Option Investor
Index Wrap

INTEL MY BELL

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Stocks dropped Friday, with the Dow falling back under some technical support, after starting the day on a high note after Intel's (INTC) mid-quarter update earlier had sharply boosted this key component to the tech heavy Nasdaq (as well as part of the Dow average).

The Dow Industrials, which had led the market rally coming into the week, closed off 74.8 points - at 9348.8 - on Friday, while the Nasdaq Composite, fueled by the Semiconductor sector (SOX), resumed as market leader but did give back 12 points on Friday profit taking to finish at 1765.3; this after being up as much as 35 points during the session on the back of the Intel news.

The S&P 500 500 (SPX) fell also, by 10.2 points to 993. However, for the week, all indices rose to new yearly highs with the exception of SPX.

Intel closed up nearly 4% to $27.39 after the world's biggest microchip maker announced that its target for Q3 revenue was being put up substantially (to $7.3 to $7.8 billion from its prior forecast at $6.9-7.5 billion). The company credited its PC business for the boost. However, the stock was also off substantially from its early peak just over 29 bucks.

INTC's announcement caught traders by surprise and those with short positions in the stock bailed by buying back shares. This short-covering prompted the market's initial sharp rally until some started thinking about the company's hefty valuation/PE ratio based on current projected earnings, which brought in substantial profit taking by those long the stock. No doubt those who exited on the rally wish they had waited until the close!

THE BOTTOM LINE -

While the economic recovery is not yet robust, market participants have got the bullish bit in their teeth for those tech darlings, particularly the smaller cap stocks. The tech- heavy Nasdaq is again leading the rally, after the Dow led the breakout of the Indices' consolidation of recent weeks.

I would be paying more attention these days to the smaller cap Russell 2000 Index (RUT), which was an early breakout leader, watching the extent of any RUT pullback ahead. And the market is trading more "technically", as in technical analysis, not as in technology shares - although both are in the forefront here.

Bottom line, the tech sector seems to be entering its next up leg but the NYSE related Indices look like they are going to continue to consolidate a while longer. Tech can go up on a wing and a prayer, investors have to see the "whites of their eyes" (earnings) for other sectors.

Sideways consolidations, after an initial strong run up, most often tend to take the "form" of a rectangular or triangular pattern as you'll see on some of the charts I've marked up. Why does it matter to label a pattern as a consolidation - the short answer is that it tells you (usually) that the next big move should be in the direction of the prior TREND. If you hunger for more on this subject, go to my prior Trader's Corner article at - http://www.OptionInvestor.com/traderscorner/082202_1.asp

The key to seeing that the rally was coming happened to come from the Dow industrials. Just as there is rotation among stock groups, while some go ahead, then others leapfrog them, there is rotation among the indexes.

The Dow, in what often used to sometimes be called a "solitary walk of the Dow", was the tip off to the rally that was coming. I didn't quite believe that there was going to be so much upside follow through in the (typical) August doldrums, but I tend to follow "breakout" moves at least for a trade, assuming that the market knows more than me. And, I trust the charts - until proven otherwise!

FRIDAY'S TRADING & ECONOMIC NEWS -

The 4-week moving average for jobless claims, which helps smooth out weekly fluctuations, showed an improvement (as announced Thursday), dipping to 394,250, down from 395,500 the previous week - this was the lowest point for the four-week moving average since Feb. 15. It is considered to be important when the 4-week average is staying below, and declining from, the 400,000 level.

So the question become whether those improvements will be reflected in a corresponding growth in the all-important monthly payrolls figures. As a "lagging" indicator, I don't look for improvement in the payrolls for another 1-2 months.

The market has also shifted its focus from questioning whether the U.S. economy will experience a "double-dip" recession to how fast the economy can grow and how long before the Fed will need to begin raising rates. Good point.

Higher interest rates have cooled the rate of mortgage refinancing and the same long rate rise should cool housing activity by year's end. So, something else has got to pick up the slack - so the thinking was in the Street of Dreams last week. Mostly, now, the market is dreaming that something will. A good dream, so I hope it happens.

One item that got attention in Intel's revenue forecast increase was that the company said it had revised its gross margins for the current quarter upward to 54% from 50.9%. As OIN's Jeff Bailey noted on Friday, this upward revision indicated that the company's newest products were being well received by their marketplace. And, with the increase in margins more of a revenue increase comes to the company's bottom line - more profit is music to the ears of investors.

Some other stocks in the news -

Schering-Plough, which late Thursday announced a major dividend cut (nearly 70%) dropped slightly over 9% or 1.52, to close at 14.96 on the NYSE, dragging down the drug sector.

The stock of Gap stores fell 43 cents to 19.22 on the Big Board, even though the apparel retailer's second-quarter earnings more than tripled. Classic buy the expectations, sell the "fact" as the retailing sector has been in an uptrend for some time.

Boeing said it plans to lay off another 1,440 employees as part of continuing job reductions at the company. Boeing's stock rallied 70 cents, to 35.68. Most of the announced cuts will take place in the Seattle area, where the company makes nearly all of its commercial jets. Hey, owning a house in that neck of the woods is far worst than the rest of the West Coast, especially California, when you want to pack up for greener pastures.

Shares of computer anti-virus software-maker Symantec, which is taking more and more of this important market, (symbol: SYMC), traded to a new all-time high at $54.59 (+2.5%)in the session and held most of those gains. SYMC has its hooks in me, as I ante up annual fees for anti-virus for both my laptop and PC - who is going to go without virus (and those worms!) ongoing protection in this day of cyber-terrorists!

OTHER MARKETS -

The 10-year Treasury note rose 1/4, or $1.25 for each $1,000 invested, to yield 4.455%. The 10-year benchmark Treasury note rose for just the 3rd time in the past 10 weeks, gaining 17/32 on the week with its yield falling back to 4.465%. Bond prices up means yields were down - or, the bond interest rate if bought at that price.

Friday in New York, the dollar bought 117.57 yen, down from 118.15. The euro fell against the dollar, trading at $1.0890, down from $1.0921. With recession now tolling in France and joining Italy and Germany, with a 2nd consecutive quarter of lower GDP, the dollar has been in a recovery rally against Euroland recently as it trades down from the 1.12-1.13 area.

INDEX OUTLOOKS -

My mother used to hate it when her supermarket changed the aisle merchandise around and she had to slow down her rush through to find stuff. What does this have to do with my Index outlook? - nothing and everything, as I go in order of interest through the Index charts this week.

TECH RULES -
Nasdaq Composite (COMPX) - Hourly chart: Sometimes ya see a pattern developing beforehand, sometimes not. I didn't have this key upper trendline drawn here on Comp chart, but it sure is telling me a bunch with this chart breakout.

ONE - The main correction is probably over in the Nasdaq indices given the completion of the down-up-down common correction pattern - this pattern relates to the way the markets work and "wave" concepts in particular.

TWO - An important thing about the breakout of a triangle pattern is a minimum upside objective can be projected - this is as I say a "minimum" possible upside objective and not to be taken as a final objective for an advance like this and does not measure a time frame in which it "has" to occur, although that is usually within a month - weeks not months anyway. The upside objective implied for the Composite becomes to around 1880-1890 - just shy of 1900 as noted on the chart below -

Another point, as with any trendline, corrections can tend to come back as far as the trendline - to around 1720 right now - but shouldn't close under it, especially on a daily closing basis. Since the trendline slopes down over the coming week, lets call it 1700 - a close under 1700 is suggesting that what we saw last week was a "false" breakout or the pattern didn't have its predictive ability it often or usually has.

Any of you not having a sunny afternoon calling you outside like here, could peruse Trader's Corner articles I wrote on the subject I'll put these references at the bottom, so as to not agitate dear readers who want to move on NOW - spoken like a true trader.

As far as looking to where being long options is favorable, unlike maybe the futures, buying calls or puts in the middle of a relatively narrow expected range doesn't offer the needed potential for a sizable move - unless there is breakout to resolve the trend, but this doesn't seem likely anytime soon.

SOX STILL ROCKS -
If you want to know why the Nasdaq, Nas 100 and QQQ rebounded, I see it as the influence of the chip stocks. To revisit the Semiconductor stock index (SOX) chart, see the chart below -

The SOX is looking quite strong and is exerting influence on tech stocks in general as it is prone to do. A close back under its trendline - call it 360 to cover all of next week - would be a bearish technical development. Otherwise, look for SOX to climb higher, maybe after one more dip to the 400 area.

Reinforcing the idea that the Chip index is due for a pullback is the oversold level reached on the 14-day RSI as seen above.

SMALL CAP RULES TECH -

Within Nasdaq, the smaller cap tech stocks are getting played in a significant way. Because of this, I suggest paying greater attention to how the Russell 2000 (RUT) acts in the coming weeks. I would anticipate, if the RUT is on a bullish track here, for any corrections to hold at and not close below the prior peak - (prior resistance, once pierced, "becomes" future support).

S&P 100 Index (OEX) - Daily chart:
My principal sentiment indicator, that of the daily volume ratio of the equities calls to puts, had one spike into "overbought" territory as noted below; i.e., a reading above the red line. As typical of this indicator, a correction followed.

No triangle breakout similar to the Nasdaq was seen and the OEX reversed in the area of its resistance trendline. In August it takes substantial institutional buying to create upside follow through above resistance areas and these folks are not likely yet convinced that its time to throw more money at stocks without further evidence of a stronger economy and a solid upward trend in earnings.

As before, would treat this Index as a trading range affair still and buy down neat 489-490. If former resistance at 500 becomes new support, then the lower level of the trading range has ratcheted up some to 500 - 510 for the time being.

I suggest buying calls at the low end of whichever range, epecially if the RSI gets back to a more fully oversold reading again, such as to around 35. A sideways trend will tend to keep the oscillator type indicators into at least neutral or midrange readings. I like to go into a more substantial position when the price is right (at the low or high end of a range) and when the RSI is at an extreme. That's the ideal - not always realized, but when it is, its worth waiting for.

Dow Industrials Index (DJX.X)- Hourly chart:
The Dow has failed or reversed its rally after getting up the 9500 area. The true and best tip off for a reversal was when the hourly DJX RSI (21 Length setting) was heading lower as the Index was heading to a new high. Buy puts into those kind of rallies, even if there was a breakout. False breakouts happen often enough to trade against them. But, price/RSI divergences tend to have an even higher degree of trade reliability as a reversal type "signal".

93 is must hold technical support now in my estimation. The new range may be for a while, at 93 - 95 and I am trading accordingly.

Nasdaq 100 Tracking Stock (QQQ) - Daily and Hourly charts:

Basis the daily chart, the Q's got back into what was their broader uptrend channel - the question is whether they can hold into that channel now and start a renewed advance. Time to go to the hourly charts -

I would note on the daily chart above, that the stock is into overbought stochastic readings and the daily trading volume has not picked up as much as I would expect if this rally was going to really take off just yet. Time for more backing and filling probably - stay tuned!

I expect a drift lower unless the Q's immediately pop back above the prior high at the red dashed line. If 31.5-31.7 holds as support, then I suggest buying the stock again for a pop, especially if the stochastic is down to the bottom again.

The stock could come back to the 30 area again and not change the overall bullish chart. I am thinking that a 31 to 34 range is shaping up for the coming 2-week period. I will feel more confident buying the stock for other than on a quite short-term basis (e.g. 1-2 day periods) when we get into September, where there is propensity to rally on a seasonal basis.

Of course, we got to get past Sept. to get Q3 earnings, but a strong rally could develop on the expectation of better earnings if the economic reports continue to show a pick up in the recovery.

Good Trading Success!

OF POSSIBLE INTEREST:

Wave analysis in price trends; part 1
http://www.OptionInvestor.com/traderscorner/tc_120502_2.asp

Wave analysis in price trends; part 2
http://www.OptionInvestor.com/traderscorner/tc_121202_2.asp

Wave analysis in price trends; part 3
http://www.OptionInvestor.com/traderscorner/tc_121902_2.asp

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