Option Investor
Index Wrap

Back in the channel again

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Bulls answered the call yesterday to stage a comeback and today's methodical trend back higher has bears looking to be dialing 911 as strong volume and a resurgence of new 52-week highs at both the New York Stock Exchange and NASDAQ look show renewed bullish leadership with several sectors breaking to new highs.

The NYSE reported 237 stocks reaching new 52-week highs compared to 5 stocks trading new lows (daily ratio of 97.9%) and the NASDAQ reported 230 stocks trading new 52-week highs compared to 8 stocks at new lows (daily ratio of 96.6). The daily ratio for the NYSE is this highest we've seen since June 17, while the NASDAQ daily ratio is the highest seen since June 19th.

The table for a bullish session may have been set for a bullish session here in the U.S. before the opening bell as Japan's "Dow equivalent" Nikkei-225 surged 3.3%, breaking above its December's highs as worries of a looming banking crisis were eased. The 313-point gain for the Nikkei has also given bulls hope that a global economic recovery is in the making. While investors ponder a Dow Industrials 10,000, the same question is pondered for the Nikkei-225.

Nikkei-225 ($NIKK) - Daily Intervals (One-year)

My eyebrows "lifted" this morning when I saw the Nikkei-225 up 3.3% and if I was surprised by anything in today's trade here in the U.S., it was the rather "anemic" open that looked to be present in the S&P, NASDAQ and Dow futures.

Often times, traders and investors (myself included) get so focused on things at home here in the U.S. that a larger global picture and markets from around the world, which can impact trade here in the U.S. are ignored.

While I wouldn't say that the Nikke-225 or Japan's economy is "leading" the U.S. equity markets to the upside, this break higher in the Nikkei-225 could have a major impact on INVESTOR optimism, and I think it may have had a great deal to do with today's trade here in the U.S.

The trade seen in the Nikkei also has me, and perhaps other traders (especially bears) among technology stocks with a "computer/storage" theme wondering if it might not be the prospects of bullishness out of Japan that had the Disk Drive Index (DDX.X) 114.82 +6.22% putting things together today and this index broke above its June highs like a pop bottle rocket on the 4th of July. Disk Drive Index (DDX.X) component Network Appliance (NASDAQ:NTAP) $17.85 +7.07 peaked its head above its June 6th high of $18.46 with a session best $18.84 and was today's number-2 gainer in the NASDAQ-100 Index (NDX.X) 1,245.75 +2.33%. While NTAP has "just" a 0.62% weighting in the NASDAQ- 100 Index, its bar chart looks strikingly similar to that of the NASDAQ-100 Index (NDX.X) and Tracking Stock (AMEX:QQQ) $30.97 +2.04%.

My biggest concern with some of the technicals seen in the Disk Drive Index (DDX.X), NTAP and the NDX/QQQ is related to last nights thoughts that bears might be their own worst enemy, and I think there was another strong round of short-covering taking place in today's trade that bearish traders need to be aware of.

Disk Drive Index (DDX.X) - 60-minute intervals

I can't say that the DDX.X is the "leadership group" for the major indexes or the NDX/QQQ, but today's trade really looks like bears are felt the heat by yesterday's close above 107.50 resistance, and got out of the kitchen when risk was assessed to the June 6th high, and when that this was broken, became the "bid" in the second hour of trade, which saw buying into the close.

The reason I show the DDX.X is that a similar type of trade action may be in the making for the NDX, but more importantly the QQQ if shorts are about to get squeezed.

NASDAQ-100 Index Tracking Stock (QQQ) - 60-minute chart

After trading my "finite stopping point" for bulls of $29.40 ($0.35 unconventional box scale) it may be up to the 60-minute bar chart and downward trend where bears with any degree of certainty or conviction (which I'm starting to lack) will defend some of the weakness seen yesterday morning.

Still, the action that I saw in the DDX.X (while stock driven as their is no tracking stock for the DDX.X) it would appear the DDX.X may have a day or two head start on the QQQ as it relates to downward trend, and if broken to the upside, I'm thinking bears are going to immediately assess risk back to the highs.

There is some potential computer sell program resistance in play at the WEEKLY S2 and MONTHLY R1 just ahead, but I'm a bit uncertain at this point if the rather bullish trade from the Nikkei if there's going to be any type of "formidable" selling at either of these two levels.

One thing I would and will monitor tomorrow morning is volume in the first hour of trade. Today's first hour saw 20.2 million shares traded. For those that don't want to wait a full hour, other volume rates had 7.1 million shares traded in the first 15 minutes and 12.7 million in the first 30-minutes of trade. I would think BEARS want to see lighter volume levels with trend or WEEKLY R2 holding resistance.

If trend were broken to the upside, watch for any type of support on retest of trend to hint that shorts are turning to cover at that trend. If so, then AGGRESSIVE bulls will most likely look to play the Q's to the upside, especially if the DDX.X continues to show further gains.

I made a note in today's Market Monitor that the QQQ/NDX becomes a very "complex" trade as it relates to the "internals." Index heavyweight Microsoft (NASDAQ:MSFT) $26.91 +2.79% has suddenly found buyers after lagging much of the QQQ's bullish move from the March lows. At the same time, the weakness in the Biotechnology Index (BTK.X) 444.16 +4.03% (weak sector) and some of the biotech stocks in the NDX/QQQ look to be getting a short- term "oversold bounce." This type of "strength from the bottom" becomes difficult to judge. Is it just profit taking by bears? Or is there such a hunger for 4-lettered stocks that it just feeds on itself for further gains? At this point, I would tend to lean toward the latter scenario on a move in the QQQ above $31.18.

I will also be monitoring the Nikkei-255 trade early tomorrow.

Today's trade saw the NASDAQ-100 Bullish % ($BPNDX) see a net gain of 2 stocks to point and figure buy signals. This has the bullish % edging back up 2% to 76%. It would currently take a reading of 80% for a reversal back up into "bull confirmed" status. As discussed in prior wraps, a reversal back to 80% would then have the NASDAQ-100 Bullish % then set up for a "bear confirmed" reading on a decline back lower with a 72% reading.

With yesterday's mid-day bullish reversal and today's follow through, I'm beginning to think that it may take a "bear confirmed" reading in this bullish % for the NDX/QQQ to ever give up any significant ground.

The very broad NASDAQ Composite Bullish % ($BPCOMPQ) saw a net gain of roughly 20 stocks to point and figure buy signals (based on roughly 3,000 stocks) with the bullish % rising 0.69% to 70.3%.

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

Today's trade and close comes above the June 25th FOMC decision to cut interest rates by 25 basis points, and may have some "Fed bashing bears" that question Alan Greenspan and company taking back some of their remarks.

I'm not trying to create "hope" for bears by adding a downward regression channel in tonight's chart of the SPX, but I've refrained from trying to place a rather "unreasonable" or very steep downward trend on the SPX without much of a relative high to attach it too. Still, I think the regression channel placed on the above chart, which is anchored at the highs and then drawn to today's bar, would tie to the shorter-term trend in the QQQ, where we at least had a decent relative high to have drawn trend from.

I will confess that I didn't think the SPX would show such a powerful move higher today, when I wrote last night's Index Trader wrap, and I hadn't considered a Nikkei-225 3% gain either!

The S&P 500 Bullish % ($BPSPX) saw a net gain of 2 stocks to point and figure buy signals today as the bullish % rose 0.4% to 78%. This is the first sign of new buy signals since June 20th, when the bullish % inched up from 81.04% to 81.24% and the SPX closed at 995.69, which is right in-between the next "zone of resistance" in the above SPX chart.

While I can't keep track of 500 stocks to see what is giving buy/sell signals intra-day, my thoughts here are that a move much above 1,000 may well see more buy signals.

The narrower S&P 100 Bullish % ($BPOEX) saw no net change in its bullish % and remains at 81% for a 7th consecutive session.

The very broad NYSE Composite Bullish % ($BPNYA) saw similar bullish breadth to the NASDAQ Composite with the bullish % rising by 0.53% to 71.47%. Based on roughly 3,000 stocks, this would be a net gain of 16 stocks to new point and figure buy signals.

Dow Industrials (INDU) Chart - Daily Interval

I was really "focused" on the Dow Industrials this morning, with several thought racing through my mind. I couldn't "believe" that the Dow was up just 25 to 50 points in the first 2-hours of trade after seeing the Nikkei-225 having gained 3%. I was very tempted to profile a bullish trade in the DIA when the Dow kissed its MONTHLY pivot of 9,063.20, but thought to myself "something's wrong here."

As you can perhaps see, with some of the downward trends we're looking at (albeit short-term trends) I'm having a hard time getting bullish.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still holding at 83.33%.

However, I'm going to stick with prior thought that the Dow is the "safer" index to trade bullish, as I've at least got the "dividend benefit" in play among fund managers.

If I need any further trigger to push me bullish into the Dow Industrials on a break above trend, then I'd use General Motors (NYSE:GM) $35.94 as the bullish trigger. It's 200-day SMA is trending lower at $36.03 and its 50-day SMA is threatening to round flat at $35.96. Crud... lets take a quick look at GM as it could be the "pivotal stock" in the Dow right now.

General Motors (GM) - Daily Intervals

While GM doesn't drive the Dow by itself, and is just one of 29 components, the technicals are in place for GM to be a potentially "pivotal" stock in the Dow right now. GM has moved up from its March lows similar to the Dow, but we can see how it has lagged the Dow and major indexes in recent sessions and even longer-term based on the 50-day and 200-day SMA. The large increase in volume of late is most likely due to GM bringing $17 billion worth of bonds to the market, which from what I've read and heard was eagerly indicated for by bond investors. A break up or further below the converging 50-day and 200-day SMA's could be a trigger to influence the Dow tomorrow.

Pivot Analysis Matrix

From what I saw today, the Dow wanted to hold its MONTHLY pivot of 9,063.20. As pointed out in this morning's Market Monitor, I think it would take a trade 10-point below the WEEKLY Pivot of 9,053.00 to really signal any type of weakness (I give the Dow 10-points fudge room based on higher values of 9,000).

Early correlative support levels are found in the SPX/OEX DAILY Pivot and WEEKLY R1's.

I've got to be "convinced" that there is something important about the BIX.X and 299-300 area as an important support level, when may be tied to the SPX/OEX for any type of "longer-term" weakness on a break/close below that level.

Jeff Bailey

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