Option Investor
Index Wrap

Where is Maxwell Smart\?

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"You missed it by that much" is what Maxwell Smart, the clumsy secret agent would say if he had traded the S&P 100 Index (OEX.X) 497.06 +1.11% as I had profiled from.

There will be days like today. Set your stop at 491, see the OEX conveniently trade 490.85, then put it back in your face with a fitting close right at your entry point of 497.

I get the feeling that the MARKET did its best to prove me wrong in every aspect today. To say that today was a "frustrating day," would be an understatement.

While some traders, investors and economists may have questioned the FOMC's decision to cut rates by "only" 25 basis points yesterday on the FOMC's belief there were signs that the economy was growing at a modest pace and labor markets were stabilizing, today's economic data in the form of declining weekly jobless claims that had the four-week average falling by 5,250 to 482,250 after the recent weeks application for unemployment benefits dropped by 22,000 to 404,000, gives thought that Mr. Greenspan and company may have a firmer grip on things than "Fed bashers" think.

While the major equity indexes recouped most of yesterday's reversals after the FOMC decision on interest rates were released, Treasury bulls were not as quick to cork the tub that sprung a leak yesterday as Treasuries found sharp selling for a second straight session, sending YIELDS higher, with the longest- dated 30-year Treasury YIELD ($TYX.X) jumping 12.4 basis points to 4.562%, its highest closing YIELD since breaking below major YIELD support of 4.6% on May 14.

General Motors' (NYSE:GM) $35.94 -1.83% record

A higher YIELD on the 30-year Treasury should have mortgage rates inching higher, but today's trade saw the homebuilders trade in similar fashion to the major indexes and reverse yesterday's losses, most likely offsetting the thought of higher mortgage rates with some sign from the labor data that the rate of layoffs may be abating. Both the Dow Jones Home Construction Index (DJUSHB) 450.59 +2.64% and PHLY Housing Index (HGX.X) 288.40 +1.81% saw gains.

If there is one thing I take away from the today's trade in bond/home construction action, it would be that the greater near- term risk for homebuilders may not only be toward future mortgage rates, but focused on the health of consumer in the form of jobs than near-term moved in mortgage rates. This line of thinking may also have been addressed in the recent consumer confidence survey, which had Tuesday's release of June consumer confidence showing that 3% of those surveyed were still looking to buy a home in the next 6 months, compared to 3.8% in May.

While the weekly jobless data addresses layoffs and Americans seeking unemployment insurance, May's Help-Wanted Index, which is tracked by the Conference Board, showed the number of jobs looking to be filled by company's in 51 of the nations major newspapers held steady in May with a reading of 36, matching economists' forecast and that of April's 36 reading.

In last night's Market Monitor (after writing the evening Index Trader Wrap) I performed some technical analysis with various homebuilders. There's not enough time in my day to begin looking closely at fundamentals, but some regional data from today's help wanted index regarding 3-month averages showed declines in eight of the nine U.S. regions monitored with the Middle Atlantic region falling 21%, West North Central down 14.5% and East North Central declining 14.4%.

I think this is at least worth looking into as a macro- economic/fundamental piece of data as Wednesday's release of May new home sales showed a 9% decline in new homes sales in the Northeast region of the country, with the Midwest rising 1.6%, South jumping 15.9% and Western region gaining 19.7%.

OptionInvestor.com has a broad subscriber ship and I would be eager to hear from anyone in the homebuilding sector residing in the Northeast part of the country as to any of the publicly traded homebuilders with greater exposure in that region.

For those interested here's a table I found at the Forbes.com website that shows the May new home sales data and some historical comparison and trends.
Paste this link into your browser:

As an additional note to today's bond/stock market trade. It is so difficult to say that any one days action means something longer-term. Right now, we're also coming to the end of the quarter and there can be a lot of "quarterly rebalancing" taking place. Not only among fund managers, but the indexes themselves with stocks being "re-weighted" based on number of shares now outstanding, additions/subtractions of various stocks in the SPX,OEX,NDX,Russell 2000 (RUT.X), you name it.

I've had several traders and investors ask me to post the "market internals" each night. While I would love to oblige all requests for more data, many of you know too well I'm usually running late with the Index Wraps to begin with.

I get my data from a subscription I have at Briefing.com and I've found out that depending on what html person updates the "Market Wrap" at OptionInvestor.com, the data source will vary too. But, for those subscribers that are tracking the various market internals in their own spreadsheets like I am, Yahoo! Finance has most of what you might be looking for Free! Here's a link to Yahoo's! site. http://finance.yahoo.com/mo?u

Now, I think it is VERY important to at least keep up on the market internals and make some observations here. Here's my spreadsheet of today's internals that I'm tracking, and what I'm doing here is making a comparison to NH/NL on both the daily and 10-day average basis and benchmarking back to June 10th. The reason I'm doing this tonight is that both the very broad NYSE Composite ($NYA.X) 5,555.84 +0.58% and NASDAQ Composite (COMPX) 1,634 +1.95% closed very close to where they did on June 10th and on June 10th, both the NYSE and NASDAQ traded higher that day. In essence, I'm comparing similar levels of trade along with trade direction for the outward appearance, but also looking "inside" at some breadth indicators to see how things look.

NYSE Comp. and NASDAQ Comp. Breadth

A quick comparison of June 10 and today's A/D (NYSE Adv/Dec) (NSDQ Adv/Dec) look almost identical at roughly 2:1. However, the bigger observation of change comes at the New high/New low breadth indicators.

At this point, we do see that the 10-day averages of NH/NL ratios has been coming off their best levels (I've highlighted the highest 10-day ratios in pink), but we have still not seen so much as a 3-box reversal when charting this shorter-term ratio of NH/NL, so assessment right now is that bullish leadership (new highs) is still strong compared to any type of bearish leadership (new lows).

There is definitely some sign of though that bullish leadership is fading on a broader market basis if benchmarking back to June 10th is done as both daily and 10-day average ratios are currently below those of similar trade on June 10th.

My thinking at this point is if yesterday/today's lows are broken as well as almost identical lows of June 10th, then the "outside" or these two broad based indexes may begin showing weakness that these internal observations are starting to hint at.

Now, I heard something on CNBC after the close regarding a recently published paper from Penn State University regarding how important new high/new low breadth was. I tried a "Google Search" (web search engine) and even tried visiting Penn State's web site to find something on this study, but came up empty on first glance. However, the point made was that new high/new low breadth does have a major impact on trade volumes as it relates to those stocks reaching new highs and new lows, and can give early signals toward market direction when a "shift in leadership" is found.

NASDAQ Composite Index (COMPX) - Daily Interval

While the NH/NL indications look weaker than they did on June 10th, the last time the broader NASDAQ Composite traded the 1,600 level (on June 9th) and rebounded on June 10th to then go on and set a new high right back near 1,684, today's move back above the 21-day SMA does look bullish.

Not that we really need "one more level of support" to monitor, but 1,600 on the NASDAQ Composite does look to be a level where bullish enthusiasm has been formidable enough to outstrip any type of bearish convictions. (Note: I set the blue retracement at the 06/06/03 relative high of 1,684.06 for two reasons. One is that by setting it there, it would have provided the first pullback support for the bounce back higher, and two being that by setting it at that high, it moves support just a little lower to make the COMPX's chart prove weakness below 1,601.76 instead of 1,603 and may keep overly aggressive bears out of trouble).

Today's action in the very broad NASDAQ Composite Bullish % ($BPCOMPQ) this bullish % slip lower by 0.14%, so rough estimate based on 3,000 stocks isn't all that significant. This has this broad bullish % for 4 and 5-lettered stock symbols slipping to 69.85% after a bull cycle higher reading of 71.76% on June 18th. June 18th would be the first bar on the above chart at the "tweezers top" of 1,685.04.

I don't have time to show the NYSE Composite, but similar use of retracement would have 19.1% retracement at 5,486.83 (say 5,485). However, unlike the NASDAQ Composite, which shows two tests of a "high," the NYSE was able to trade above its June 6th relative high of 5,669.04, by a wider margin with the recent high of 5,739.03 coming on June 17.

The very broad NYSE Bullish % ($BPNYA) saw no net change in its bullish % today and remains "bull confirmed" at 71.15% and just off its bull cycle high reading of 71.78% set on June 19th.

Here's my table of the various major market bullish % readings, which you could compare to tonight's first chart of breadth readings.

Bullish % readings since 05/27/03

Only the NSDAQ-100 Bullish % ($BPNDX) (C5) has exhibited any real meaningful type of deterioration in its bullish %, which took place on June 19 when reversing back lower to "bull correction status." It would still take a reading of 68% at this point to reach "bear alert." The other major index bullish % continues to show internals holding a "bull confirmed" status, but we can se some slight internals weakening, but not all that much. Even the very, very narrow Dow Industrials Bullish % ($BPINDU) (H5) which will change 6.66% with just two stocks giving a reversing point and figure sell signal, holds strong at this point.

I colored the numbers as "green" to signify bullish internals that were building up to the more overbought and 70% level of bullish %, then "pink" to signal higher levels of bullish risk on the overbought 70% level, and "red" to signify that some giveback of bullishness and internal weakening is being found as more stocks begin giving supply/demand sell signals with some bullish risk being taken out by the markets.

The "bull correction" status is really like it sounds, where we see a recent "bullish market" taking a rest and not unusual for it to resume. It is when we begin seeing "bear alert" and "bear confirmed" status that bears will begin getting more aggressive with their trade.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Chart

The Q's and the NDX were the only indexes to bid stronger at the open and not turn red and once the Q's got above $29.74, they found 5-minute bar chart closing support at that level then found intra-day highs either side of the $30.22 level, to close right there. With the broader NASDAQ Composite showing some equally broad gains, it may be some "end of quarter" window dressing that finds the QQQ testing its weekly pivot tomorrow.

Using market history as a guide for Monday, I would certainly take a bearish shot at a short/put in the QQQ's ahead of Monday on any trade in the QQQ back near $30.60-$30.80 (again, bears should only be dipping toes in the water with partial positions) still.

While yesterday's break and close below our upward trend does look like a "trap," I'm not certain that's the case over the next month, but view it more as a first sign of some technical weakness. If the bullish % were rising and at 50%, then I'd be more inclined to try and call it a trap.

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

When I profiled the OEX trade from 477 on I was "certain" that a stop at 491 would give the trade enough room. Evidently not. After the FOMC minutes were released today, the Indexes did reach their highs. I've drawn a very short-term downward trend on the above chart from yesterday's session high of 500.76, which may have been in play today. The only trade I think I like right now from the swing-trade perspective on the 60-minute chart is if the OEX were to slowly trudge higher tomorrow to the 500 level. I'd monitor the day's trade in the QQQ too, but if all is rather gradually higher tomorrow, I'd look at an OEX short/put near the close.

This type of scenario is based on the Stock Trader's Almanac noting that Monday, which is the last day of the second quarter has seen the Dow Industrials trade lower 8 of last 11 years. If there might be any type of "trigger" to get the indexes breaking lower, then this historical trade might be the one.

Now.... before traders get too gung-ho, the very next day, Tuesday, the Stock Trader's almanac notes that the Dow has traded up 12 of the last 13-day years on the first day of June.

With that said, and trying to envision things, I could see the OEX trade up to 500 tomorrow, fall back to 495 on Monday, then rebound right back up to 500 by Tuesday's close. Envision that on the above chart if you can.

Heck... lets look at an intra-day chart of the Dow Industrials and see if the Stock Trader's Almanac mentioning of historical tendency makes any sense.

Dow Industrials Chart - 60-minute chart

I've tried to envision a possible trade for the Dow Industrials over the next three sessions using the Stock Trader's Almanac notes of historical tendency. I could envision a reverse head/shoulder patter type of trade. First test for that would be to see if the Dow and get itself back above short-term downward trend, which looks to cross right at the WEEKLY S1 of 9,094.60.

S&P 500 Index (SPX.X) - 5 and 10-point box

Alert! As I was finishing up the Index Wrap tonight, I was looking at some point and figure charts at Dorseywright.com and saw their SPX point and figure chart. Stockcharts.com PnF chart is more "unconventional" in that their scale above 1,000 turn to 50-point increments! Dorsey's, which most institutions will view increments in 10-points above 1,000.

What shows up as "alarming" in the above chart, which I've doctored to reflect Dorsey's SPX chart is a classing "bull trap" pattern, which is depicted by a triple top buy signal, that only grows 1 box at the triple-top, and then gets "quickly reversed back lower. It is often found in stocks whose sectors are at "overbought" levels above 70%, but can also be found in sectors and indexes themselves at higher levels of bullish risk. The pattern is thought to represent the "last bull" that has been watching the move all the way higher, finally get convinced that things are "ok" without any regard to risk.

This pattern identification at this point certainly should have any bulls sticking firmly to past work with did with the "finite" stop of 972.

With the SPX closing at 985 tonight, bearish traders may well look for good risk/reward bearish entry setup on a 3-box reversal back up to 990, maybe even 995, but then look for some type of 1- box decline back lower as if sellers are looking to get more aggressive to the downside.

Pivot Analysis Matrix

I'm now running way late with the update as I had to re-do some of the SPX chart. I thought it that important. I'll work on the pivot matrix, but WEEKLY and MONTHLY levels will be changing soon.

INDU, DIA, SPX, SPY all tested their WEEKLY S2 today. BIX.X still looks to be a key sector for holding at 300.00. If broken, then may see the major indexes trade with that type of lower trade, but BIX.X still holding for now.

Jeff Bailey

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