Option Investor
Index Wrap

"Big Apple" was full of juice

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The major market indexes closed at new yearly highs for 2003 after the New York Empire State Index jumped to 26.8 and well above economists' forecast of 8.8.

While the New York Empire State Index is not as widely followed of regional manufacturing indexes (just two years old), and many traders/investors didn't even know the index existed, the Federal Reserve Bank of New York said 43% of firms surveyed said business was better in June than in May, while 41% said business was the same.

The news helped reverse Friday's losses and a weaker than forecasted preliminary University of Michigan consumer sentiment reading of 87.2 on thoughts that while consumer confidence looks to have deteriorated in recent weeks, a rebound in manufacturing in New York may have been the apple today, that helps keep a recession at bay.

The Empire State Index reading was a major improvement compared to recent reports from the Philadelphia Fed, Chicago purchasing managers and national Institute for Supply Management surveys.

And what a pleasant surprise today's trade was for bulls that may have sold some QQQ June 29 puts on Friday at QQQ $30.00 level on thoughts the Q's wouldn't trade $29.00 or lower by this Friday's Triple Witching expiration, or took a shot at a bullish call option play from SPX 988 level from Friday's correlative support in the DAILY/WEEKLY pivots. Both trades were profile on Friday in the OptionInvestor.com market monitor based on Thursday evening's Index Trader Wrap observations.

I (Jeff Bailey) certainly would have thought SPX 1,006 would have offered more formidable resistance in today's trade (overlapping WEEKLY/MONTHLY pivot retracement levels), but as the session grew long, it certainly appeared bulls became more hesitant to sell with the indexes challenging their 2003 highs.

One thing I was monitoring on Friday that skewed me toward some bullish trades was the 52-week High/Low indicators for both the NYSE and NASDAQ. Friday was the "first chance" we had gotten to really see advance/decline ratios back at 1:2 since Monday, and give us a benchmark to measure from on Friday.

Here's a look at the market internals up to today's close, where I was "focused" on Friday's actual daily NH/NL ratios, which looked to be holding up and showing bullish leadership still in place. However, the growing number of 52-week lows in the NASDAQ begins to hint to me that the "rising tide lifting all boats may have started to run its course." This last observation is more important for individual stock traders that have been having some bullish success with bottom feeding, but the slight pickup in new 52-week lows among NASDAQ stocks hints to me that market participants may be losing their past aggressive bullish stance to a buy everything and anything type of trade.

Market Internals

In "red" on the NYSE and NASDAQ Adv/Dec areas, I've made my comparisons of A/D 1:2 compared to the NYSE and NASDAQ NH/NL ratios (blue). During the day's trade on Friday, both of the daily ratios were holding their own. While I wasn't focusing on the 10-day Averages of the NH/NL, these will continue to be monitored and charted on my handmade Point and figure chart, which both continue to show leadership at the NH/NL end of things.

Now, I can't put too great of focus on the 13 NASDAQ stocks hitting new lows today can I? If I look back to May 23rd, I see the NASDAQ reported 14 new lows that day, with 154 stocks having traded new 52-week highs. Similar new lows were found today, but note today's trade saw 250 new 52-week highs as a comparison.

One thing I think we all need to be cognizant of this week, is that there may be a lot in play, that isn't necessarily related to the economy.

Options traders will know to look for volatility and positioning going into a Triple Witching Friday. With the market's run up and some comments from traders that institutional mutual fund managers were sitting on piles of cash that had been waiting for pullbacks that never came, there may be a greater deal of "window dressing" heading into the quarter ending June.

There probably is no greater "hell" for a mutual fund manager that has seen strong investor inflows, during a market rise, that at the end of the quarter has the mutual fund manager sitting on piles of cash that his/her investors had wanted invested. The tendency among fund managers is to overweight the winners (52- week highs) and get rid of the loser (52-week lows).

As we move into Friday's close, on thing I think traders will want to test against with the New High/New Low indicators is to see if the "buy the winners" and "sell the losers" trade holds validity. Trouble might be on the horizon into next week should we see our New High/New Low ratios deteriorate more than 4% from current levels.

Why? While fund managers are "forced" to sometimes do things they really don't want to (invest excess shareholder capital at stretched valuations), not all MARKET participants, that didn't just watch the market advance, which in most cases was the "smart money" at the bottom, might now look to sell into the quarter, when they've got the fund managers over the proverbial "barrel." If so, then we might see this type of trade reveal itself in the NH/NL category in the next couple of weeks.

Onto the indexes!

I received multiple positive e-mail from traders regarding Thursday evening's Index Trader Wrap, where we looked to define "finite levels" of trade where a bull that understands risk is high, as depicted by the bullish %, would still either play long with regarding to risk/reward trading, or look for a "finite" level where profits in larger longer-term positions might be taken off the table.

I decided to use Friday's overlapping correlations in the SPX DAILY S2 and WEEKLY Pivot at 986 as support, but Friday's intra- day low of 984.27 was suspiciously close to where our 6-point box SPX chart would have shown a 3-box reversal at 984.00.

I don't want to show all the major indexes again tonight using that unconventional approach to changing PnF box size and risk/reward trading, as today's trade in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $30.88 +3.07% was the only index would have shown MEANINGFUL change from Thursday evening wrap.

NADAQ-100 Tracking Stock (AMEX:QQQ) - $0.35 box

Traders (most likely swing-traders) or investors looking to manage open positions that will use the unconventional techniques of risk/reward trading that the PnF charting systems allows, may still incorporate the WEEKLY and MONTHLY pivot analysis levels into their trading. I've made note that WEEKLY S1 in this WEEK's QQQ pivot analysis is at $29.41, and closely matches the $29.40 stop that now presents itself from the above chart which we showed Thursday evening. The MEANINGFUL change today was that the QQQ was able to reverse up 3-boxes on the $0.35-box scale chart and suddenly presents a more favorable risk/reward profile with stop at $29.40, than it did Thursday evening with downside risk being assessed to $27.30. Regardless of Friday's preliminary University of Michigan Data, or today's New York Empire State survey, a risk/reward bull can raise a stop to $29.40.

Here's a bar chart of the QQQ with WEEKLY/MONTHLY retracement overlaid. Zone of resistance from $30.60-$30.63 broken to upside, with zone of support $29.32-$29.41 well below.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

Stochastics look to go "overbought" and that might correlate with a QQQ re-test of the $31.30 level. The bulk of the QQQ open interest as of Friday night's close was at strikes below $30.00 and if I were holding June $31 calls, I'd be looking to sell strength close to $31.30 or guarding that type of position into Friday's expiration on thought of that QQQ settlement below $31.00 has June $31 calls going "poof."

S&P 500 Index Chart (SPX.X) - Daily Interval

The SPX powered and close at new 2003 highs and looks to have momentum into tomorrow's early trade with good potential early to 1,018. Trading curbs were in play while the SPX traded within a "zone of resistance" below our MONTHLY R2, which served up early resistance on last Friday's (June 6th) spike higher in the early morning trade. Shorter-term SPX traders might take note of the WEEKLY R2 as being a level in the early going tomorrow to look for resistance.

There are 4 economic reports due out before tomorrow's open. CPI/Core CPI, Housing starts, Building permits (09:00 AM EST) and Industrial production/Capacity Utilization (09:15 AM EST).

The area that "bulls" would most likely look for any type of major upside surprise would be the CPI data at the consumer level after recent PPI data showed price declines. I would think any type of "bearish" surprise would only be found in the housing starts and building permits data considering the Dow Jones Home Construction Index (DJUSHB) 482.05 +3.36% traded and closed an all-time high.

One thing I'm picking up on in this evening's wrap is how this WEEK's S1 really came into play last week, especially as support during Monday's declines, which we benchmarked our breadth indicators against, and how nicely these levels tie in from Thursday evening's wrap. Here's a 60-minute interval of the S&P 100 Index (OEX.X) 509.33 +2.31%

S&P 100 Index (OEX.X) - 60-minute chart

The S&P Banks Index (BIX.X) 314.56 +2.2% traded strong out of the gate today and while the SPX and OEX both exceeded their June 6th highs and closed there today, the BIX.X is just about 1.5-points shy. However, the BIX.X, SPX and OEX are lined up like stars in the sky as it relates to their WEEKLY pivots.

Often times, economic reports can "confuse" traders, but I'd try and stay focused on the BIX.X as an index away from the major equity indexes and measure things on a "hot open" at the WEEKLY R2s.

In the above chart, I mention that I'm not the type of trader to initiate new bullish/bearish trades on "gut feel," but I will tend to protect short-term gains ahead of option expiration.

Tomorrow morning, I'll be monitoring the OEX/SPX and BIX.X very closely on a trade at WEEKLY R2's, and will also follow the HL Camp & Company buy/sell program premium alerts, which I post in the 09:00 EST Update. I will post any alerts from these buy/sell programs in the early part of tomorrow's market monitor.

Dow Industrials (INDU) Chart - Daily Intervals

All 30 of the Dow Industrials finished in positive territory, and you know it was a bullish day, when the laggard stock AT&T (NYSE:T) $21.06 +0.95% gained almost 1% on the session. What really hints to me that mutual fund managers are scrambling to get invested by the end of the month is today's showing from Dow components, which are VERY liquid stocks that institutions will flock to when they are looking for liquidity. Of the 30 Dow components 22 of the 30 finished with gains of 2% or better!

With some thought that bonds sold off today, with the 10-year and 30-year reversing early gains on thoughts that stocks with dividends looked attractive had 7 of this year's "Dow Dogs" (10 highest YIELDing Dow components at 12/31/02 close) having little difficulty attracting capital in today's session.

Dow Dogs listed in order of current YIELD (MO, EK, GM, SBC, T, JPM, DD, HON, GE, CAT).

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

Pivot analysis Matrix

A lot of correlative support/resistance levels show up for tomorrow between DAILY Pivot/WEEKLY R1 (which was violated to the upside today) and DAILY R1 and WEEKLY R2, with WEEKLY R2 a bull's first target in tomorrow's trade.

There were no net changed in the INDU, OEX or NDX Bullish % charts. The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 1.43%, or roughly 7 new point and figure buy signals. This has the broader S&P 500 Bullish % ($BPSPX) growing to a bull cycle high reading of 82.83%.

Jeff Bailey

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