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Index Wrap

Groping for gains

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The major indices traded in a rather narrow range as California's gubernatorial candidate Arnold Schwarzenegger, and his past improprieties on "rowdy movie sets" more than a decade ago, received more coverage than the 0.8% decline in August factory orders and a weekly jobless claims report that continues to hover around the 400,000 level. A level that economists say is the waterline for an improving or deteriorating job market.

The August factory orders news is considered "old" data these days where greater focus will be given to tomorrow's nonfarm payrolls data for September, where economists are forecasting the economy to have lost an additional 25,000 jobs in September, after losing 93,000 in August. Perhaps the weekly 399,000 new filings for state unemployment claims, a smidge under the 400,000 level, was enough to have the broader S&P 500 Index (SPX.X) 1,020.24 +0.19% gaining 2-points by the close.

If economists' are correct in their monthly nonfarm forecasts it would be an 8th consecutive monthly decline for nonfarm payrolls, where a recovering U.S. economy would have lost 635,000 jobs in the past 8 months.

If today's trade lulled anyone to sleep, the get out those smelling salts, as you may want to be sharp tomorrow!

Tonight I want to lay out a little plan and build some observations that may help keep a trader calm, when before the opening bell, the markets are going to get September nonfarm payrolls, September unemployment rate (forecasted at 6.2%, up from August's 6.1%), September hourly earnings (forecasted +0.2% from August's +0.1%) and September's average hours worked per week (forecasted 33.7 hours from August's 33.6 hours).

While I strongly suspect the pre-market economic reports will grab the day's headlines, at 10:00 AM EDT, ISM Services (non- manufacturing) are forecasted at 63.0%, down from August's 65.1% reading.

There are two levels I think a trader might want to monitor tomorrow morning AFTER the all the payroll data is announced, in order to judge a market's response.

If by the cash open at 09:30 AM EDT S&P futures are holding above 1,015.50, then I would have to hold a neutral to bullish bias. Below this level, the downside risk could immediately be found to 1,007.80 and from there, 1001.80. On the upside, a trade in the futures at 1,019.20 would be bullish in my opinion, where upside builds to 1,029.10.

Here's the layout for my DOWNSIDE, thoughts. While I'm bullish at tonight's close, here's my thinking.

December S&P futures (sp03z) - Daily Intervals

This is the same chart of the S&P futures (sp03z) we put together several weeks ago after the S&P 500 broke to new highs. The reason I say I carry a bullish bias into tomorrow's session, is the ability of the futures to hold above 1,015.50. If the MARKET is trading these levels, then it made some sense yesterday that a break higher at sp03z had upside to 1,015.50, the next level higher. Right now, it makes sense that futures above 1,015.50 has upside to 1,029.10.

With that chart in mind, where the blue retracement still give us further upside targets, if the S&P 500 decides it want to break to another 52-week high, lets look at a futures chart, and lets just pretend that the recent 52-week high is THE high for the next several months, and lets say that the recent high and Tuesday's low becomes a more critical near-term range, and use the more CONVENTIONAL approach to retracement.

Regardless of what retracement you use, make NOTE of 1,007 and 1,029.

S&P futures (sp03z) - Daily Intervals

Here's the same S&P futures chart (sp03z), but this time I'm showing the more conventional use of retracement. Even with this retracement, it would appear a bullish bias was carried into today's close, as this futures contract was able to close above 1,019.20. The little black tick you see as a bar, is tomorrow's session already underway. Do you see some of the commonality at 1,029 and 1,007 in the above chart, that also presents itself in the first chart, using our fitted retracement technique?

The reason I think there's a pretty good chance we could see a trade at 1,029 right now, and continues to be a test of early and mid-August is represented by the PINK circles I've drawn. See how in August, when the S&P 500 rebounded from the 981 level, it traded 5 PINK circles higher, before it ever came back through (below) a prior level? Today's trade and ABILITY to CLOSE 1,019.20 would be a 4th level of upward trade. This would be a pattern we might look for DUPLICATION.

Follow that first pattern of PINK circles. How many levels lower did it trade, before a new high was set. I count 3. But look at the CLOSE. See how the futures never CLOSED below that 1,007.29 level? On an intra-day basis, the futures ALWAYS seemed to want to close above the third level lower and perhaps there was just too much demand still in place.

The reason I have a RED lower arrow below 1,007 right now, is that we've only seen 4 upward levels traded, and a trade below and CLOSE below 1,007, would be DIVERGENCE of the August pattern.

I point this out, for one reason. Some traders may be playing the SIMILARITY pattern from August based on the pivot levels.

Note that in the above chart, I've calculated the difference between today's S&P futures (sp03z) settlement, and the S&P 500 Index (SPX.X) 1,020.24 cash close.

In tomorrow morning's 09:00 AM EDT update, I'll report what stock futures are doing at the time of writing and all you need to do is add about 0.64 to the futures number, to figure out where the cash will open at 09:30 AM EST.

Here's tomorrow's Pivot Matrix. Remember.... 1,007 and 1,029.

Pivot Analysis Matrix -

OK... so 1,007 and 1,029 don't show up EXACTLY in the MATRIX, but I've highlighted some very close correlations, where within 2 or 3 points, these two levels become rather important, and I think the SUPPORT levels and WEEKLY/MONTHLY pivots become VERY important tomorrow.

It would be my opinion that some of the slight softening in economic data will place GREAT emphasis on the nonfarm numbers tomorrow.

The scenario for gain to WEEKLY/MONTHLY R1's is if the nonfarm data comes anywhere close to economists' forecast, it may be just enough to get the bid higher and keep investors/traders hanging in their for one more week, where a bull gets his/her trade target of WEEKLY/MONTHLY R1.

However, a miss on the data may have some of last night's mentioning of trader talk that mutual fund managers are now playing more short-term moves, looking to pad buy side results with more modest gains, and we see the markets get "flushed" back lower, and thought begins to build that this rally is a failed rally, and the SPX gets pushed back below the WEEKLY/MONTHLY Pivots.

Where the futures come in, I think, is if things get flushed back lower, then a futures CLOSE below 1,007 then has our CASH MONTHLY R1s in play.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Interval

I received several e-mail from traders asking if we should "believe" the QQQ break above the WEEKLY/MONTHLY pivots, or even "believe" today's advance as it came on light volume.

Under the scenario that a bull plays the SIMILARITY of the August rally, the decline in volume might well be a good sign. While today it is easier to say that in August, the QQQ may have simply been "sold out" and that the light volume rally was simply due to lack of sellers.

At some point, the QQQ will not lack sellers, but I thought a trader should trade the QQQ's long on today's move back above the WEEKLY/MONTHLY pivot resistance. A jittery bull, like myself, could follow with a tight stop under today's low, especially if looking of any DIVERGENCE to the past, where in August, when the QQQ began its rebound, the QQQ didn't trade below a prior day's low until August 25, when the QQQ traded below its Friday, August 22 session low of $32.33.

And a bullish stop under today's low, or even the recent lows might not be a bad idea as the NASDAQ-100 Bullish % ($BPNDX) saw a net loss of 2 stocks to a point and figure sell signal. This has the bullish % falling 2% to 72%. Still "bear confirmed."

S&P 100 Index (OEX.X) Chart - Daily Intervals

I think traders should continue to notice the "distance" between the QQQ/NDX and its weekly/monthly pivot and the OEX/SPX/INDU and their WEEKLY/MONTHLY pivots.

One shorter-term trader was "smart" and after having taken a bullish trade in the SPY yesterday, sold that trade and decided to rotate to the QQQ. His thought was... "if they're going higher, why not play follow the leader."

That thought will be tested tomorrow. The reason I think this was "smart" is that he at least booked a profit in one trade, and didn't overleverage to the bullish side.

Today's trade saw the narrower S&P 100 Bullish % ($BPOEX) see a net gain of 1 stock to a point and figure buy signal. This has the bullish % edging up to 79%, but still reading "bull correction" status. Right now, it would take a reading of 84% to have this bullish % reversing back up to "bull confirmed."

The broader S&P 500 Bullish % ($BPSPX) saw a net gain of 0.2%, so a net gain of 1 stock to a point and figure buy signal was found. Still "bull confirmed" and edging back up to 77.2%.

Dow Industrials (INDU) Chart - Daily Intervals

The INDU came into our zone of near-term resistance and closed about as close to its now rounding flat 21-day SMA, without closing right on it we could possibly have imagined. Today's trade was hardly that of a "rowdy movie set," but grab you popcorn and a soft drink, as I think tomorrow's trade has the potential of a quick hitting action film!

Today's trade saw a net gain of 1 stock to a point and figure buy signal as the very narrow Dow Industrials Bullish % ($BPINDU) rose 3.33% to 83.33%. Still "bull correction" status and would take a reading of 86.66% to reverse back up to "bull confirmed", while a reading of 78% would be further internal deterioration to "bear confirmed" status. Do you sense the range in the bullish % too?

Caterpillar (NYSE:CAT) $72.70 +1.90% was the Dow component and the OEX component and most likely the SPX component that gave the "buy signal." Remember how CAT had achieved a prior bullish vertical count of $72, traded $73, then eventually gave a "sell signal" at $68? It has now reversed back up on today's news it may be in line to win an Iraqi reconstruction bid. Today's buy signal now has the stock building a bullish vertical count to $81, and this type of bullish count may indeed be a "new revelation" that has the MARKET thinking higher prices are in store for the CAT.

Jeff Bailey

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