Option Investor
Index Wrap

Let's make sure they work

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I'd call today's rebound for stocks a "jaw dropper" as the Dow Industrials (INDU) 9,469.13 +2.09% jumped 194 points in today's session, and on the first day of trading in the new quarter, bulls quickly tested the new quarter's program trading-collars, which restrict index-arbitrage trading on a Dow Industrials advance or decline of 180-points.

Today's rally was a roof raiser, especially for the homebuilders as the Dow Jones Home Construction Index (DJUSHB) 497.14 +6% surged higher by 28 points to a new 52-week high. The advance to record highs came after a rather modest 0.2% gain in construction spending in August, but some stability from the Mortgage Bankers Association reporting its weekly Mortgage Applications Index rose 1.1% in the latest week. The surge in the DJUSHB is both impressive and perplexing considering the weekly data showed the purchases index portion of the overall index (includes all mortgage applications for the purchase of a single family home) fell for a second-consecutive week.

Mortgage Bankers Association - Weekly Statistics

We've looked at this set of data before, but today's strong performance for the homebuilders comes despite the subset Purchases Index slipping for a second-straight week after rebound from its August 27 report. It would be my analysis that the homebuilders are experiencing major short covering on today's technical breakout, or as is many times the case, accurately predicting growing demand on a decline in mortgage rates. I've been keeping track of the MBA's weekly reports as to the national average 30-year fixed mortgage in the column (30-yr Fixed) and have highlighted the trough level found in mind-June, the recent peak high at the August 6 report, and last week's average 30-year fixed rate average of 5.67%, which was reported today. It would be my thought that should we see anything close to 5.0% on this decline in mortgage rates, or Treasury YIELDS, we should look for SELLING in Treasuries at or just above those levels. I also take a reading each Friday of the 5-day Average 10-year YIELD, which I think depicts a week's average 10-year YIELD.

If I were to point to one economic positive taking place, it would be the stability of the subset Refinance Index. I've noted the 45.5% jump from the September 10 MBA report, and in past commentary we followed up after the 15.4% decline, with the thought that the 15.4% decline was not overly concerning after such a large jump the week prior. Traders can review their 01:00 PM EDT intra-day update from September 17. http://members.OptionInvestor.com/intraday/091703_3.asp

The stability from the refinance index, while nowhere near the levels found in mind-June can be viewed as a positive, especially in the wake of a still weak job market, where some homeowners may be taking the opportunity to pull some liquidity from their homes, which may eventually find some of that money firming consumer spending.

The S&P Banks Index (BIX.X) 311.74 +2.37% also make a strong move higher in today's session and broke above the correlative 308-309 resistance levels in its WEEKLY/MONTHLY pivot levels, and here too may be a strong response from the banks on stability in the Refinance Index statistics.

An individual name that traders might want to monitor for strength near-term is shares of Washington Mutual (NYSE:WM) $39.26 -0.27% for strength above $40.00.

Dow Jones Home Construction Index (DJUSHB) - Daily Interval

The MARKET didn't seem too concerned about a housing bubble at this point. In yesterday's 03:15 PM EDT intra-day update I made brief comment of the homebuilder looking to break out from congestion and today, if there is a housing bubble in the future, it was filled with one heck of a lot of helium today and looks well positioned to rise to an altitude of 527.

I've listed the various DJUSHB components in the above chart.

As we review today's action in the pivot matrix, I think tomorrow's test for further upside will have to come from the NDX/QQQ and this would relate back to observations and thought made in early August. The INDU/SPX/OEX did their job today for bullish gains and showed strength above the correlative WEEKLY/MONTHLY pivots. Tomorrow, it would be rather important, that the NDX/QQQ follow this technical move.

Pivot Analysis Matrix -

I've "dashed green" the WEEKLY and MONTHLY pivots for the SPX/SPY/OEX as tentative support tomorrow as they were traded through to the upside today, but should now be viewed as near- term support tomorrow, should some giveback of today's rather impressive gains be found. An original upside target for the SPX on a break above 1,010 was viewed at 1,025 and we see multiple correlations in the matrix scattered around the 1,025 level, with perhaps greater emphasis of this level coming from the Dow Industrials (INDU) at its DAILY R1 and WEEKLY R1.

In PINK, I've emphasized how the S&P Banks Index (BIX.X) may be leading in the pivot matrix, and with the BIX.X closing just above its September relative highs of 311.44 at today's close, has the BIX.X looking like it wants to mimic the Dow Jones Home Construction Index (DJUSHB), if not at least test its 52-week high of 317.94, which was set on July 14th. That very 317.94 52- week high would be very close to the BIX.X monthly R2.

Sometime a market can have a very short memory. I, and hopefully you, have not forgotten some of the issues that may be in play as it pertains to the weaker dollar. As I type, the U.S. Dollar Index (dx00y) 92.29 -0.6% continues to weaken in today's trade. In this morning's 09:00 Update, it was noted that business in Japan made comment in the tankan sentiment survey, that there was concern among Japanese-based businesses of the yen's rise versus the dollar, which might have some businesses being less optimistic about the future, than those views expressed during the survey. December yen futures (jy03z) showed the yen gaining against the dollar today at 0.906 +0.72%. Meanwhile the December euro futures contract (eu03z) 1.1686 +0.55% are nearing a contract high of 1.1804, set on May 29.

As an alert to any currency-related action, I'm going to also set a 10-year YIELD alert at the 3.903% YIELD level from the DAILY S1, which I would use as an alert to equity weakness. Here's why.

One comment I read today at Briefing.com, was there mentioning that when they asked some of their contacts on the floor, which are in touch with several buy side mutual funds, and for the most part, the general tone was that the main strategy for fund managers is to protect their year-to-date gains, where many are not looking to further commit funds in October, but now take on more of a short-term focus, in an attempt to at times pad gains with shorter-term trading.

And those comments, is perhaps where I think it somewhat important that the NDX/QQQ follow the INDU/SPX/OEX moves above their WEEKLY/MONTHLY Pivot resistance levels tomorrow.

The only trade I see a BEARISH trader looking for tomorrow, is for the NDX/QQQ to struggle at the pivots, and find a reversal lower in the INDU/SPX/OEX back BELOW their WEEKLY/MONTHLY pivots, which would be a sign of a failed rally attempt in today's session. Should this type of action unfold with a further weakening dollar as it approaches the summer lows.

There is building concern amongst traders and some institutions regarding what is going on with the dollar and its potential impacts on global markets.

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

Striking similarities found in early August (oscillators, moving averages, SPX/OEX/INDU trying to lead a rally, QQQ still pullback range) and while the SPX did hesitate intra-day right between its MONTLY pivot (1,008.86) and WEEKLY pivot (1,009.74) its was notable that when the SPX moved into that range, it began finding support at the monthly pivot, and when the break higher of 1,010 came, further gains in the afternoon built to the close. With some formidable looking resistance now nearing the 1,023 level, the SPX is counting on the QQQ for strength as the SPX tries to lead.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) edge up 0.2%, so a net gain of 1 stock to a PnF buy signal was seen. Still "bull confirmed" at 77.00%.

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

I would expect bulls to POUND a move higher at $33.25 in the Q after today's break higher in the SPX/OEX/INDU above their WEEKLY/MONTHLY pivots and try to get a short-covering rally to take hold in the Q's. It is this expectation that becomes the test in tomorrow's trade. In Monday's Index Wrap, I touched on the similarity a QQQ trader might look for in the QQQ, and so far, history looks to repeat itself.

But be ALERT to DIVERGENCE from the past. It took some guts, or selling to keep the QQQ's below the $33.22 and for August history to have a shot at repeating, I think the QQQ's need to see the break above $33.23. As a note, I changed my QQQ intervals to 1- minute intervals and the QQQ traded $32.23 for two-minutes at the highs of the session, which came at 03:42 PM EDT. This was AFTER trading curbs were in place at 03:26 PM EDT. Somebody, not institutional computers, were selling the Q's at this level ($33.22) so I still deem it resistance.

With the banks looking to heat up, there may be some bulls that did take partial positions in a bullish trade on today's break, where a partial position made sense considering some of the currency issues currently at hand. Let's use the OEX chart and one of our old upward trends as a good upside test of resistance, should the banks really catch fire and break to new 52-week highs.

On a further rally follow through tomorrow, to WEEKLY R1's, here's a way I think a bull could try and let things run a bit, but still snug up a trailing stop if the current move underway is simply a short-term mutual fund trade as discussed in the Briefing.com discussion.

Today's trade saw a net loss of 1 stock to a point and figure sell signal in the NASDAQ-100 Bullish % ($BPNDX). This was enough to have this bullish % reversing BACK LOWER to "BEAR CONFIRMED" status at 74%.

KEEP THIS IN MIND AS IT RELATES TO THE WEEKLY/MONTHLY PIVOT RESISTANCE!

S&P 100 Index (OEX) Chart - Daily Interval

The test for further gains in the OEX in my mind is to see the NDX/QQQ participate further. However, the BIX.X gains today were impressive and ANYTHING, I mean ANYTHING can happen when a group of stocks breaks to new highs (see today's DJUSHB). An OEX bull that may have taken a partial new bullish entry in the OEX on the break above 507 and WEEKLY Pivot of 506.53 sees 513.70 as resistance, but should the financials really catch fire, then OEX 520 not out of the question. A trader holding 1 OEX call may not have the flexibility to take a profit at/near the 513 level on strength as a trader holding 2 calls, where 1 call option might be sold to book a profit, and hold the other for potential further gain. One way I'd look to trade a 1 call position, would be to raise a profit stop under the WEEKLY 38.2% retracement, should the OEX advance to test the WEEKLY R1.

Today's trade saw no net change in the narrower S&P 100 Bullish % ($BPOEX). Still "bull correction" status at 78%.

Dow Industrials (INDU) Chart - Daily Interval

In last night's Index Wrap I thought a trader might look to sell strength on a INDU rally back to 9,500. I can't say the bearish side of me after today's trade is excited to sell short or buy put at 9,500, but some of Briefing.com's comments do lay some groundwork where if it is true that buy side mutual find managers are only looking to pad some yearly gains, the a trade near 9,535 and QUICK reversal back below 9,500 may be first alert to this type of trade philosophy actually being in play. Further weakness back below the MONTHLY Pivot, in my mind, would be larger confirmation that the buy side is becoming more conservative.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" at 80%.

I think we must ALWAYS be skeptical of what a floor trader says. I'm sure Briefing.com has some trusted sources, but I'm always a little skeptical that a floor trader telling me one thing, is to serve his/her purpose for being on the other side of the trade.

Jeff Bailey

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