Option Investor
Index Wrap


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Whip-saw markets are ones where there is roller coaster ride during the week and very short-term traders can make money with masterful timing, but the patient longer-term holder of index calls or puts will mostly only see erosion of the option (time) premium as, by week's end, there is not much of a price change. Call me "whippy".

However, the bulls can take heart as the past 6 weeks action looks like a bull flag consolidation before another up leg. This would be "confirmed" by a decisive upside penetration of 1013- 1015 in the S&P 500 (SPX) or 505 in the 100 (OEX), in which case OEX projects to 550 as a possible target based on the measuring implication of the aforementioned flag pattern.

The (Nasdaq) Composite or COMPX has a different pattern and this past week has already broken out above the top end of the same type of "flag" pattern by piercing 1690. However, the aforementioned bull flag formation doesn't project to more than 1750 as a next objective, which is also near resistance impli9ed by the top end of its weekly uptrend channel. However, other technical considerations suggest that COMPX could eventually get back to the 2100 area or its early 2002 peak. This would also suggest that the Nasdaq 100 could reach the 1700 area by year's end or early next, from its current level of 1280. 40-42 is a possible target for QQQ. Stay tuned!

What could "support" such a bullish technical potential is the question that my bottom line commentary raises; i.e., what are the fundamental influences. Now, I sometimes have been known to call these the "funny-mentals", but I declare it's only in jest. Actually, there are some well-reasoned arguments for a bullish unfolding scenario for our economy.

The U.S. unemployment rate climbed to 6.4% recently, which was the highest in nearly 10 years. Not exactly a picture to gladden the hearts of consumers and get them to open those wallets even more than they've been doing to reach for the plastic. However, a close look at some other economic signs point to a possible end of a "jobless" recovery:

1. A set of surveys of corporate chief executives taken over the past few weeks indicate that more a third of these CEO's say they are planning to hire in the Q3 and very few are planning to lay off workers or any MORE workers. (Surveys were conducted by the Center for State and Local Policy at the University of Massachusetts and polled 400 chief executives in Boston, Chicago, Dallas and San Francisco.)

The key question was: "In the next three months, Q3 of 2003, will the number of employees at your company increase, stay the same or decrease?" 36% said the number would increase, 54% said stay the same, and 10% said decrease. This is quite bullish for hiring hints relative to what was the case in the year before this survey.

2. In May and June, the Labor Department reported a rise in the number of temporary workers - often a first hint of a rebound. Temporary workers are generally the first to be fired as times get bad and the first to be hired as times become good. In April, 1.6% of all workers were temporary employees, but this rose to 1.7% in June. The increase may be small, but its a significant trend and suggests some hope for laid off and unemployed workers.

3. The number of wage and salary workers in the non-farm sector has actually risen some 266,000 since Jan. 1 - the total is as of early-July and is according to the Labor Department's household survey. This rise can be compared to the huge loss (1.4 million) of workers in 2001 and 2002.

Note: Reservations about these stats in the household survey - the numbers for the total civilian population used in the survey sample were not adjusted for the call-up of reservists for the war in Iraq, which might account for about half of the increase.

4. The survey of employers also done by the Labor Department shows a modest decline of 30,000 jobs from May to June. This represents a big improvement in the rate of job decline over 2001 and 2002, a period when employers reported whopping losses of 2.2 million jobs - an average of 90,000 jobs per month!

When the Fed talked in late June about "labor and product markets that are stabilizing," it was making a key point. The rates of change in recent Labor Department surveys, reinforced by the optimism in the recent set of chief executive surveys, suggests that the job market may be about to turn the corner. And, pent up demand by recently hired workers offers a potent boost to the economy typically.

Stocks closed higher after General Electric (GE), a Dow component met the Street's earnings expectations. Because of it there were some analysts' upgrades of some other blue-chip stocks.

The Dow was up 83.5 points, closing above 9100 at 9119.6, while the Nasdaq Composite Index ran up a substantial 1% or 18 points to close at 1734. The S&P 500 index rallied 9.4 points to close at 998, still under the key 1000 mark.

Money managers and investors appeared to be paying up for up stocks in anticipation of Q2 earnings that will be at least in line, if not better than, expectations.

S&P bellwether GE's earnings led to a collective sigh of relief by not missing its revenue and profit targets, even though its Q2 net income was off by 14%. Overall revenues did rise a bit to to $33.37 billion from $33.33 billion, although this figure was just a bit shy of estimates.

GE also shaved its full-year earnings estimate to a range of $1.55 to $1.61, from a range of $1.55 to $1.70. This performance by GE led to some upbeat talk about other key stocks, like Home Depot and rival Lowe's.

Intel (INTC) which figures prominently in both the Dow and the Nasdaq was up nearly 2% after an analyst upgrade. IBM ran up a percentage point after some upgrading by Street analysts.

In economic news, a report on U.S. wholesale prices indicated a RISE in prices for the first time in three months in June, as food and energy prices were up. With the market more worried about falling prices taking corporate profits down also, this was actually "good" news.

The Producer Price Index or PPI rose by a greater than expected half percent, ending some months of declining prices that had raised this specter of deflation - think Japan.

The widely followed "core" index, which excludes food and energy prices, fell by 0.1%, versus an expectation of a 0.1% increase in the core index.

Meanwhile, the U.S. trade deficit of goods and services widened to $41.8 billion in May from a revised $41.6 billion in April, according to the Commerce Department. No surprises there - and, I defy you to buy something these days NOT made in China - excepting autos and high-end electronics.

Earnings (its the money honey) are the primary focus for investors as they await 100's of company reports expected over the next 3 weeks.

The 10-year Treasury note gained an 1/8 point, to yield 3.636%. The dollar firmed also and traded at 117.65 yen, up from 117.58 yen late Thursday, while the euro fell against the dollar to $1.1298 from $1.1389 in the previous session.


S&P 500 (SPX) - Weekly chart:

The S&P 500 Index (SPX) is the key to the old economy stock sectors, and the most widely watched market measure by big money institutional (fund) money managers. This week I provide a little bit extra focus on the SPX in that I start the way I often start when I survey price history each week - from the big picture weekly chart showing 3 or more years, to the daily chart with the multi-month record of trading and finally to the hourly chart. The hourly chart should ideally be able to display a 100 days of the hourly OHLC (Open, High, Low, Close), but this is not achieved by many chart packages, so I tend to show a lot of the longer hourly history, which you may not see elsewhere.

The weekly chart above with the "flag" or consolidation (sideways) pattern outlined that I described in my "bottom line" comments at top. Now, the upside potential (emphasis on "potential") implied by price consolidation, a period of a narrow price range after a sizable run up, is not suggested unless there is a move above the upper line. Conversely, a move down below the bottom line is a negation of the bullish potential, so we would look out below if there was a drop to below 970.

The range bound pattern is why the trading suggestion has been to buy calls or select stocks on moves toward the lower end of the consolidation and buy put options on moves to the areas of selling interest or resistance - which has been in the 1010 area. It takes earnings momentum trends to get the S&P moving higher as individual traders and investors don't achieve as much influence in the large capitalization main-stream stocks in the main S&P indices.

Whereas, it takes only a wing and a prayer to move some of the tech stocks ever higher - hey, I think I've seen this before! Anyway, I would note that Charles Schwab got some favorable ratings increases last week cause their trading volumes have jumped over recent weeks. The big guns aren't trading 10-50,000 share blocks at Charles the Schwab.

I would still say that it will take the ability for the S&P 500 to hold above 1000 to be seeing renewed upside momentum in the S&P stock groups.

S&P 500 (SPX) - Daily chart:

Trading in the middle range, as represented by the 21-day moving average, which is mostly bullish - because, after a big run up, the ability to then find support on the pullbacks and on price dips is the sign of a technically strong market.

Trading "sentiment" among option traders is closer to the bearish view shown in increased or substantial put option volume activity and is keeping me leaning toward the idea that the next breakout will be to the upside. Summer is not when big sustained advances occur, but all money managers don't go on vacation - heck, this isn't France where everyone goes away for August. (Or, where all eyes are on the Tour in July - if you don't know this reference you don't "know" the incredible ironman from Austin, Lance Armstrong.)

Anyway, given that the market discounts or looks ahead to the earnings picture expected out 6 months ahead, you will see the expectations implied by buying stocks NOW.

S&P 500 (SPX) - Hourly chart:

1010-1015 is the area to watch for its potential to signal a further upside move on a move above this area.

Conversely, A dip much below 990 or a close under the prior hourly lows at 983 would be a bearish omen suggesting that would be some further selling pressure or downside potential.

S&P 100 Index (OEX) - Hourly chart:

The sideways move is either a consolidation pattern - consolidation or minor "give-back" of the prior up swing - or is suggesting flagging upside momentum in stocks or the willingness to continue to bid the leader stocks higher.

As long as the OEX stays above the recent low in the 495 area and especially the low before that at 485 only the normal consolidation pattern is being suggested. If there is a move above the "line" of recent hourly highs at 506-508, this would suggest renewed upside momentum.

I'm anticipating wanting to buy calls in the 495 area, exiting at 492 if OEX slips to there, and perhaps add to positions on an advance through 506-508. I'll likely want to trade out of the same if 512, the prior top is again the reversal point for a rally. A decisive upside penetration of 512, suggests a next objective to around 530 however.

On the bearish side, a break of 485 suggests downside back to the 470 area in the OEX, which would be the low end of a downtrend channel.

I think we need some more positive earnings announcements to kick the S&P 100 through overhead supply or stock for sale when OEX hits the top end of its recent range around 510-512. The way bellwether S&P stock General Electric (GE) has failed to maintain upside follow through after its move to new high for the year, it seems that there is amble stock for sale on rallies from here.

Dow Industrials Hourly (DJX.X) chart:

The Dow has held above 89-90 which maintains its hourly price pattern within its uptrend channel. 96 is the high end of this channel currently as noted on the chart below.

92.50, then 93.50 is the area of likely selling interest for the Dow 30 and these points are the key technical resistance levels to watch. It could be just more sideways from here. So far however, the Average is maintaining price levels that are keeping it the well-defined uptrend channel outlined below. Until the Dow breaks below the low end of this channel, I have to assume a bullish trading bias.

I mentioned GE and its a good example, as the stock should find good support in the 26 to 28 price zone and it seems unlikely that there is a lot of downside to the stock (and to the Dow itself) unless the earnings start to show up as under or well under expectations.

Nasdaq Composite Index (COMPX) - Weekly:

What looked like it might be a "triple top" when viewed from the perspective of the hourly charts just turned out to the top end of a temporary price ceiling as seen from the perspective of the weekly chart below. Remember the point about looking first at the weekly chart even if you're a very short-term trader - otherwise you could miss the forest for the trees.

The Composite (COMPX)looks to be near at least temporary resistance at last week's high, which is also the top end of a weekly uptrend channel. Prices tend to swing up and down even within an uptrend and this recent zig (rally), may have a zag to follow. There is another little channel that suggests that the Nasdaq, even though nearly at an "overbought" extreme, could zip on up to 1900 before coming down. Stay tuned - hardly ever a dull moment with tech stocks.

Nasdaq 100 (NDX) MONTHLY chart:

To keep a broad BROAD view, we can look at the Nasdaq 100 on a monthly chart basis. From this way of viewing the semi- logarithmic chart scale (equal PERCENTage moves being the equal in distance) in a multiyear time frame, its not surprising to see a rebound from the lows of last fall as the Index came down to long-term support. I think of it as falling back to its long- term rate of change or upward price "progression" - like falling back to the mean so to speak. Hey, when you get too far ahead of the traffic flow, there's a speeding ticket in the wings.

Nasdaq 100 Tracking Stock (QQQ) - Hourly:

I thought there was a chance of QQQ falling to major support around 27.50-28 - WRONG! But, as I said also, a sign of renewed bullish trend was the hourly close above 31-31.25 and that fact that it there was the same close on daily basis.

If you were short the stock and I was, I exited on my suggested ay with it, with exiting stops at 31.30 stop for only a slight loss. The very reason I like to take out short stock positions in a price area where there appears to be substantial stock for sale. If the stock then churns through there, more buyers are going to be behind the pack.

The 33.50 area is where I peg technical resistance currently, at the top of an implied uptrend channel. What was resistance around 31.25 should now be support if last week's rally has got "legs".

The price channel lines have been pretty reliable over recent week (true almost anytime the market is "trending"), except for the occasional "overshooting" of them which tends to drive traders crazy for a while, me included. That is at least for those who rely on technical patterns - but, you have to allow for the occasional tendency for price swings to carry further than expected.

Extreme temporary price swings might today be a gut reaction to stories that suddenly appear on the news wires and seems to, or actually does, relate to terrorism or a new epidemic or the like. Or, like the week before last, a mistake in a sell order for index futures as 10,000 instead of 100 - opps!

Good Trading Success!

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