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Index Wrap

Thump, thump.... thump, thump...

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There was little pulse to begin the week of an option/futures quarterly expiration as the major indices flat lined for the bulk of the session to finish fractionally lower.

Coated-stent maker Boston Scientific (NYSE:BSX) $66.01 +7.5% received the bulk of today's headlines as the results of a long- awaited trial for its Taxus device, which is designed to open clogged arteries to the heart. The company has said that Taxus sales could read $2 billion in 2004. Trial results appeared to be favorable with a modes 7.9% of trial participants seeing reclosure, which compared favorably with 26.6% of patients who got older "bare" stents.

Boston Scientific's partner, Angiotech Pharmaceuticals (NASDAQ:ANPI) $49.70 +13.3% were also halted during the bulk of today's session, but surged $5.85 before their NASDAQ close. The Vancouver-based company had licensed rights to certain drug- delivery technology to BSX for use in the drug-coated stent.

A court battle is developing between Boston Scientific (BSX) and rival Johnson & Johnson (NYSE:JNJ) $50.84 -1.53%, as JNJ has filed a patent infringement lawsuit against BSX in Federal court seeking an injunction to block BSX from marketing the stent. SG Cowen analyst Matt Dodds said in a note to clients last week that he doubted JNJ would win an injunction before BSX could launch its Taxus stent. Still, Mr. Dodds cut his rating on BSX to "market perform" from "strong buy," saying FDA approval of Taxus will likely be delayed until April 1.

Economic data released this morning showed the NY Empire State Index jumping to a reading of 18.35 in September, which was well ahead of economists' forecast of 15.0 and August's reading of 10.0, but wasn't enough to jolt the indices higher as a modest 0.1% more national August industrial production gain and August capacity utilization, which still showed approximately 25.4% of the nations capacity sitting idle, at 74.6%, showed more anemic gains.

The capacity utilization data was still rather cool and showed little improvement from June's 20-year low reading of 74.1% and gives little economic indications to the Fed that any policy tightening is needed, as there's plenty of idle capacity still available to meet any resurgence in demand.

Economic data scheduled for release tomorrow comes in the form of August consumer prices. August CPI is forecasted to show a 0.3% gain, while the core rate, which excludes the more volatile food and energy components, is expected to rise 0.2%. Then at 02:15 PM EST, the FOMC's decision on interest rates should be announced.

A calm in the major indices before Hurrican Isabel (now rated category 4) is to reach landfall later this week near Cape Hateras North Carolina (current forecast) did see the S&P Insurance Index (IUX.X) 268.56 -1.1% fall 3 points, while building product retailer Home Depot (NYSE:HD) $32.78 +3.76% helped boost the S&P Retail Index (RLX.X) 356.70 +1.52% as coastal residents were said to be readying to board up windows and stockpile some last-minute construction materials and flashlight batteries.

Volume levels at both the NYSE and NASDAQ were above the 1 billion mark, but off recent sessions rate. The NYSE turned just over 1.13 billion share with decliners outnumbering advancers by a 9 to 7 ratio, while 131 stocks traded new 52-week highs versus 8 stocks reaching a new 52-week low. NASDAQ churned just over 1.44 billion share with decliners outnumbering advancers by an 8 to 7 margin, while 242 stocks hit new 52-week highs compared to just 8 stocks trading a new 52-week low.

Gillette (NYSE:G) $32.42 -0.82%, which makes Duracell batteries failed to hold an early morning charge of $32.75 and slipped $0.27 per share, while Energizer Holdings (NYSE:ENR) $37.65 +0.72% drummed up a 27 cents per share gain in today's trade.

Treasuries opened today's session with selling after the stronger-than-forecasted NY Empire State Index, but saw a slow reversal to buying with YIELDS finishing lower after the more national August industrial production/capacity utilization data was released. The shorter-dated 5-year YIELD ($FVX.X) fell 5 basis points to 3.106%, the benchmark 10-year YIELD ($TNX.X) fell 2.4 basis points to 4.245% and the longest-dated 30-year YIELD ($TYX.X) edged down 0.4 basis points to 5.171%.

Here's a quick look at the pivot analysis matrix, where the major indices found intra-day resistance on several occasions early at their WEEKLY pivots. While not entirely certain (can't prove this quantitatively) I do think there was quite a bit of covered call writing taking place in August in some out the money index calls in the then range-bound SPX/OEX (selling OEX 505) and some protective put buying to hedge a decline below OEX 485. I thought this as we witnessed an up tick in the Market Volatility Index (VIX.X) 20.25 (unch) in early August when the VIX.X rose for four-consecutive sessions from 21.22 to 25.66.

I mention this observation ahead of this week's triple witching expiration for quarterly expiration, where the 405 OEX level is dead smack between its MONTHLY Pivot and MONTLY R1, while WEEKLY S1 is 506.75. I'm not certain that institutions were selling some out the money covered calls on positions, but if so, we might at least be aware to some potential long stock selling of partial positions into expiration back near OEX 405, which would still be comfortably above more firm support of 500 and WEEKLY S2.

Pivot Analysis Matrix -

I've dashed red some correlative levels of resistance, where those levels were traded today, but looked to have served some resistance when the indices were trading in positive territory.

This week, the OEX shows some correlative 512 resistance at MONTHLY R1 and WEEKLY Pivot, where its WEEKLY S1 and WEEKLY R1 would mark last week's range. When we look at the bar charts with new WEEKLY retracement, there is really little change from last week and traders seemed to want to take a wait and see approach to things and perhaps wanting to listed to some of tomorrow afternoon's brief statements from the Fed.

My best guess is that the FOMC's comments will echo their last meeting. Improving signs of economic growth, with no inflationary pressures showing up as the jobs market along with past increases in productivity give ample room for expansion before inflation concerns arise.

S&P 100 Index Chart - Daily Interval

Economic data (aside from jobs) continues to show signs of recovery, but August industrial production is one of those glass half full and half empty reports. The negative view is that manufacturers are still hesitant to bring on production as if they don't see more robust demand. At the same time, we've seen inventories fall, sales increase, and this anemic August production should see September production accelerate.

One trader asked me if I had written any educational comments on WEEKLY and MONTHLY pivot levels, and how they should be traded.

I haven't, but will say that I believe, based on observation, that a LONGER-TERM trend or level, like a MONTHLY level (S2, S1, Pivot, R1, R2) may hold greater significance than a WEEKLY level, while a WEEKLY level, would be expected to hold greater significance than a DAILY level. Remember, the various levels are derived from MONTHLY ranges of trade, WEEKLY ranges of trade and DAILY levels of trade.

In the above OEX chart, I make note that the MONTHLY R1 (comes from August's high,low,close) Pivot of 512.53 along with the WEEKLY Pivot of 512.53 have correlative resistance in play right now. I didn't mention that the OEX's MONTHLY Pivot of 498.31 is quite close to this WEEK's S2.

I do note here that the OEX 500 puts (OEBUT) were actively traded today at 2,866, while the OEX 520 calls (OEBID) were saw 3,893 trade. Both contracts currently show largest open interest for month of September. My thinking is call and put selling with few days left to expiration.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Status remains "bull confirmed" at 88% bullish.

S&P 500 Index Chart - Daily Interval

Since I addressed a trader's question regarding overlapping WEEKLY and MONTHLY levels, I would also note that in the SPX, I worked through a different trader's question on August 10th in an Ask the Analyst column regarding his observation of QUARTERLY levels. Just out of curiosity sake, I went back an looked at the last SPX chart in that exercise and will note that the current QUARTERLY R1 is 1,044, which would still be very much in play. In that exercise we also continued to trade the prior QUARTER's levels, and I see where the prior QUARTER's R2 (June expiration) was 1,004 and could be BIG support into Friday's expiration.

Today's trade saw no net change in the broader S&P 500 Bullish % ($BPSPX). Still "bull confirmed" status at 81.2%.

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

Friday's intra-day reversal from the $33.05 level didn't quite get the follow through to $33.95 I thought it might late Friday afternoon in the Market Monitor. Volume today was about 1/2 of the last three-day's average, but I think bears will be pressed on a move above today's highs with an achievable near-term target of $34.54.

A bull isn't necessarily "crazy in love" with the QQQ having made a more than 10% move from the early August lows at this point, with MACD just crossing below signal at a past relative high reading for this oscillator and is counting on short-covering (in my opinion) to get the pop back near last weeks highs as Stochastics, which have helped fuel bounces, begins to turn higher.

In a trending upward or downward market, I tend to put more weight in the MACD that Stochastics, which tend to give better indications of a rebound in a sideways to range-bound trade. The QQQ and the Dow Industrials have been in more of an upward trend than the SPX and OEX.

Today's trade saw not net change in the narrower NASDAQ-100 Index Bullish % ($BPNDX). Still "bear correction" status at 78%.

Dow Industrials (INDU) Chart - Daily Interval

The Dow Industrials (INDU) lost a bit of its upward momentum last week when MACD edged below Signal and today's break of aggressive bullish trend has the rising shorter-term 21-day SMA of 9,437 the key technical momentum driver for bulls, otherwise Dow a bit vulnerable near-term to WEEKLY S1 of 9,368, which does a good job of marking the summer highs, when broken as resistance should serve support.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % (BPINDU). Still "bull confirmed" at 83.33%, where it would take a reversal reading of 80% for "bull correction" status and 78% to achieve "bear confirmed."

Jeff Bailey

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