Option Investor
Index Wrap

Financials provide the catalyst for new highs

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An upside earnings report from broker Bear Stearns (NYSE:BSC) $76.20 +5.14%, and upgrades on banker Citigroup (NYSE:C) $46.65 +3.8% and consumer credit lender Providian (NYSE:PVN) $12.00 +5.72% ignited gains in the financials and gave boost to the major indices, which closed at new highs.

The strength from the financial sectors couldn't have come on a better day if the major indices were going to push to new highs after an August book-to-bill reading of 0.91 ($91 in orders received for every $100 of product billed) found renewed talk of overextended valuations in the technology arena early this morning, and had the major indices opening mixed.

A Reuters survey of five major Wall Street firms showed the average expectation of a book-to-bill ratio of 0.98, in a range of 0.98 to 0.99, which had August's b-to-b of 0.91 well below analysts' estimates. Semiconductor Equipment and Materials International (SEMI), a group whose members sell tools used to make semiconductors, said the three-month average of equipment billings, or the value of chip-making gear accepted by customers and booked as revenue, was $789.9 million, slightly above the revised July level of $785.9 million and 21% below August 2002 billings of $995 million. The Semiconductor Index (SOX.X) 461.99 +0.75 gained 3.4 points in today's trade, after a morning decline to 449.92 found rising 21-day SMA (450.19) support.

Here is a closing market screen capture of today's major index and sector action, with new 52-week highs marked with a green arrow.

U.S. Market Watch - (Q-charts screen capture)

There was plenty of "umph" in today's session and all it may have taken to provide a catalyst for the S&P Banks Index (BIX.X) 310.90 +1.99% to quickly negate the observation of a potential head/shoulder pattern developing, was the mentioning of that pattern in last night's Index Trader Wrap, but more likely the plethora of upgrades and strong earnings from BSC. An intra-day bar chart of the BIX.X would show that during any 30-minute period, the BIX.X never witnessed a trade below its prior 30- minute interval, as the sector found steady buying throughout the course of today's trade. This intra-day observation was closely mimicked by the major averages, except for the 30-minutes either side of today's 12:00 PM EST release of the September Philadelphia Fed report was released, where traders seemed to take some time check gains against a potential negative reaction to the economic report.

I'm going to show a chart of the shorter-dated 5-year YIELD ($FVX.X) in a moment, as I think it shows a little more "defensive" response from the bond market after the Philly Fed report than equities did. With some handsome bullish gains under a bull's belt from Tuesday's post-FOMC, this shorter-dated bond (less risky than the 10 and 30-year maturity) may be the bond for traders to monitor early tomorrow, as it relates to some levels in the matrix tomorrow. I'll set this up in a moment, but lets first look at the Pivot Matrix.

Pivot Analysis Matrix

When reviewing last night's comments regarding the potential for a pullback in equities at today's open and an option expiration push higher, using the OEX chart as an example, we didn't get the weakness to the DAILY S2's, but we certainly saw the swoosh higher. The 10-year YIELD ($TNX.X) did trade its DAILY S2 and so did the U.S. Dollar Index (dx00y), but the swoosh higher in both prior to stocks opening for trade may be something to monitor against tomorrow morning, where I think there's a pretty good likelihood we should be monitoring stocks for a pop and then some digestion of gains for a pullback.

WEEKLY R2's are in play for the INDU, SPX and OEX as correlative points in the DAILY R1 and WEEKLY R2, as well as the SPX's MONTHLY R2, which has three levels of resistance for SPX at 1,043-1,044, where this would simply be a level where some institutional computers that may have been buying WEEKLY pivot to feed stock out. I'm not really thinking that we're looking at mass selling at an SPX 1,044 level, but I'm not overly confident there would be a high degree of buying after a strong move from Tuesday.

I've bold greened the WEEKLY Pivot correlations as stronger support, and green-dashed the WEEKLY R1's, which were broken to the upside in today's trade, as more tentative levels of support. At the DAILY SPX pivot, that's colored pink to simply tie in with our fitted retracement on the SPX chart, shown in last night's wrap. I will note here that the 1,036.81 level, which is the 61.8% retracement from our fitted retracement bracket served resistance on two intra-day tests (11:45 AM and 12:50 PM EST), but was eventually broken to the upside later this afternoon at 01:30 PM EST.

I do NOT think the major indices would see a trade tomorrow at the more formidable levels of correlative support (WEEKLY Pivots), but lets carry this observation into next week support levels. Here's my mindset.

According to the Stock Trader's Almanac, September Triple Witching has shown the Dow Industrials trade down 8 of last 12 years. Mindset: Possible for the INDU to trade 9,700 early, then fade after a WEEKLY R2 achievement (might also finds SPX at/near 1,043).

I want to show you the past four-weeks of Pivot Matrix data. I'd like to show more in a single chart (I'm limited vertically due to screen height), but see if you agree with this observation of how institutional computers may be working at the WEEKLY R2's and WEEKLY S1's, as they feed stock out at R2, and replenish inventory at S1.

Prior 4 weeks of WEEKLY Pivot Matrix -

Our current WEEKLY Pivot Matrix levels would be shown just below this chart, but doesn't it seem to be a bit of a pattern that during the week of 08/18 to 08/22 the indices traded WEEKLY R2, then the next week (08/25 to 8/29) a trade at or near WEEKLY S1 was seen, then a week later (09/02 to 09/05) a trade at WEEKLY R2 and then a week later (last week) a trade at WEEKLY S1.

As of today's close, were getting closer to the WEEKLY R2's again.

Here's a quick look at an intra-day chart of the shorter-dated 5- year YIELD ($FVX.X) chart on 5-minute time interval. The retracement shows is the technique of simply marking the 5-minute opening bar, measuring that range, to build some intra-day levels higher. We did this in the cash SPX this morning in the market monitor, with early thought that a move above SPX 1,027.29, which happened to be very close to the DAILY pivot would be bullish.

5-year YIELD Chart - 5-minute intervals

While Treasuries found buying at their open (reaction to SEMI book-to-bill), they started reversing that buying into stock's opening traded (helped by WEEKLY jobless claims 399,000) and then mirrored stocks up to the 12:00 PM mark. That's when we saw some intra-day divergence, where Treasuries seemed a little more defensive than stocks. I'm using this divergence to only be alert for selling in equities at the WEEKLY R2.

How could stocks continue higher while YIELDS slipped lower? I think short covering. Hey, when I'm on the wrong side of a trade and its price is moving against me, I don't really care what the heck is going on elsewhere, especially if I'm short, my wrong trade is moving against me at 52-week highs, with little overhead supply to keep things in check.

I'm running way late, so lets whip through the charts real quick. Let us also try and view Stochastics in similar comparison to what I noted in the WEEKLY Pivot matrix comparisons for the prior four weeks.

S&P 500 Index Chart - Daily Intervals

Nice gains for the SPX this week. Looking a little overextended now from its shorter-term 21-day SMA and nearing MONTHLY R2 and WEEKLY R2. Should look for formidable support next week at the 1,020 level, especially with banks showing some life and helping confirm the SPX's new highs in early September.

Can the SPX make a break above the 1,044 level? You'd better have thought yes. And a good index to test against is the Dow Industrials. Note that the SPX's WEEKLY and MONTHLY are aligned, but how bullishness above 1,044 could build, especially from short covering, should the INDU clear WEEKLY R2 of 9,702.

Dow Industrials (INDU) Chart - Daily Interval

Traders might use the Dow Industrials as their "psychological" index and right now is damaging bearish psychology. We'll get new WEEKLY levels next week, but at current trade, the WEEKLY levels will be moving higher and 9,702 may not be present. It is entirely possible with MACD just turning above Signal today, and the INDU getting some serious momentum behind it that 9,800 isn't out of the question. As the Dow marches higher, it should further improve investor confidence. We know that when confidence gets "too high" during a move it is more like greed. As such, a bull need only control that greed and pay themselves at some point.

I think INDU traders keep an eye on the SPX and perhaps Treasury YIELDS. I do NOT think a bears wants to see too much Treasury selling as that just creates liquid cash, that could flow to equities.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

I think the SEMI book-to-bill data might take some BULLISH steam out of the QQQ, but what BEARS are pressed to do is another problem entirely. There's no telling how long, or powerful short-covering can drive a security. Recent QQQ pullback have been short-lived, but I view support as being firm back at the lower end of the current upward channel, and would we will now also monitor support at the now broken downward trend, which we've noted has been a rather eager bear short covering level on its re-test. The red downward trend that we've been cloning is at approximately $34.25 today, which I would line up with tomorrow's DAILY S1.

Jeff Bailey

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