Option Investor
Index Wrap

Texas Two-Step with banks and bonds

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Stocks may have reversed earlier losses in the second-half of today's trade based on more rumors of Saddam Hussein's capture, but I think too many levels of support were found in today's trade and in a rather range-bound market the past couple of months, bears may have been eager to lock in some swing-trade gains, while bulls looked for bargains at what has been the lower end of a monthly trading range.

For lack of a better example to try and depict how I think the major markets will trade in the coming weeks, I'd use the country western dance called the "Texas Two-Step" do describe a market where we might look for the indexes to work slowly lower, with a one-and-a-half step backward for every one-step higher, with Treasury YIELDS and financials leading the day-to-day fluctuations, with the markets gyrating between their WEEKLY S2 and WEEKLY R1.

You don't really need to know that much about the "Texas Two- Step," but understand that some of the intra-day swings we've been seeing will most likely come from both the low and high end of the range and a few quick steps somewhere in-between as the pace of the music quickens and slows.

Pivot Analysis Matrix -

Concerns regarding the recent sharp rise in Treasuries YIELDS, specifically the 5, 10 and 30-year YIELDS, which I think will continue to be volatile as traders try and get things under control after seeing sharp selling in recent months, abated today as the 10-year YIELD ($TNX.X) fell 9.5 basis points to 4.320% by session's end.

In Friday evening's Market Monitor, one observation made was that the S&P Bank Index (BIX.X) 302.41 +0.42% had correlative support in the DAILY/WEEKLY/MONTHLY levels at 297 today, and after seeing some selling in its last 5-session, might well find support at the 297 level, but a trade at that level, might find the other major indexes finding a near-term bottom at their WEEKLY S1's, where there too we found correlative support at the DAILY S1's.

My observations today are that Treasuries found buying early, which had YIELDS lower at the open. A trader's mindset might be that some fears of the rather rapid rate of YIELD rise in the recent month were perhaps calmed near the open, and stocks started out mixed.

I saw little in today's release of June factor orders to exacerbate this morning's early selling, but instead feel there was simply a destiny calling for the BIX.X to the 297 level and more likely have both the S&P 500 Index (SPX.X) 982.82 +0.27% and S&P 100 Index (OEX.X) 495.50 +0.37% Two-Stepping their way lower and matching stride. That action then weighing on the Dow Industrials (INDU) 9,186 +0.35% as it fell to a session low of 9,048, and the tech-heavy NASDAQ-100 Index (NDX.X) 1,267 +0.24% as it too traded under our newly created WEEKLY R1 of 1,248 (DAILY S2 today was 1,250) before it recovered from a session low of 1,240.67 to finish with a 3-point gain.

Traders will note that I've added the U.S. Dollar Index (dx00y) 96.16 -0.51% to the pivot matrix for the first time. I wanted to do this as a way to try and measure money flows into and out of the U.S. at this time. If anything, I will try and think of this currency weighted index as trying to depict the pace of the music I mention above.

For instance, I will try and make this association right now. A dollar decline and Treasury selling, or higher YIELD could spell trouble or declines for the major equity indexes and should the rate of change higher in YIELD be seen, then we might expect further growing concern as it relates to banks and as consumer interest rates rise. Also bearish would be a sharp rise in Treasuries (YIELDS sharply LOWER) and sharp rise in the Dollar. This latter situation might only come from an asset shift AWAY from U.S. equities, with money rushing back into YIELDS at these higher levels, while at the same time, money leaving the U.S.

I need to find a good source of foreign bond market trade, but did see some commentary this morning, which I posted in the 09:00 AM EST update, as to the euro-bund 10-year YIELD of 4.16%.

A steady dollar, but some abating of the recent high YIELDS in Treasuries, might have equity traders less concerned about further rise in consumer loan rates, find banks easing back off of today's lows, and generally find the major indexes ranging back higher toward WEEKLY R1's.

If I were to define a dance floor for this week's trade, in simplistic terms, I would define the range from WEEKLY S2 to WEEKLY R1, with a more bearish outlook coming from some shift in leadership to bearish as depicted by the NYSE new high/new lows indications, which on Friday showed the number of NEW 52-WEEK LOWS outnumbering new 52-week highs, where that trend continued today. Here's a quick look at the market internals since late June.

Market Internals - Focus on New High/New Lows

We've been monitoring the NYSE 10-day average of new highs and new lows since the reversal lower on July 18th and Friday's trade is the first time since late March, when the indexes were actually showing strength that the number of new lows begins to outnumber new highs.

As I look at Dorsey/Wright and Associates various sector bullish % charts, the only sectors I currently show in a weakening phase is the Building Sector Bullish % (BPBUIL), which turned "bear alert" on June 23 at 66% (from 72%) and currently reads 66.4%, and the Drug Sector Bullish % (BPDRUG) which turned "bear alert" on July 17th at 68% (from 80%) and has fallen to 57.14%.

While I can't state exact numbers, it would be my general belief that there are a much greater number of drug/building stocks listed on the NYSE than the NASDAQ. While many of these stocks may not be trading new 52-week lows, there has been a tie between rising Treasury YIELDS and many of the homebuilders to this point.

It would also be my best guess, without reviewing all 3,000-plus NYSE listed stocks, that many of the new 52-week lows are most likely stocks that rallied with the broader market averages since March, never gave a negating point and figure sell signal, but as bullishness dries up, or takes a rest, the number of new 52-week lows builds among 1,2 and 3-lettered stocks.

As we find weakness in the NYSE, we would then be on the alert for that weakness to spill over to the NASDAQ new high/new low indications. While we see some softening in the daily ratio at 88.7%, this isn't that far off from the July 1 NASDAQ-100 Index (NDX.X) 1,267.38 +0.24% relative low benchmark, when the NASDAQ- 100 Index (NDX.X) itself traded a session relative low of 1,180.11.

I make note of the NDX.X only because it is in our pivot analysis matrix. An apples to apples comparison would be the very broad NASDAQ Composite Index (COMPX) 1,714.06 -0.09%, which on July 1 tested the 1,600 level, which had been a level of support since the very broad NASDAQ Composite (COMPX) closed above the 1,600 level on June 3rd.

Let's cover the indices bar charts, with their new WEEKLY levels in place.

S&P 500 Index Chart - Daily Interval

The only thing that had me eyeballing a 967 trade in the SPX today was that the BIX.X still was weak early and looked to have some downside room to the correlative support of 297, and eyeball approach to SPX downside was roughly 967. Whether a trader traded updated target of 976 from last week or today's trailing stop of 973, was good decision in my opinion.

The BIX.X still looks like it may have some downside to correlative 293-294 area, which in my opinion would correlate with SPX WEEKLY S2. With SPX Stochastics nearing oversold, I would look for a bullish trade on an SPX decline back below 972, but assess downside risk to 962. As noted in Thursday evening's Index Wrap, MONTHLY S1 is currently at 963 and would correlate closely with WEEKLY S2. To break that level lower, I do think it would take a continued move higher in YIELDS and weakness in BANKS below their WEEKLY S2.

The more severe breakdown of wedge gives the impression to me that we might look to for the 1.5 step lower for every 1 step higher type of trade, as do the current market internals.

Today's action saw a net loss of 5 stocks to point and figure sell signals as the bullish % ($BPSPX) fell 1% to 75.20%. As some benchmarks, the July 1 reading, which would be the recent relative low on the SPX was 77.60%. Still "bull correction" here and would take a reading of 68% to achieve "bear alert" status. I will note that Dorsey/Wright and Associates S&P 500 Bullish % (BPSPX) also reversed into "bull correction" status today at 75.20%, and it now looks like Dorsey and Stockcharts.com are now in unison. Again, these two services' bullish % will sometimes get out of whack as www.stockcharts.com adjusts their charts lower in some stocks for dividends, and we may also expect some past bad ticks in intra-day stock trades to create some fractional differences in broader bullish % indicators.

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

I placed the OEX's MONTHLY S1 of 485.30 to perhaps give better indication of broader "zone of support" than the sliver of support found from WEEKLY S1 and its WEEKLY 80.9% retracement. However, OEX trader might see how OEX found today's low near 487 as BIX.X traded 1 point below its 297 levels of correlative support. I've tried to outline a systematic "IF, THEN" type of bullish trade setup in the OEX where a risk averse bull might look for the OEX to firm in the 484-486 area, get Stochastics more "oversold" and then look for some near-term momentum back above 490 as the bullish entry point with target back near 500, where the apex (point) of our wedge points. This would also be a good psychological level that traders might target to the upside.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX) and holds at "bull confirmed" status of 82%. On Friday, the OEX bullish % fell 1%, or lost 1 stock to a point and figure sell signal. It would currently take a reading of 78% to reverse into "bull correction" status.

Dow Industrials Chart - Daily Intervals

I view a zone of support in the Dow Industrials from 9,000 to 9,039 only to line up with an area where Stochastics might achieve an "oversold" reading as they did in late-June, just before the July 1 spike lower to 8,852. The Dow is the only major index in our pivot analysis to close back above its 21-day SMA and gives me the look that it is near-term stronger, or carries more short-term momentum than the other indexes in the pivot. This type of trade can lend some bullishness to market psychology near-term, just as it being able to hold support near 9,000.

On Friday, the double bottom sell signal in Merck (NYSE:MRK) $54.13 -0.16% at $54.00 was the one stock in the Dow that had its very narrow bullish % ($BPINDU) reversing into "bull correction" status at 80%. Today's trade saw no net change in this bullish % and it would now take a reading of 68% to achieve "bear alert" status, or a reversal back higher to 86.66% and the bull cycle high to get back into "bull confirmed" status.

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

The Q's briefly pierced below our upward trending regression trend, similar to action found back on July 1. While the bullish % ($BPNDX) are now close to reversing into "bear confirmed" status after reversing losing 2 stocks to point and figure sell signals today and the bullish % reversing back lower to "bull correction" status, the Q's remain rather "neutral" in my opinion, with a lot riding on tomorrow's after the bell earnings from Cisco Systems (NASDAQ:CSCO) $19.26 +0.57%.

I think the QQQ finds resistance building at $32.00 with near- term support at $30.50 on any further break of bullish trend. Tough trade in the QQQ here in my opinion, but would be more willing to short/put if we were to see the bullish % reverse into "bear confirmed" status and then look to trade the bearish channel lower.

Jeff Bailey

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