Option Investor
Index Wrap

The best offense is a good defense

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In sport, it has been said that the best offense is a good defense. While investing or trading is not considered a sport, but parallels can be drawn, bulls showed they were willing to defend a stronger-than forecasted second quarter gross domestic output of 3.1% despite still-weak news on the jobs front.

While stocks found an early bid from this morning's GDP data reverse into losses with a flat July Help-Wanted Index reading of 38 (below forecast of 39), and the Labor Department's July Mass Layoffs statistics still showing larger employers trimming staff (2,087 layoffs in July, no forecasts available), equity bulls seemed only happy enough to buy the dip and then build a recovery into the close, driving stocks to their highs of the week, almost laughing at a bears claim that a light volume rally means nothing.

Some traders old enough (like me) to remember on of the most feared defenses in American football, will remember the Pittsburgh Steelers Steel Curtain Defense of the late 70's. While the Steelers' had some offensive weapons, it was the defense that struck fear in the hearts of the opposition, and establishing favorable field position for the offense to launch its attack.

And no sooner could I comment in today's market monitor that the Dow Industrials (INDU) was back to test its WEEKLY S1 for a second time this week, and then start writing today's 11:00 AM EST update, that 30-minutes later the bulls had defending and by sessions end, had the Dow Industrials at its WEEKLY Pivot of 9,390 before the close. And I must say, things were NOT looking good for the BULLS, based on some observations and thoughts I had outlined in last night's Index Trader Wrap regarding the U.S. Dollar.

Market Monitor Notes - 10:19 AM - 10:26 AM EST

There was sign of the "pump and dump" early and I was going through my checklist of notes from last night's Index Wrap and it looked like certain things (dollar/INDU) were at an important level of support. The lower YIELD and slight bid still holding in gold had me thinking "deflation?" Only because the Chain deflator for July came in at 0.9%, not 1.0% or higher.

Linda Piazza made a very good comment/call on her past observations with the OEX and accurately (within 1.04 points) was looking for support and an OEX bounce.

Tomorrow, I'm going to continue to monitor the U.S. Dollar Index (dx00y), which current trades 98.71 -0.15%. Remember, in the DAILY pivot matrix, I show H/L/C from the 09:05 PM EST to 03:00 PM EST trade. When the bond market closed at 03:00 PM EST, the U.S. Dollar Index (dx00y) was trading 98.84, so the dollar is a bit soft this evening.

Here's tomorrow's Pivot Matrix. BULLS look to have built a "Steel Curtain" at tomorrow's DAILY S2 and for the first time this week, pushed the DIA, SPX, SPY, OEX and BIX to their WEEKLY Pivots, making for a strong close. Tomorrow it may be a BEAR's turn to see if they can mount a defense.

Pivot Analysis Matrix -

Last night we thought it entirely possible that the indices might trade their DAILY S2 to DAILY R2 range, and all be darned if they didn't do that today. Those weren't big ranges, but the indices were pushed around, with bulls having the upper hand by the close.

In pink, all I'm trying to show is how the NDX/QQQ lows did NOT test their WEEKLY pivots as support, while the DIA,SPX,SPY,OEX and BIX.X all traded their WEEKLY Pivots of resistance for the first time this week. This action within the pivots gives me the observation of strength.

CNBC's Bob Pisani said today that he called some sell side trading desks, asking them what they thought of the rebound in stocks late this afternoon. The general comment was that it meant NOTHING on light volume.

This type of commentary has my e-mail full of questions from bulls and bears alike. "What do you (Jeff Bailey) make of today's trade considering it is on light volume."

I may have vented a little bit in today's 03:15 PM EST update, but light volume just means there isn't much interest. Again, lots of Wall Streeter's take this week off to get a last bit of summer vacation with their families. Visit them at the beach house before closing it up for the fall.

I'm not picking on bears, but gosh darn it, if it means nothing, then defend your stance, or show some conviction. Same comments would be directed to a buy side trader when early gains are reversed to losses.

While volume on the NYSE was still light at 1.12 billion shares, the NASDAQ turned 1.42 billion shares, its highest volume this week. From my breadth spreadsheet I tabulate daily, I averaged the last 30-day's volume where average volume on the NYSE has been 1.21 billion and NASDAQ volume has been 1.48 billion. The NASDAQ Composite (COMPX) 1,800.18 +1.66% closed at a new 52-week high today. That means something. There are few sellers.

The NYSE showed positive breadth by the close with advancers outnumbering decliners by 2258:955 with 187 stocks hitting new 52-week highs compared to 4 stocks at new lows. I have to go back to July 14th to find the NYSE new lows at just 4.

The NASDAQ Composite advance/decline wasn't as impressive, but still positive for a third-straight session at 1905:1234, while 259 stocks traded new 52-week highs compared to 14 stocks hitting new lows.

Next week, I'm going to be on vacation and will return on Tuesday, September 8th. I currently have no open positions in the indices, but have some bullish and bearish positions open in stocks (past September expirations) with sell profit/break even targets if they are hit while I'm tromping around in the mountains of Colorado, sleeping in a tent, and eating camp food that my dog Drake would turn his nose away from. My only contact with the stock market will be on Wednesday evening when I grab a warm meal and a much-needed hot shower at a tiny diner. You can bet I'll grab a newspaper and see how things are going, but more for curiosity sake than anything.

At tomorrow's close, I will update the Pivot Matrix for next WEEK and the MONTH of September. With just one day left in the trading week, I'm going to take a more general approach to some charts in tonight wrap.

Today's economic data may have some pockets of weakness still not filled by a recovering economy, but the bearish side of me could not hang its hat on any economic data that showed glaring weakness.

Yes, the jobs data continues to be weak, but it still appears that despite higher levels of bullish risk (per the bullish % charts), bulls are still holding onto their convictions that this last piece of economic data to turn positive in an economic recovery, that will eventually turn up, finds an improving Q2 GDP growth rate and the economy headed in the right direction.

If I have one devil's advocate comment regarding some economists' word of caution regarding the second quarter's GDP growth being due to increased government spending as the U.S. prepared for war against Iraq, it would be that history has shown how a war effort can lift an economy out of an economic slowdown. It could well be that the increased spending by the government is the very shot in the arm that was needed to stimulate growth, witch can then build on itself.

One chart we've discussed in the past is the S&P futures chart (sp03u) where we first built this chart in an "Ask the analyst" column (July 6, 2003). Based on this chart and making note of CLOSING levels, and using a rather simple IF, THEN, ELSE type of decision making, the S&P futures should not have been able to close back above 991.40 after it closed below 960.50 on August 5.

While I'm gone on vacation, I would view it BEARISH if this futures contract CLOSED below 991.40. Then and only then would I feel that bears are through talking about how bad things still are. While I have pointed out some things that I think bull's do NOT want to see (dollar/Treasury/gold/banks) take place, these are observations somewhat removed that might give early hint to weakness, where the higher levels of bullish RISK may warrant such monitoring of scenarios.

S&P futures Chart - Daily Intervals

For whatever reason, the S&P futures (sp03u) after refuses to close back below the 991.41 level. My explanation, based only on trading of levels, is that bears, which shorted the 991.40 level (like they should have) after seeing an August 5 close below the 960.50 level, are buying after seeing the futures contract hold a close above 991.40 and then trade 1,010.51.

Tongue in cheek I pose a question to the sell side. Are you trying to make be believe that its is only sell side traders that are on vacation and why volume is light?

Current view using this basic set of rules trading with the levels above, firm support at/around 970 and resistance 1,010.51. If bulls can hold a CLOSE above 1,010.51 next week, something they have not been able to do, then new highs are in store for the S&P 500 Index (SPX.X) 1,002.84 +0.6%.

In today's market monitor, I profiled a day trader's bearish trade in the SPY just below this morning's highs. This would have been equivalent to SPX 997.24 with a stop just above the morning high of 1,000.18. Treasuries were finding buying and while the dollar had not broken below the 98.50 level, I thought bears would defend the WEEKLY pivot as they had on Monday and Tuesday. While the SPX sat below its weekly pivot for the better part of the afternoon, at 03:00, right when the bond market closed, buyers took control and got the SPX to close above our downward regression. Bears calling it quits into the weekend? That's my guess, and I think sellers are going to sit on their hands and concede 1,010.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

If it is possible that only the sell side is taking the week off, then it certainly looks like bears have conceded the $33.30- $33.46 level and all the bulls that are still trading this week didn't feel it necessary to sell enough stock to get the QQQ to test its WEEKLY Pivot. QQQ did trade close to its DAILY S1 (2 cents shy) and session high was a penny shy of its DAILY R2.

Last night I drew a similar "bearish channel" for the Dow Industrials, by taking an old trend where resistance broken served support, and cloned it, moved it higher to a 52-week high trade. If bears have conviction that government spending was the main reason for a better than forecasted Q2 GDP, then at some point a bearish trend will hold. When the bearish trend has not held, its has served as support on the pullback.

Stochastics turned up and MACD is still trending higher. So are the QQQ. Support next week should be FIRM at $31.30.

Dow Industrials Chart - Daily Intervals

WEEKLY S1 and the rising 21-day SMA may have been important support today and by the close the Dow's WEEKLY pivot did hold resistance. The INDU did hover around 9,400 last week, spiked higher to fall rather quickly back to the 9,270 area. With the Dow still in a longer-term upward trend, a wavering MACD, which is back below signal gives a near-term tentative look. The 50- day SMA is starting to round flat and would probably take a move below 9,200 or the 50-day SMA to have MACD falling below zero, which then had 9,000 back in play.

Keep an eye on Caterpillar (NYSE:CAT) $70.65 into next week. I like to continue following strong stocks that have met a bullish vertical count. They can be exceeded and if they are, simply gives further thought at how strong a market/index may be. However, when some leadership stocks take a rest, an index or similar sector can do the same.

Have a great 3-day weekend and I will be anxious to see how things went next week!

Jeff Bailey

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