Option Investor
Index Wrap

Bulls reveal "aces over eights"

HAVING TROUBLE PRINTING?
Printer friendly version

On August 2nd, 1876, in Deadwood, South Dakota, James Butler Hickok, who everybody called "Wild Bill" was fatally shot in the back while playing poker. Wild Bill was holding aces over eights that fateful day in American History. Ever since then, aces over eights has been called the "dead man's hand."

With coalition forces already having found a "pair of eights" and an "ace of diamonds" in the form of Abid Al-Tikriti in their deck of Iraqi most wanted playing cards, U.S. military officials confirmed late today that an overnight raid in northern Iraq had killed a "pair of aces" in the form of "ace of clubs" Qusay Hussin" and "ace of hearts" Uday Husein".

Today's revelation of "aces over eights" found a mixed session in the major indexes turning bullish. Today's timing could only have been made more perfect if it had taken place on August 2, 2003, 127 years to the day of "Wild Bill's"

The news and optimism of such a capture/elimination of Saddam Hussein's top to advisors, his sons, lifted investor sentiment and found the major indexes closing in positive ground.

I can only imagine the renewed optimism and lift it could have given coalition forces in Iraq that have been targets of Iraqi rebels the past several weeks.

As one trader's e-mail read when noting the condition of the building in northern Iraq where Qusay and Uday were found ...

"Yes...closer examination did in fact look like the Army boys had some serious issues with the occupants. God bless those boys."

And while this is just one trader's comment, there were reports that traders on the floor of the New York stock exchange erupted in cheers on first news of the events that had unfolded in Iraq.

And that's the "story" regarding what lifted stocks in broad fashion for today's session. It wasn't about earnings, economic reports or forward looking guidance. I think today's trade was all about the still lingering thoughts of how the continued effort to totally free Iraq and capture or eliminate the "evil doers" still plays a role in investor psychology and how a more "negative tone" out of the region in recent weeks, took a turn toward optimism today.

Sector action, which started out mixed finished broadly positive with only the Oil Service Index (OSX.X) 87.83 -1.86% finished down more than 1%. Drugs (DRG.X) 317.71 -0.19% finished fractionally red after a disappointing quarterly earnings report from drug giant Merck (NYSE:MRK) $57.81 -3.36%.

Sector gainers had the Networking Index (NWX.X) 184.38 +4.7% and Semiconductor Index (SOX.X) 388 +3.25% building gains into their close, with Lehman Brothers providing a catalyst for gains early in the session with upgrades in the wireless integrated circuit stocks and raising bullish target on semiconductor capital equipment names like KLA-Tencor (NASDAQ:KLAC) $52.30 +5.3% to $62 from $45.

Here's a quick look at tomorrow's pivot matrix with correlative levels highlighted.

Pivot analysis matrix

On an intra-day basis of the major equity indices in the pivot matrix, only the Dow Industrials (INDU) 9,158 +0.67% was able to trade a higher high intra-day basis that their late morning "news" highs AFTER military officials confirmed (before the close of trading) that Saddam Hussein's two sons and top aids had been killed in the overnight raids.

The Dow Industrials were lower by 56 points early in the session and looked to lead the other major indexes into the red, but the news out of Iraq and bullish optimism turned things around. While I do believe it was the news out of Iraq that had the indexes finding renewed bullishness, the news came just after the Dow/SPX and OEX traded their weekly R1's.

Dow Industrials (INDU) - 50-point box

After generating a double bottom sell signal in early July at 8,900, the Dow Industrials have set a pattern of equal highs (9,250) and higher lows, which lends to near-term bullishness. I would "expect" or look for some carryover of bullish optimism from today's news out of Iraq, but view 9,300 as resistance and look for a break at 8,950 to signal weakness for a lower trade into 8,500, perhaps ahead of third-quarter earnings as forward guidance after some earnings reports has been for lackluster growth near-term.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull confirmed" at 83.33% for a 6th-straight session.

S&P 500 Index ($SPX.X) Chart - 5-point box

I like the SPX short/put on further rally back near 995, which would be a 3-box reversal to the upside. After having shorted/put the SPX in early July at the 980 level and closed out for loss last week, I'm not going to wait for 975 to short/put again after today's trade saw the S&P 500 Bullish % ($BPSPX) see a net loss of 4 stocks to point and figure sell signals as the bullish % fell 0.8% to 76.00. The 76.00 reading is a 3-box reversal lower on the SPX Bullish % chart, and now has this very broad bullish % indicator reversing to "bull correction" status.

I've marked 5 different bullish % levels at various inflection points on the SPX PnF chart that show the SPX's first trade at 1,010 on the PnF chart had the bullish % at 82%, second test was 79.2% and most recent test was 79.8%. It is the bullish % levels on the recent SPX lows that show the internals are weaker than the externals look at this time, and that bullishness is beginning to narrow among fewer stocks.

Since I looked at the SPX chart on conventional scale, I'm going to look at the narrower S&P 100 Index (OEX.X) 497.64 +0.98% on our unconventional 3-point box size. I will note that the conventional 5-point box chart did give a double bottom sell signal in early July (SPX equivalent of 965 above) at OEX 485, which currently has the bearish vertical count of 460.

Before I begin, I'll make note that the S&P 100 Bullish % ($BPOEX) saw no net change in its bullish % and remains "bull confirmed" at 83% which has been its bull cycle high reading.

S&P 100 Bullish % ($BPOEX) - 3-box scale

This is the same box size we began using back in June to establish a "finite stop" for bulls, where the OEX did eventually give a "sell signal" at 489. While the OEX has shown ability to trade an "equal high" of 510 on the PnF chart, which matched the June 17th high, it juuuuust couldn't quite exceed that June 17th high with a trade at 513.

Using similar benchmarking with the bullish % readings at inflection points, I get more of a bullish internal reading from the narrower OEX bullish % than I do the broader SPX bullish %, where the internals really look to represent what has been going on with the outside, or the OEX Index itself.

What's causing this type of slight divergence between the OEX and SPX bullish %? One thought is that there may still be some "dividend" play going on, where money is more attracted to the larger OEX stocks, but may also be due to institutions rotating some cash to more liquid names.

If looking to trade the OEX bearish, I'd prefer a rally back near 500 for a bearish entry, then going forward, should the OEX reverse lower and trade below the early July lows (red 7) at 483, a bear would certainly want the bullish % to be below 81% bullish. Currently, it would take a bullish % reading of 76% for the OEX bullish % to reverse into "bull correction" status.

Also... in the upper-left hand corner of the chart, I make comment as to a "normal" pullback to 460 being some digestion of gains under the scenario that we may not be seeing some of the robust earnings and bullish forward looking guidance from some companies that a bull might have been looking for at this point. It would be that we see a slower move lower into some of these current bearish counts in the months to come. Find the bullish % charts reversing to "bull correction," then "bear alert" and when we near some of the bearish vertical counts, begin to see the bullish % charts reverse back up into "bull confirmed" status for a renewed wave higher.

Before we look at the NASDAQ-100 Tracking Stock (AMEX:QQQ) $31.34 +1.48%, I want to quickly note the comparison of new high/new low comparisons between the NYSE Composite ($NYA.X) 5,527 +0.79% and NASDAQ Composite (COMPX) 1,706 +1.46%.

Today's trade saw the NYSE report 73 new highs and 30 new lows (yesterday was 63:26) and after the 10-day average reversed to "bull correction" status for this indicator on Friday at 90.8%, the last 2-days has seen the 10-day average fall to 85.5% today. Compare this to the NASDAQ, which reported 123 new highs and 7 new lows today (yesterday 124:7) where the 10-day ratio since Friday's reading of 97.0% has slipped to just 96.0%. This still has a traders attention in my opinion that there is more bullish leadership being found among 4-lettered stocks than 1, 2 and 3- lettered stocks listed on the NYSE.

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

The semiconductors and networkers benefited from some positive comments early, but as the Dow Industrials reached its lows of the session, the QQQ's did give back early opening gains to trade just fractionally red, but were back higher at about $31.10 when the first news out of Iraq that Saddam's two sons may have been killed. The Q's did spend about 20-minutes either side of the WEEKLY 61.8% retracement level of $31.22 after the news hit, but then "spiked higher" to the session high of $31.50. After the session high of $31.50 was achieved, the "Eiffel Tower" news reports did see the QQQ break back below the $31.22 level, but my goodness if it didn't close that $31.22 level on the 5-minute bars over the course of 15-minutes as if every short was using the weakness to cover some positions on the Iraq news. From 01:45 PM EST on, the QQQ found pullback support at $31.22. It is notable, and Jim Brown even made comment that bears might find it "good news" that before the close of trading, when the U.S. confirmed that Saddam's sons had been killed, the QQQ session high on that confirmation was $31.44.

I'm still looking for some "choppy" trade based on current oscillator setup, which is similar to that found in late June where the QQQ tries to digest some of the recent pullback.

I'd still be looking for bullish entry and a "pop" back higher to $32.08 at this point as I still find the NASDAQ new high / new low indications showing bullish leadership.

Today's trade saw no net change in the NASDAQ-100 Bullish % ($BPNDX) and holds at the 78% level.

Treasuries saw a real choppy trade today and traded higher, then lower, then higher, then lower to finish higher on price, with YIELDS lower. The 10-year YIELD ($TNX.X) fell 2.4 basis points to 4.150%. I looked at an intra-day YIELD chart of the 10-year and tried to see what, if any type of reaction there was to the news out of Iraq. It would be my opinion that bond traders were more focused on what has taken place in the bond market in recent weeks and trying to get things back under control, than they were on events unfolding in Iraq.

Jeff Bailey

Index Wrap Archives