Option Investor
Index Wrap

"Jawbone" Ben Bernanke

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Just last week, Fed Chairman Alan Greenspan gave Congress his views of the economy with an outlook for 4% GDP growth in 2004. Some critics of Mr. Greenspan said his outlook was too positive and Treasuries sold off with YIELD being driven higher on recent comments that the Fed may not be looking to buy back longer-dated bonds as had previously been thought and that deflation wasn't thought to be as great a concern as some economists have thought.

Today, Fed Governor Ben Bernanke may have been doing some "jawboning" of his own in a speech of his own at the University of California at San Diego when saying "We should be willing to cut the funds rate to zero, should that prove necessary to provide the required support to the economy."

I've heard that the Fed has wanted to try and steer itself away from giving any type of "bias" toward future interest rate policy, the recent talk from the Fed has many economists and Wall Street Analysts wondering just what the Fed policy is going to be.

If anyone thought Mr. Greenpsan's views of 4% GDP growth is confusing, when Fed Governor Ben Bernanke is still discussing a 0% Fed funds rate, then add further comment later in the day from Dallas Federal Reserve President Robert McTeer, speaking to the Rotary Club in Dallas, saying the U.S. economy could grow at 5% for a couple of years without worries of igniting inflation. Mr. McTeer added "There is no great pressure to tighten" interest rates.

After all this "conflicting" talk from the Fed (Greenspan/McTeer on one side, Bernanke on the other), the end result is certainly had precious metals traders active and sending the Gold/Silver Index (XAU.X) 81.46 +5.35% and AMEX Gold Bugs Index ($HUI.X) 159.29 +6.44% higher. I'll note that I was looking for a rebound entry point for some short/put entry points yesterday, but today's sharp move higher was a freight train I didn't necessarily want to get in front of.

While gold stocks were on the move higher on either massive short-covering or thoughts of deflation, the dollar was weak and closed at its lows of the session with the U.S. Dollar Index (dx00y) 95.27 -1.15% falling 1.11 points. The dollar action depicts that where investor were listening more to Mr. Bernanke, or "surprised" by Bernanke's 0.0% discussion on potential Fed policy.

I (Jeff Bailey) think Mr. Bernanke's comments were just a little "jawboning" and an attempt to try and coax some traders back into Treasuries after the recent sell-off there, which has had YIELDS on the rise. As part of my evidence for this, I looked at how Mr. Bernanke voted at the recent FOMC meeting and decision to cut rates 25 basis points to 1.0%. Mr. Bernanke voted in favor of the decision. Robert T. Parry was the only FOMC policymaker that preferred a 50 basis point cut.

Equity trader's didn't necessarily like Mr. Bernanke's comments as a rally from the morning lows found selling after his comments were reported at 11:00 AM EST.

While the Dow Industrials (INDU) 9,194 +0.39% and NASDAQ-100 Index (NDX.X) 1,268 +0.86% did not break back below their early morning lows on Bernanke's statements, both the S&P 500 Index (SPX.X) 988.61 +0.05% and narrower S&P 100 Index (OEX.X) 497.79 +0.03% did achieve new session lows, but an afternoon rally, perhaps spurred by Mr. McTeer's statements left the major equity indexes back in the green by session's end.

Here's a quick look at tomorrow's pivot analysis matrix. If bear's are going to pressure things, which they didn't seem willing to do today, then they'll have a chance early and the first level I'd want to see broken to the downside is in the Dow Industrials (INDU) at the WEEKLY pivot of 9,161.50. The test for further strength comes at the WEEKLY pivots for the SPX, SPY, OEX and NDX, where today's highs in these indexes fell just shy of on an intra-day basis.

Another stream of after-the bell earnings finds the NASDAQ Tracking Stock (AMEX:QQQ) $31.60 +0.82% edging lower at $31.52, while a quick check of S&P futures (sp03u), which settled at 987.60, trade 988.00 as I type.

Pivot Analysis Matrix -

I will admit that from a bear's perspective having profiled a bearish trade intra-day in the INDU and SPX, that I really wanted to see a close in the INDU back under the WEEKLY pivot.

As it relates to last night's Index Trader Wrap, today's trade at 9,203.38 was enough to have the Dow Industrials' point and figure chart seeing a 3-box reversal higher. Based on that chart, a bear now wants to see a trade at 9,000 before he/she sees a trade at 9,300.

Let's take a look at the Dow's 60-minute chart. The main support zone right now is from WEEKLY S1 of 9,044 to MONTHLY Pivot of 9,063, with resistance zone of WEEKLY R1 9,305 to WEEKLY 19.1% retracement of 9,322.

Dow Industrials Chart - 60-minute interval

Looking for a bearish trade in the Dow, I made note of a weaker dollar and buying in Treasuries, which had me thinking "stocks" might be the odd-asset class out. The Dow did make a strong move up from through its WEEKLY pivot of 9,151.5 (my retracement is off fractions, but on 9,000 points not trading fractions), but after seeing some selling begin to take hold from the 9,200 level and just below the lower end of regression channel, I thought it worth a shot at a bearish entry points.

Tomorrow morning, I would really want to see resistance take hold below the 9,122 level, give or take 10-points and get weakness BACK BELOW the weekly pivot and "old" downward trend I've been using.

I was monitoring the 60-minute chart throughout the day and thought to myself early that if Stochastics on the 60-minute would near "oversold" on this time frame, I'd pull the trigger on a bearish play.

Points of concern that I have for today's bearish profile in the Dow is that the most heavily market cap weighted MMM making a move to all time highs and past "dog," which has been notably weak in recent weeks (it is one of this year's Dow Dogs from Dow Dog Theory too) rebounded from multi-year lows after the company reported earnings above the company's own lowered guidance of June 11th.

Today's trade saw a net gain of 1 stock to a point and figure buy signal (MMM at $138) and has the very narrow Dow Industrials Bullish % ($BPINDU) rising 3.33% and back at its bullish cycle high reading of 86.67.

Personal comment here. EK now ranks number 2 to Advanced Micro Devices (AMD) as a company that gives very inaccurate guidance to analysts. Most "buy side" firms look for accurate guidance or some "resemblance" of truth from company officials, and when they don't get it, or see "misguidance" from management, tend to avoid the stock as it isn't worth the time, or potential risk of capital. I do not, nor have I held a short position in EK, but I get the sense that EK's management doesn't have a grasp of their own business trends, so I tend to avoid the stock (short/long) altogether.

I will be monitoring strength (MMM) and weakness (EK) or the head and the tail of the Dow very close. A bear would prefer NOT to see both MMM and EK continue their trade.

Review of profiled bearish trade: Short/put at DIA $91.93, stop $94.10, target $85.10. Risk averse bearish trader's stop: $93.10.

S&P 500 Index Chart - 60-minute Interval

I compressed the horizontal access on the SPX 60-minute chart more that the above Dow chart only to show why I'm using the trend I did on the Dow and not the most recent high found in the Dow.

I thought "long and hard" regarding an SPX bearish trade, and decision to profile short/put was based on yesterday's observation of this index's bullish % reversing to "bull correction" status from "bull confirmed" and seeing selling in the dollar and fractional buying in Treasuries.

Similar to the Dow, I was monitoring the SPX 60-minute chart, and while the SPX has been somewhat "sideways" in recent weeks, and starting to diverge away from the lower end of our bullish regression channel, I liked the more "overbought" nature of Stochastics (5,3,3), which I feel tend to "work better" in a sideways type of market trade.

Where is this recent "990" type of resistance coming from in recent sessions? My only explanation is from the S&P futures (sp03u) retracement. With me running late as it is, I discussed this level in the July 6th "Ask the Analyst" column, and I'm using the last chart and technique of "fitted" retracement to identify this level, which looks to be in play right now. Here's a link to that article.

First thing I'll look at tomorrow is this. If S&P futures (sp03u) are above 992.00, then I would immediately have to think the SPX is going to make a move higher to 995 in the early part of the morning session.

Review of profiled bearish trade: Short/put at SPY $99.16, stop $102.27, target $92.50. Risk averse bearish trader's stop $100.30.

Today's trade saw a net gain of 1 stock to a point and figure buy signal in the broader S&P 500 Bullish % ($BPSPX) and has the bullish % edging up 0.2% to 76.2%. (There may have been 3 buys and 2 sells, but MMM is obvious thought of 1 stock giving the buy signal).

Since we looked at the SPX on 60-minute time frame, lets look at the "almost identical" S&P 100 Index (OEX.X) 497.79 +0.03% on the daily intervals

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

I did not profile a bearish trade in the OEX today. I probably could have, but in the "heat of the moment" and some of the "lack of near-term" resistance in the OEX, I was more cautious toward an option trade, when a trader might be able to defer to a short in the DIA or SPY.

As it relates to an SPX and OEX options trade, I do think the 502 level in the OEX is an important level of resistance that a bear needs to have hold.

In recent sessions, the Morgan Stanley Cyclical Index (CYC.X) 524.35 +0.32% has really started to get its act together. Heck, its has been as bullish from the March lows as the SPX or OEX, but has been breaking to consecutive 52-week highs the past four sessions.

A fellow trader and subscriber at OI made a very good point in an e-mail sent last night regarding comments about the S&P 100 Bullish % ($BPOEX) still showing strong internals compared to the broader S&P 500 Bullish % ($BPSPX) of recent sessions. His comments were that the OEX bullish % was probably stronger as the deeper cyclicals have been showing continued strength compared to the OEX, SPX and INDU of recent weeks. As a technical/economic observation, this action from the cyclicals is a "confirming" bullish move to the thought of economic growth. Make no mistake about that. I will try and prepare a technical discussion of this chart and group of stocks within for tomorrow morning. Only near-term caution is that DAILY Stochastics are "overbought" and curling lower.

A quick browse of the CYC.X components that are represented in the Dow Industrials are (AA, C, CAT, DD, HON, HPQ, IP, MMM, UTX). These Dow components/CYC.X components are obviously components in the SPX and OEX too.

Today's trade did see a net gain of 1 stock to a point and figure buy signal in the S&P 100 bullish % ($BPOEX) (MMM gain) and has this narrower bullish % growing to 84% and a bull cycle high.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Interval

Qualcomm (NASDAQ:QCOM) $36.25 +0.02% fell to $35.70 in after- hours trade after reporting quarterly earnings of $0.33 per share, which beat estimates by 3 cents. Guidance for Q4 was $0.27 to $0.29, with consensus at $0.29.

The "dynamics" at play look to be some renewed INDU strength and the "last things" a bear wants to see at this point is an "sponsorship" from the QQQ.

I continue to trade some tech stocks and have profiled some names like MU, AV, MXO in the market monitor that have been on the move the last couple of session. Some of the moves have to do with what I think are very stock specific and sub sector bullish trend, but I've also noticed that the moves higher seem to find a pickup in volume, which I think is also coming from short- covering as a key level of resistance is broken.

I think it important for even my DIA and SPY bearish trades that the QQQ stay below this $31.65 level, otherwise I see immediate short-covering strength to the $32.08 level.

A quick update on QQQ short interest as of July 15th is 250.1 million shares, and that's up from the 223.4 million of June 13th and up from the May 15th 201.0 million shares.

At some point, BEARS need to defend a level and if they're going to do it, then $31.65, if not $32.08 are as good as any.

Today's trade did see a net loss of 1 stock to a point and figure sell signal and this has the narrower NASDAQ-100 Bullish % ($BPNDX) slipping to 77%.

Jeff Bailey

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