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Index Wrap

Gravedigger shows up, but bulls say ...

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The gravedigger may have shown up to dig his first scoop of soil in an attempt to bury the bullish rally from the March lows, but bulls fought back into the close as if to say, "don't throw dirt on me just yet!"

Traders will pick a reason for the push back into positive territory by session's end despite economic data still showing that an economic recovery still remains anemic as the latest June ISM Index still showed contraction in the manufacturing sector with a reading of 49.8, while construction spending fell for a third-straight month in May by falling 1.7% from the previous month at a seasonally adjusted annual rate of $869.8 billion, which was well below economists' forecast for a 0.3% gain.

Asset allocation from Treasuries into equities. A favorable ruling for the brokers when a judge dismissed an investor lawsuit against Merrill Lynch (NYSE:MER) $48.20 +3.25% that the firm's analysts mislead investors. Market history in play with the Dow Industrials finishing the first day of the third quarter up 12 of the last 13 year, make that 13 of the last 14 years the reason that the markets were destined to finish with a gain. All three could be argued.

Still, if based on some work we did in the June 12th Index Trader wrap regarding "finite levels" where the indexes and QQQ tracking stock "shouldn't trade," the "gravedigger" may have indeed shown up in this morning's early trade to signal that supply may indeed be outstripping demand.

Are stocks the "lesser of two evils" when considering an alternative investment in Treasuries? One has to wonder as today's economic data did find some defensive buying in Treasuries earlier in the morning, which reversed to selling as the session wore on as YIELDS finished higher in the 5, 10 and 30-year maturities.

Gold stocks as depicted by the Gold/Silver Index (XAU.X) 81.07 +3.07% and AMEX Gold Bugs Index (HUI.X) 154.22 +3.19% were the morning's only sectors showing gains, and by the close were edged out by the Disk Drive Index (DDX.X) 108.09 +3.35% for today's sector winner, with the bulk of equity sectors finishing today's session's with gains (Oil Service (OSX.X) 90.44 -1.25% was the only sector to fall more than 1% today).

With the major equity indexes all reversing morning losses, but the early bid in gold stocks holding through their close, I'm still going to interpret this intra-day action that thoughts of "deflation" resurfaced on the still contractionary June ISM Index reading, which held into today's close. I would have thought the early DIVERGENCE between gold stocks and the major market indexes would have seen similar DIVERGENCE taking place with gold giving up gains as stocks recovered.

Again... one day doesn't make a trend, but the bullish side of me begins to be outweighed by bearish thoughts as all of my "finite levels" of support were traded this morning, and have me looking for bulls to begin using rally opportunities to lighten up their exposure. For now, the "main test" will be to see that the recent relative highs hold as resistance, and violations of today's lows, be violated further in the weeks to come begin to set a pattern of lower highs and lower lows.

As a quick review of our "finite levels" of support, I had the Dow Industrials (INDU) on conventional 50-point box scale having the 8,900 level as "finite," which was traded today with a session low being 8,871.20. The S&P 500 Index (SPX.X) on unconventional 6-point box scale with "finite" level being 972.00 and session low today of 962.10 and narrower S&P 100 Index (OEX.X) unconventional 3-point box scale with "finite" level being 489.00, with session low of 484.41. I had also shown the NASDAQ-100 Tracking Stock (AMEX:QQQ) with unconventional $0.35 box size establishing a "finite" level of $29.40, which was traded with a QQQ session low of $29.26.

Again... these were levels simply identified where we "made the point and figure charts" look as bullish as we could, and not show a single sell signal since the March lows, and if we did see a sell signal on these charts, would give first hint that supply was beginning to outstrip demand.

I'm not going to look at all of these point and figure charts tonight as I want to show the bar charts with their new WEEKLY and MONTHLY Pivot analysis retracement on them, but I will show the unconventional 6-point box chart of the S&P 500 Index (SPX.X) 982.32 +0.8%.

To be truthful, I wanted to profile a bearish trade in the SPX this morning on the initial break at 972, but with yesterday's "historical" trade lower, the only reason I didn't profile a bearish trade at 972 and waited until later at 980 to profile a bearish trade in the SPX was simply on "fear" of a bullish session based on the previously mentioned Stock Trader's Almanac notes discussed last week.

S&P 500 Index (SPX.X) - 6-point box size

On our unconventional 6-point box chart of the SPX, it has now given its first sell signal since giving a buy signal on March 17th at 858, which was one day prior to the bullish % indicator reversing up to "bull confirmed" status.

I've made some notes on the above chart as it relates to the bullish % back in December, and traders/investors can perhaps tie that trade action on the 6-point box scale with the bullish % readings found during that time.

A bear should now be looking to enter bearish positions in the SPX with RISK to a stop being assessed to 1,020. This would be little different in my opinion to a bear entering a trade back in December at SPX 912 and assessing risk to a stop at 960.

Today's trade saw the S&P 500 Bullish % ($BPSPX) see a net loss of 5 stocks to new point and figure sell signals. This has the bullish % slipping an additional 1% to 77.60%.

S&P 500 Index Chart - Daily Interval

The SPX did more than violate some correlative support between its WEEKLY (blue) 80.9% retracement and WEEKLY S1 of 968.12 earlier this morning. Program trading curbs were not in place, and I'm thinking that if computers were set for buying regardless of what hit them on the sell side, we shouldn't have seen such a violation of that 968 level. I found myself "wishing" I had taken a bearish trade earlier this morning. Sometimes the MARKET gives a trader a second chance, which I thought bears should take on the SPX rally back to 980 and just below the WEEKLY Pivot. Sometimes the MARKET gives a bull a second chance to get out of a trade he/she has been watching slowly slip lower and I'm looking for resistance back at WEEKLY R1 of 990 to provide resistance. Based on the above point and figure chart, a rebound back to 990 (if seen) might then have a more RISK AVERSE bear looking for at least a 6-poin decline back lower to then put on a bearish trade, using today's "sell signal" at 972 as an observation of weakness that leads to a lower low.

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

I readjusted my upward trending regression channel (2 Std. Dev.) as I had been using an older regression channel. By now setting the regression channel from the March lows to recent June 17th highs, I'm in essence "saying" that I think the OEX high for this bull cycle is in at 511.73. One could say that tomorrow is a "pivotal" day for the OEX based on the above chart as it managed to rally back to its WEEKLY Pivot of 494.83 and lower end of regression channel.

I like a partial bearish in the OEX, similar to that profiled in the SPX, and one thing I would monitor the next several days is this. A bear wouldn't be overly concerned if the OEX inches higher along the broken lower part of trend (trading either side), but I do think a bear wants to see the 502-503 zone provide the "ultimate resistance."

I think this 502-503 zone will indeed be the more formidable resistance as I'm going back to the bullish OEX trade profiled from 497, where I saw the OEX make ultimate gain back to 500.76, only to then get stopped out at 491.00 with a June 28th session low trade of 490.85. As "weird" as it may seem, the OEX came back to bullish entry of 497 and has now seen a lower low of 484.41. In essence, while I'm disappointed that I took a loss at 491, I haven't really seen enough bullishness from the OEX to make me wish I was still holding long at 487. Maybe other market participants feel the same way?

Today's action saw no net change in the S&P 100 Bullish % ($BPOEX) and bullish % stands at 81% for the 6th consecutive session and still just off its bull cycle high reading of 82%. These internals should still have a bear cautious. It becomes rather apparent after the seeing the OEX recent pullback from the June 17th high, that there are a lot of large cap stocks that were probably quite far from a level where a "sell signal" on their point and figure chart would have been found. This may have stock traders looking for some large-cap stocks that are showing a supply/demand pattern of lower highs, but steady lows, which would now set up a "sell signal" as good stocks to monitor for relative strength softening, where a sell signal could find the stock sharply lower if consolidation support lies "way below."

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

Were the QQQ a "bargain" between WEEKLY 80.9% retracement and WEEKLY S1 of $29.34 on weaker-than forecasted economic data? There isn't a "broker/dealer" in the bunch. Today's increase in volume, when compared to a building short interest, especially the 32.4% jump in short-interest from April 15th to May 15th hints to me that bears short below $28.90 took the opportunity to try and cover a mistake made in from April 15-May 15th, but I think market participants that have seen $30.64-$30.75 will be sellers after seeing today's lows.

Today's action saw the NASDAQ-100 Bullish % ($BPNDX) see a net loss of 1 stock to a point and figure sell signal. This has the bullish % slipping further to 74% after a bull cycle high reading of 91%.

Dow Industrials (INDU) Chart - Daily Interval

22 of the 30 Dow components finished in positive territory, but that wasn't enough to get the Dow back above its December highs of 9,043 and WEEKLY/MONTHLY pivots. From an economic point of view, it remains perplexing to me how the Dow Industrials, which holds some of the biggest US-based companies with exposure to various economic sectors trades "technically" weak (using the December highs as a benchmark) to the other indexes, where many company's in those indexes actually "rely" on Dow components for future business.

The "fundamentalists" are currently saying it's not the economy that will be key to stock prices holding in, but upcoming quarterly earnings.

June auto sales from the "Big 3" totaled 5.5 million autos (consensus was 5.5 million) with truck sales of 7.5 million (consensus 7.6 million) for a total of 13.0 million (consensus 12.9 million). Dow component General Motors (NYSE:GM) $35.74 -0.72% did battle back from its lows of $35.00, but closed below its still trending lower 200-day SMA ($36.07) and starting to round flat 50-day SMA ($35.99).

If an old market saying of "as GM goes, so goes the market" is true, then Dow bulls and perhaps major index bulls want to see the stock get back above its 50-day SMA soon.

One bullish % indicator that Dorsey/Wright and Associates tracks, is the percentage of stock that are trading above their respective 50-day SMA's (an intermediate-term moving average) This indicator recently reversed into "Bear Confirmed" status at 80% recently after reaching bull cycle high readings of 90% twice (March lows were 26%). As it relates to the bar charts of the indexes, traders might assess downside near-term to the 50-day SMA's.

Stock traders may look for stocks breaking below their 50-day SMA's to identify stocks that are "leaders" to the downside as they are among just 20% of stocks slipping below their 50-day SMAs.

Pivot Analysis Matrix

Q-charts and several other data sources show the SPY having traded as high as $98.85 in today's trade. However, I looked at the intra-day chart of the SPY and can only find a high trade of $98.66, which I'm using for tomorrow's DAILY levels.

"Early support" from matrix correlations looks to be in the NDX/QQQ at DAILY Pivot and WEEKLY pivot, while QQQ does show correlative resistance at $31.18 from MONTHLY R1 and DAILY R2.

There's no economic data due out tomorrow, but several economic reports are due out on Thursday.

Jeff Bailey

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