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Index Wrap

IMAGINE THAT!

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The OEX finished above 500 and QQQ above 30 on Friday, causing the puts at those strikes and below to expire worthless - imagine that! Duh, who could have guessed it?! It's the bears turn to NOT have things go their way as market participants wear only rose colored glasses and not just their dark shades. With competing bond yields so low, money managers are following each other into the market, not wanting their April-June (Q2) report cards to reflect underperformance.

THE BOTTOM LINE -
At least a modest pullback to around 980 in SPX, to between 490- 495 in OEX, 1600 in COMPX and to the 1180 area in the Nasdaq 100 (NDX) seems likely - especially once Q2 stock portfolio buying is done, which is coming up this week.

Also, the Fed meeting is on Wednesday and with the rally partly based on the anticipated rate cut, it's doubtful that we see further upside based on that. Buy the rumor (anticipation) and sell the fact as they say.

Actual earnings will be coming out for the current quarter in July and there will likely then be a period of sideways to lower price action that is longer than 1-2 days. Of course the market is anticipating a better second half, but the over-optimism going on here may get a dose of sobriety with the bound to be overall current slow recovery of corporate profits.

LAST WEEK and FRIDAY'S TRADING -
There was a jump in the equities call to put daily volume ratio on Friday to a bearish 2.8 on triple (now being called quadruple) expiration day. While this jump is in significant measure related to expiration-related unwinding, I usually find these extremes to be nevertheless meaningful. Stay tuned.

The Dow Jones rose 21 points (0.2%) on Friday to 9200.75 after spending most of the day about 60 points above its Thursday close. The Nasdaq Composite Index (COMPX) fell 3.92, or 0.2%, to close at 1644.72, as heavyweight Nasdaq stocks like Cisco, Oracle and Nortel fell. For the week, the Industrials gained 83.6 points, while the Nasdaq was up 18 points.

General Motors (GM) was up some 2.5% and led gains in the big cap blue chips after the company announced plans to beef up its balance sheet with new debt offerings and Prudential upgraded the stock.

The amount involved is $10 billion in debt and convertible securities, which doubles its original balance sheet strengthening target for 2003. GM stated that it intends to use "substantially all" of the proceeds to partially fund its pension fund and other benefit obligations.

The move by GM caused Prudential to upgrade the stock to "buy" from "sell" on the belief that an eventual economic recovery will overcome any short-term negative news. Imagine that - an actual sell on the stock! Not just some wimpy "under-perform" rating or the like. That's the effect of not having an investment banking arm. And, why, when Pru speaks the market often takes more notice these days.

It used to be that heavy borrowing was NOT a great bullish plus. But rates are low and GM has heavy unfunded pension liabilities - better to deal with it now than have the past come bite you when it might be more difficult to deal with. Or at least that's what my dear ol pappy used to say - well, at least the "bite" part, said a little differently.

Fellow Dow stock General Electric (GE) climbed a half percent after the company reaffirming its Q2 earnings outlook at an analyst meeting. On Thursday, several Street analysts cut their full-year earnings forecasts on GE, noting the softness in the global economy and weak performance in the plastics division.

An article in the business-influential Wall Street Journal speculated on the Fed being undecided on how deep this week's rate cut should be.

On Thursday, there was a Washington Post article suggested the Fed was ready to drop its (Fed funds) rate a full half, which currently stands at 1.25%. Hey, how low can you go!?

And, the Street of Dreams influential Goldman Sachs indicated a "more optimistic" attitude about the U.S. economic outlook due to improving financial conditions over recent months. Goldman raised its growth projection for '04 gross domestic product to 3.3% from 2.5%. "What's important here is the shift in the Fed's regime -- to focus on keeping short-term rates low for a sustained period in order to prevent deflation," according to their economist. They're expectation was for a 1/2 point cut this week, and then to be on "hold" through 2004. Well, again, how low can they go - this ain't Japan you know!

By the way, Goldman also forecasted a "slightly firmer" corporate profit growth this year and predicted the yield on the 10-year bond will rise further, to 3.8% by year end. (I usually no longer call the 10-year a "Note", as its more the bellwether bond than the diminishing supply of 30-year paper.)

OTHER MARKETS -
The 10-year Treasury note fell about one quarter point to yield 3.374%. The 30-year bond dropped a half point and at its closing price, yielded 4.44%.

The dollar gained against the Yen slightly, trading at 118.35, up from 118.28 on Thursday, while the euro eased against the dollar to $1.159 from $1.172.

INDEX OUTLOOKS -

GOLD -
In updating the XAU (Philly Gold & Silver Index) chart below, you'll see that the Index did achieve a bullish break out above the triangle pattern I highlighted last week. What's it all mean in the bigger scheme of things? - I can't say with authority, but there is still a lot of unrest and threats out there and gold is the traditional go-to asset for times of uncertainty and war.

The metal itself and shares of the gold mining companies usually move inversely or opposite of financial assets like stocks in general, at least over the long haul. Either gold stops going up and stocks go down, or vice versa. Maybe they both go up. I find it worthwhile to keep an eye on the gold market as representing a possible different view of how things are -

S&P 500 (SPX) - Hourly chart:

Technical support implied by the lower boundary of the uptrend channel is up to around 965-967. Resistance and selling developed in the 1015 area last week rather than in a move all the way back up to the upper channel boundary. My best guess is that a minor rally develops next, but that falls short of the prior (1015) peak. This should be a put buying opportunity - certainly a stop out point will be close at hand (assuming another rally) at just above 1015. Reward potential from there should be decent.

Moderate to good rallies have developed when the 21-hour stochastic has gotten to a fully oversold reading, which it has done here. This tendency suggests buying calls into a dip on Monday morning, such as to the 985 area.

S&P 100 Index (OEX) - Daily & Hourly charts:

The extreme reading in my "sentiment" indicator of course has to be viewed in the context of the expiration as equities call volume ran 2.8 times puts. However, now the 5-day average is at the kind of extreme that tends to mark points where bullishness is extreme enough to suggest that the S&P is overbought and due for a countertrend move. Stay tuned!

As with my analysis of SPX, I think there could be another rally that would set up a put buy, such as back up to the 505-507 area. If so and in puts at that point, I would exit if OEX trades back above 510.

Support implied by the lower end of the daily and hourly channels comes in in the 485-490 area. Resistance at the "line" of prior hourly highs is at 512. More major resistance looks to be in the 515-517 area.

When tracking support and resistance implied by steeply rising or falling trendlines it does change significantly over a few days so my view here is also a "snapshot" in time and looking ahead only 2 or at most 3 trading sessions usually. Like a "moving" average, trendline support and resistance needs to be checked periodically by applying a trendline that is up to date so to speak.

I note with interest the price/RSI divergence that has shaped up here. Does such a divergence always signal a top, no. But the reliability of such divergences is as high as any patterns and indicators in common use.

Dow Industrials (INDU) Daily & Hourly (DJX.X) charts:

93.5 - 94 is the key technical resistance I would peg. The 14- day stochastic has rolled over to the downside - sell (buy puts) rallies. And, there should be another rally attempt to sell into, such as back up the 93 area.

If DJX were to get all the way back down to the lower end of its trend channel, 88 looks like a downside target. I think support being 92 and 88 is the midpoint 90. Look for the bulls to support (buy stock) in this area of the Dow. A close above 94 would be enough for me to exit puts.

Picking a top is like choosing Miss America - tough to find the right one. However, the move to a new high followed by a fairly immediate pullback after one further move up the upper channel line is suggesting that the market is due for a pause, pullback and "rest".

Nasdaq Composite Index (COMPX) - Hourly:

The Composite has made a potential double top. This is "confirmed" (as long as there is not a higher high) when the prior downswing low is pierced - in this case, by a move below 1625. Key support looks to be down in the 1600 area.

When I see a double top I tend to believe it, as it's a pretty reliable signal for a reversal - in a market with upside momentum (MO), there is usually another rally attempt. And there has been plenty of MO in this rally.

We've been starting the weeks lately with rallies such as last week, in the pick up in New York State manufacturing activity. Of course New York is not a powerhouse in this sector, but never mind. Hard work there is commonly doing such things as using your brains and instincts on the Street of Dreams, but there are industrial sectors so I don't want to make the garment workers mad at me.

Nasdaq 100 Tracking Stock (QQQ) - Daily & Hourly:

So the bulls kept the Q's above 30 and rained on the bears parade. Too bad for them, but they should get a trade in the July options and by shorting further rallies, looking for a move back to the 29-29.50 area at a minimum. I would love to short QQQ around 31, taking a short risk to 31.5, with downside potential to 29.50 - a worthwhile trade from a risk to reward standpoint. With earnings season ahead there is bound to be some selling pressure pockets.

The spike top on a big upward spike in volume suggests at least an interim top. After a decent pullback, if the bulls give a chance to buy much of a correction, upside is still pretty good into the end of Q3 and earnings to see if the bulls can prove their case on this optimistic view that techs can make money this year.

Good Trading Success!

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