ from today. I see "three levels" of early resistance from $30.84 to $30.80 and this would be the "first level" I'd watch for resistance/selling on morning strength. I've outlined two different levels for stops, based on a trader's tolerance for downside risk. Both are at overlapping resistance.

With three earnings warnings from MOT, NOK and TXN, I won't disagree that bulls may be "playing with fire" in the QQQ, so I'm using tight stops to control risk on bullish trades, as trying to use jittery BEAR'S short-covering to my advantage when the opportunity looks to present itself. That's it!

Today's trade saw a net loss of 1 stock to a new point and figure sell signal. This has the NASDAQ-100 Bullish % ($BPNDX) slipping back 1% to 90% after three-days of bull cycle high readings of 91%.

I'm running late, but here's the pivot analysis matrix for tomorrow.

Pivot Analysis Matrix

Jeff Bailey

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