Option Investor
Index Wrap

Prodded and probed

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I thought the broader S&P 500 Index (SPX.X) 974.12 +0.72% got just about everything it needed for a bullish session as economic data offered little negative surprise, the benchmark 10-year Treasury YIELD ($TNX.X) fell 5.9 basis points to close with a 4.229% yield, in a third installment of the Treasury's record $60 billion worth of three-year bonds.

While an equity bull will take a 7-point gain in the SPX any day of the week, news that state tax officials accused at least ten banks ten banks of channeling $10 billion into investment funds that may have been set up to avoid hundreds of millions of dollars from state taxes, kept one of a bull's catalyst sectors and the S&P Banks Index (BIX.X) 301.37 +0.25% showing more modest gains. While the banks were prodded higher by lower YIELDS in the longer-dated maturities, the thought of any type of wrongdoing weighed on the group.

The Securities and Exchange Commission says its records indicate that Bank of America (NYSE:BAC) $80.53 -0.08%, which is a component of both the S&P Banks Index (BIX.X) and money center KBW Bank Index (BKX.X) 870.86 +0.71%, put about $8 billion into its fund, saving it from paying taxes on $750 million in income. Media reports say accounting firm KPMG was behind the creation of most of these investment funds, funds that were not publicly traded and paid dividends to the banks that instituted them.

Technology sectors stabilized, but found tough sledding to stage a rebound from recent declines. The Biotechnology Index (BTK.X) 427.33 +1.27% was today's tech-sector standout and helped offset losses in the CBOE Internet Index (INX.X) 132.16 -0.78% and Semiconductor Index (SOX.X) 380.53 -0.45%, as the NASDAQ-100 Index (NDX.X) 1,217 +0.16% and its Tracking Stock (AMEX:QQQ) $30.31 +0.39% finished with fractional gains and traded either side of unchanged for the bulk of today's trade.

Dow component Hewlett Packard (NYSE:HPQ) $19.31 -2.9% traded lower for a fifth-consecutive session after broker Goldman Sachs trimmed their Q3 revenue and EPS estimates to $17.4 billion and $0.26 per share, from $17.7 billion and $0.27 per share and brought the firms estimates in line with recent consensus estimates of $17.5 billion and $0.26. Goldman cited weakness in European economies, soft enterprise sales and a more aggressive PC pricing environment making it a higher likelihood that HPQ wouldn't be able to achieve Wall Street's Q3 revenue estimates.

The Oil Service Index (OSX.X) 88.65 +4.23% was today's sector standout after the Energy Information Administration reported that U.S. natural gas inventories rose by 74 billion cubic feet to 2106 bcf, which according to some natural gas traders was below 100 bcf expected. The September Natural Gas futures contract (nd03u) $5.11 +7.69% jumped 36.5-cents higher and back above its slowly trending higher 200-day SMA. The news sparked optimism among oil service bulls toward a pick up in drilling activity.

Let's review tomorrow's Pivot Matrix. There are a couple of key levels I think we should be monitoring tomorrow. I'm going into tomorrow's trade still bullish on a short-term basis, but cautiously slow. Tech didn't carry its weight today, and banks lagged the move higher. True, there may have been some news in the group regarding these funds, and while and SEC probe may widen beyond BAC, if reports are correct that BAC put $8 billion into one of these funds, and there are 9 other banks with these type of funds, then most of the negativity should have surrounded BAC.

Pivot Analysis Matrix

Before I start, I'd better explain why the U.S. Dollar Index (dx00y) 95.79 -0.45% is asterisked. I remember why I've left the dollar out of the matrix as long as I have. They say a good investor's dollar never sleeps, and that's true for the dollar, which trades nearly 24-hours per day, with the Dollar Index trading 15-hours per day. I'm looking to use the dollar only as a way to try and track inflow/outflow of money as it relates to the U.S. economy and I'm using the U.S. Dollar Index (dx00y) 09:05 AM EST to 03:00 PM EST session high/low/close in the DAILY matrix. This index is actually traded in 3 separate periods where a new day starts at 07:00 PM EST to 10:00 PM EST, closes, then resumes trade at 03:00 AM EST to 09:05 AM EST, closes, then opens again at 09:05 AM to 03:00 PM EST. Unless a subscriber vehemently thinks I should do otherwise, I'd like to use the 09:05 AM EST to 03:00 PM EST time of trade, which would be very close the Treasury bond markets time of trade.

I must also stand corrected in recent commentary regarding this index being made up of 7 foreign currencies. I can't remember, but evidently a currency was recently absorbed into the euro or dropped from the index. Six foreign currencies now make up the U.S. Dollar Index. Further Info can be found at the New York Board of Trade http://www.nybot.com/specs/dx.htm(copy and paste this link into your browser)

Let's start quickly with the 10-year YIELD ($TNX.X) and today's low, along with its WEEKLY S1. I would think a trader (bullish or bearish) needs to have an alert set at this level as a break lower there, or 42.00 on the point and figure chart of the 10- year YIELD (0.50 box scale) is a break of near-term support. While the scenario of lower YIELDS calming concerns toward higher mortgage rates may well be in play, I think traders still need to be wary of a defensive move taking place into Treasuries.

This is one reason I wanted a financial-related index like the S&P Bank Index (BIX.X) 301.37 +0.25% in our pivot matrix, as it may help give us some alert as to how the equity markets respond toward Treasury YIELDS, which will impact various consumer lending rates of interest. I will draw upon Tuesday evening's Index Wrap, where in the first paragraph below the Pivot Matrix I made note that the BIX.X had been leading lower in the matrix, and while the BIX.X did trade lower that day it seemed to firm. Today I make note that the BIX.X didn't seem to lead the SPX/OEX like I thought it would, so I'm cautiously bullish near-term, but on the alert. I have BIX.X correlative resistance at 304 and support 297.

A weird level I make note of tonight is in the Dow Industrials DAILY R1. The Dow was today's index of strength for the most part, and if last night's story clicked with anyone, then it was the Dow Industrials (INDU) 9,126.45 +0.71%, which on an intra-day basis seems to find a bid, when the other indexes needed it most. This 9,164 level is where I have our WEEKLY 61.8% retracement level of 9,165, which would mark the upper-end of a near-term "zone of resistance."

I've also marked the NDX at 1,225.41 and its S2 of 1,231.70. I mark this level only because fellow analyst Jane Fox and I couldn't fully understand what might be holding the NDX back at that level just before the 12:00 EST. But quick review showed the MONTHLY 61.8% retracement of 1,225.74 and WEEKLY S2 of 1,231.71 as the near-term "zone of resistance."

On early bullishness tomorrow, a trader might look to correlate the aforementioned "zone of resistance" in the Dow Industrials, with that just mentioned in the NDX and QQQ from $30.45 to $30.57.

Again... this type of thinking into tomorrow's trade would perhaps ring a bell with the thought that each index is counting on the other for some strength. If the Dow were trading at current levels and the QQQ were to trade into its "zone of resistance," I think it a small likelihood the QQQ could muster much of a move above WEEKLY R2, without some leadership from the Dow, or SPX/OEX for that matter.

NASDAQ-100 Index (NDX.X) Chart - Daily Intervals

I wanted to show a chart of the NDX itself, just in case there are some longer-term trader that might look to hold a trade for more than a week or two. I would look for a bearish NDX put option trade on a rally back near the MONTHLY pivot of 1,257 with the NASDAQ-100 Bullish % ($BPNDX) having turned "bear confirmed."

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

QQQ tends to be a little "sloppier" in its trade as there are a lot of retail traders than can sometimes overtrade the QQQ when we get excited and start to panic. Darned close to the NDX chart though. Note Tuesday's bar extends lower on the QQQ than it does in the NDX. Current observation is that the QQQ hasn't given back too much of those lows, where some QQQ bulls may have panicked a little after CSCO's earnings? Too soon to say that as the QQQ hasn't been able to reclaim WEEKLY S2 at this point.

Today's trade saw a net loss of 1 stock to a point and figure sell signal in the NASDAQ-100 Bullish % ($BPNDX), and has the bullish % slipping lower to 66%.

Dow Industrials (INDU) Chart - Daily Intervals

I wanted to show the INDU chart right after the NDX/QQQ charts so that we might make the correlative tie to their current near-term zones of resistance. Both charts would look very similar as it relates to their July 1st lows and current pullback lows. When considering the pivot retracement levels, especially the WEEKLY S2's, both the INDU and NDX/QQQ look like they are counting on each other for strength. The INDU is trying to lead a bounce, but needs some help from the QQQ. Bullish or Bearish reactions to any of these two indexes components in the near-term could really have notable impact on trading. Of the major Indexes, only the Dow shows its MACD still holding above zero.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU) and status remains "bull correction" at 80.0%.

S&P 500 Index (SPX.X) Chart - Daily Interval

As it stands, the SPX did get back above a near-term "zone of resistance" and now it would like to see both the NDX/QQQ and INDU follow in similar fashion. On an intra-day basis, once the SPX got back above its WEEKLY S1, it didn't trade below 969.71, say 970. SPX bulls that may have taken a bullish trade yesterday on move back above MONTHLY S1 of 963.10 at 965, would like to see some SPX support early at DAILY Pivot and WEEKLY S1. I really thing an SPX/OEX bull needs the banks to participate for a move higher.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 4 stocks to point and figure sell signals, as the bullish percent slipped another 0.4% to 73.4%. This has SPX 997 looking more formidable as internals continue to weaken.

Today's trade in the narrower S&P 100 Bullish % ($BPOEX) saw a net loss of 1 stock to a point and figure sell signal. This has the OEX bullish % slipping to 80%. Still "bull confirmed" and the only bullish % (INDU, NDX, SPX, OEX) still in a column of X. It would take a reading of 78% to reverse into "bull correction" status.

Jeff Bailey

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