Option Investor
Index Wrap

Some fireworks of their own!

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An apparent mistaken sell order in Chicago Board of Trade (CBOT) e-mini Dow futures created pre-4th firework havoc and wild price swings at both the CBOT and the Chicago Mercantile Exchange (CME) Index futures pits in a short session Thursday.

There is no news about what the CBOE might do, if anything, relating to traders who (because of the sharp down swing in futures) were forced out or hit the panic button in the DJX options or in the S&P index options contracts. I would not assume that the CBOE would do anything as it was not something they had any control over.

CBOT traders reported the exchange announced all trades below 9018 in the Dow futures market would be canceled, although CBOT officials told the business press they were still investigating the situation and didn't have an official comment yet. Well, there is one spoiled long weekend for a bunch of exchange officials!

Floor traders said an apparent order to sell about 10,000 contracts instead of 100 was put in by a member firm by mistake in the e-mini Dow futures market. Some mistake!

The e-mini Dow futures trades electronically alongside the open- outcry market, and are half the size of the standard contract. The minis are priced at $5 times the index per contract, representing approximately $45,000 in value with the Dow at 9000.

The CME also offers trading in e-mini stock index futures products of course, such as in the S&P 500 and Nasdaq 100 indices. At the time of the massive CBOT Dow futures sell order, stock index markets at both the CBOT and CME futures exchanges were in an upswing, after a stronger-than expected Institute of Supply Management's (ISM) non-manufacturing index. Very suddenly, the market took a sharp down turn as the heavy selling in the e- mini futures hit over on the CBOT.

This selling threw participants in trading pits at both the CBOT and CME into major confusion and caused them to cancel bids and, of course, turning to the sell side in some cases. Trader's speculated for example, that there could have been a terrorist incident that wasn't on the newswires yet.

The sell mistake created a ripple effect in the CME's S&P 500 and S&P e-mini contracts as well, as many of the same traders are active in both markets and also arbitrage between S&P and Dow futures markets. Fast markets were briefly posted at the CME during the chaos, and even interest-rate markets reacted by pulling off their lows when the equity-futures markets started to melt down at both exchanges.

Needless to say, traders long, with stops in which is common, were highly upset to get stopped out for no real reason. CME officials said they aren't going to cancel any trades in their markets, saying the market made some erratic moves but not enough to create a widespread impact on traders. Well, you can probably count on the CBOE not doing anything to help bail out trader losses as stops are not "build in" to trading in options the way they are in the futures markets.

With the final downdraft in the NDX, all the indexes have met my short-term downside objectives, but I am not ready to suggest buying much ahead of earnings season and in the typical summer doldrums. I think this recent whip saw action suggests that stocks are more or less where they have at least temporary equilibrium. Buyers don't appear ready to bid aggressively in the face of weak economic news, but neither are sellers coming in heavily as pricing reflects a better second half and the reality of this is still a ways off.

OEX and SPX dipped briefly below their uptrend channels, but this seemed due the Thursday gyrations only. DJX held above the low end of its channel by holding the 89 (Dow 8900) area. The Composite (COMPX) held its 1600 support. If anything these lows were areas to do some buying, but only for quick short-term intraday trades. I envision more of an overall sideways drift. The charts below will tell more of a story as far as support and resistance areas.


The S&P 500-stock index fell 8 points to 985.70, the Dow was off 72.6 points to close at 9070.2, while the Nasdaq (COMPX) Composite dropped 15.3 points to close at 1663.

Those hoping to see improvement in the economy received discouraging news as the unemployment rate ran up to a 9 year high. Improvement was seen in service-sector activity however.

Total U.S. Unemployment stood at 6.4% in June, up substantially from 6.1% in May according to the Labor Department. Non-farm payrolls declined by 30,000, bigger than anticipated, after falling by a revised 70,000 jobs in May. The May figure had originally been reported as a decline of 17,000. Dismal.

The economists consensus had forecasted an increase to 6.2% in the unemployment rate and no change in the payrolls figure.

This all calls into serious question that the anticipated economic acceleration in the second half may not happen. The 5th consecutive month of declining job total cuts suggests that tax and interest-rate cuts have yet to revive the struggling economy. Moreover, the numbers highlight and justify businesses' tendency to continue to reduce costs in order to deal with disappointing economic growth.

Meanwhile, 1st-time claims for unemployment insurance in the week ended June 28 rose by 21,000 to 430,000, after falling 22,000 a week earlier to a three-month low versus expectations for an increase of 6,000 claims. The only positive seemed to be that the 4-week average, which smoothes out weekly fluctuations, declined to a 3-month low of 425,000.

The latest report non-manufacturing sector activity gave the market some hope - the ISM's latest non-manufacturing index, which measures service-sector activity, increased to 60.7 in June, the best reading since September 2000. These results were way above estimates of an increase to 55 (from 54.5 in May).

The 10-year Treasury note lost about 1 point to end up yielding 3.656%. The dollar was stronger again the Yen, trading at 118.26, up from 118.04 on Wednesday in New York, while the euro also fell against the dollar to $1.1489 from $1.1542.


S&P 500 (SPX) - Hourly chart:

As I said last week, I thought SPX would get to or near 960, if the low end of the channel got pierced - I'm not sure about the whole thing looking like a complex Head and Shoulder's top however, as this last rally hasn't carried high enough.

There was completion of a 50% retracement, another thing I was looking for as technically significant. The way retracements tend to work, if 950 (a 62% retracement) gives way I think we're then seeing a reversal of the current uptrend.

My expectations are for another decline in the early part of the week. I suggested buying calls in at 950-960 area and we got to the 960 area. After this, the rally was into the 990-1000 resistance zone.

I'm basically buying into the support and selling into resistance - expecting a trading range for a while. The market only trends about a third of the time, and trades in more of range bound fashion for the other half to two thirds of the time. That's the situation this index seems to be in for now.

I mentioned to look at put buys on rally failures to the 990 area and if you're in em, exit on a close above 1000. It would take the ability to trade and stay above 1000 to resume the bull trend.

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

While the OEX is holding on to its uptrend on the daily chart and is staying above the 50-day average so far, momentum is slipping on balance. My sentiment indicator is showing a build up in put volume in individual stocks, which, in a contrarian fashion, is becoming mildly bullish. However, the chart suggests more downside and the price pattern is my primary focus when the market seems to be in a consolidation or correction.

490, then 485 are the near technical supports. A close under 485 would suggest the short-trend was turning down - confirmed by OEX then piercing 480. The typical correction is a down move, a rally, then another decline to a lower low - that's more my expectation than any other, especially as the S&P has already had a good run to the upside. Without more bullish fundamental news on the earnings and economic front, there's limited room for stocks to go much higher.

If long puts on the move to the 500 resistance area, stay with em per my comments last week about 500 looking to be an area to buy OEX puts if they got this area but couldn't climb above it.

I continue to keep an eye on the RSI as to when it shows an oversold reading again - and that's some way to go - so no green light on getting back into calls except for very short-term trading. I'm trading lightly, if at all - I'll wait for the market to start trending again for doing very much.

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

88-89 was seen as first chart support in DJX and 89 at least is right where DJX got before rebounding - right to the low end of the channels more or less.

What do we go from here is the next question. If 89 gives way, look out below or at least for a test of 8800-8750 support in the Dow. I anticipate a decline early in the week as the economic news sinks in to more traders and per the longer hourly stochastic. The daily oscillator is getting into an oversold area, but it should dig into it more.

Nasdaq Composite Index (COMPX) - Hourly:

I'm finding lately that the hourly charts on the Nasdaq are showing the most. Note the triple top in the Composite. You actually don't see triple tops all that often in the indexes - sometimes it turns out to an area that is the top of a trading range for a while.

A trading range was my thought for how price action was going to unfold last week and a pullback looked to be the most likely next move. After that and since 1600 was a "line" of support, it was also the place to look for a rebound.

Since the hourly stochastic is showing downward momentum and given the top again in the same area - down we should go again and I'm playing NDX and QQQ that way. I would not be surprised to see 1550 get tested based on what looks to be a broadening top in COMPX.

Nasdaq 100 Tracking Stock (QQQ) - Hourly:

Looking at the hourly closing chart of the Q's, a similar pattern of an index making a top or forming the top end of trading range is what looks to be the pattern. My target in the Q's has been for a move down to the 29 area which I've thought was the key near support.

I still see a chance of QQQ falling to more major support around 27.50-28. What would get me bullish again is a close above 31- 31.25 for more than one day. More likely is that a new low for the current correction is made - to below 29.5 on an hourly closing basis.

If short on the last rally, stay with it, with exiting stops at 31.30. While use of stop loss protection probably drove some CBOT and CME index futures traders mad last week, such crazy mistakes are rare. I can imagine that the responsible parties are not having a great Independence Day weekend, but hope yours was/is pleasant.

Good Trading Success!

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