Option Investor
Index Wrap

QQQ at Weekly S2

Printer friendly version

A bull's convictions are going to be tested tomorrow if tonight's after-hours trade is any indication.

While the major indices traded mixed as technology shares found selling, tonight's post-session reaction to software giant Microsoft's (NASDAQ:MSFT) $28.91 +0.06% quarterly earnings, finds the stock lower by $1.21, or 4.2%, and finds the NASDAQ-100 Tracking Stock (AMEX:QQQ) $34.17 -1.15%, which shed 40-cents in today's trade, extending those losses to $33.75, and its WEEKLY S2 in tonight's extended session.

Microsoft (MSFT) reported Q1 (September) earnings of $0.30 per share (excluded a 6-cent per share charge for stock compensation expense), which beat Wall Street's estimates of $0.29 (estimates excluded the 6-cent per share charge) and said revenues rose 6.1% year-over-year to $8.22 billion, which was also ahead of consensus estimates for $8.09 billion. In a press release issued by the company, Microsoft Chief Financial Officer John Connors said PC demand during the back-to-school spending season had been better than expected but corporate spending on information technology had been slower.

Microsoft's MSN Internet service, meanwhile, posted its first- ever operating profit bolstered by 50% growth in advertising sales.

Fundamental guidance for the company's second quarter (December) looked bullish and initially had the shares jumping to as high as $29.53 when first released. In print, and I stress print, the company said it saw Q2 EPS between $0.29-$0.30 (ex-items), which would be at the high end of consensus estimates for $0.28, and said revenues looked to be between $9.7-$9.8billion, which was also above consensus for $9.28 billion. For fiscal 2004, MSFT said it sees EPS of $1.10-$1.12 versus consensus of $1.12 billion, on revenues of between $34.8-$35.3 billion, where analysts have their estimates at $34.758 billion.

While I didn't listen to the company's conference call, Jim Brown evidently did as depicted by these comments in tonight's Futures Monitor.

Futures Monitor Post

I was confused by MSFT's comments in their conference call. In the recent quarter, they reported revenues that were slightly ahead of analysts' estimates, and for next quarter, guidance given was ahead of analysts estimate, and for fiscal 2004, looked to be in line.

Being totally confused by MSFT's "we missed the forecast...," I went back to guidance given by MSFT after it previous quarterly earnings report, where the company gave Q1 EPS guidance of $0.23, which included the 6-cent charge for stock compensation, so $0.29 per share, and said it saw Q1 revenues (just reported tonight) of $7.9-$8.1 billion, which at that time was above consensus of $7.89 billion. If MSFT "missed the forecast" then to me, based on July 17 guidance, they missed it to the upside.

I also checked the company's full-year 2004 guidance given on July 17. MSFT said it saw 2004 revenues between $34.2-$34.9 billion, which at the time was above consensus of $33.95 billion, and said EPS (excluding $0.24 for equity compensation) should be between $0.85-$0.87.

It must have been the phrase, "we are not expecting significant revenue growth for the rest of the year," that had the stock and equity futures falling in after-hours.

Anyway... the markets will sort this out tomorrow. Jim Brown posed the question of how much lower S&P futures (sp03z), which settled at 1,028.50 and below our fitted 19.1% retracement of 1,029.10 might fall, and I thought 1,015.50 might be a level where futures might find support in their overnight session.

S&P 500 Futures (sp03z) - Daily Intervals

I was perfectly willing to have a continued bullish bias based on yesterday's settlement in the S&P futures (sp03z) on a near-term basis, and one just never knows if the futures market settling below 1,029.10 was a tip of the hat for a negative response to MSFT's earnings report or not. Not that Jim Brown needs my opinion, but based on the above chart, I thought near-term risk now becomes 1,015.50, or 1,015.40 depending what side of 1,015.44 a trader might round the "fitted" retracement to. Remember that we've had this retracement on the sp03z for a couple of months and all be darned if the recent relative high didn't find some selling at 1,051.20.

What I would use the above futures chart for if I were an investor/trader that was 100% long this market, is to be VERY careful. Based on trading levels, it would have been my thoughts that when 52-week highs were found, liquidity to the futures markets would have come from long-liquidations, and SHORTING to provide liquidity to buyers. As such, the pullback to the next level "should have held" support on early test. Today's settlement below 1,029.10 now has near-term risk being assessed to 1,015.50.

Before today's after hour session, and even the S&P futures settlement at 04:15 PM EST, I really felt as if the markets held a bullish tone.

While we didn't get a full reading on the S&P Banks Index (BIX.X) 326.22 +1.16% in today's trade (there seemed to be a computer network problem for the BIX.X, as every source I found showed incomplete data) the regional bank, the money center banks BKX.X 930.44 +0.44%, the Broker/Dealer Index (XBD.X) 626.69 +0.67% and Insurance (IUX.X) 277.71 +0.55% had the financial sectors reporting gains. The Dow Jones Home Construction Index (DJUSHB) 546.02 +3.25% traded and closed at all-time highs, while Pharmaceutical Index (DRG.X) 311.12 +1.59% got a shot in the arm from Eli Lilly's (NYSE:LLY) 65.10 +7.10% earnings report and upgrade from AG Edwards.

Other than the Biotechnology Index (BTK.X) 454.96 +1.15%, technology stocks just couldn't shrug of early session weakness, but there were times, before MSFT's earnings, the QQQ and NDX were holding tough at their WEEKLY S1s.

Let's take a quick look at the Pivot Matrix. There are a lot of correlative "tentative" (dashed red and green) levels of support and resistance that show up for tomorrow that saw trade above and below in today's session.

Pivot Analysis Matrix

Just after MSFT reported earnings, I monitored the QQQ in extended hours and on the QQQ's first decline the QQQ traded sideways from $33.95-$34.02 for about 80-minutes, and then fell quickly to $33.61, with last tick currently at $33.75. This stair step lower action is something I would want to monitor closely, as it hints of computerized buying at $34.00, which was eventually overcome by selling to the $33.61 level.

It should be noted that I had colored the NDX/QQQ DAILY S2 and WEEKLY S2 correlations as solid green. This represents REGULAR hours of trade, not extended hours. However, based on tonight's after-hours trade, these levels should be monitored very early for potential resistance.

As it stands now, at least in my point of view, the QQQ/NDX should be monitored closely, where continued weakness would most likely have NEGATIVE impact on the other major indices.

For bulls that may have taken today's bullish profile in the S&P Depository Receipts (AMEX:SPY) $103.35 -0.18%, correlative support would be found at the $102.80 level and as I type, the SPY's last tick in extended hours is $102.70.

My current thoughts are that tomorrow's trade is going to be highly dependent on how things go in Asia. And while I felt today's modest selling in Treasuries and strength in the U.S. Dollar Index (dx00y) was still bullish, even the U.S. Dollar Index (dx00y) 91.27 (unch) fell, or showed dollar weakness on the MSFT earnings news, so I feel bulls need to honor stops as profiled.

Let's start with the "troubled child" and the NDX/QQQ.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

Momentum is a wonderful thing when a trader is on the right side of things, but earnings from MSFT may have taken any chance for a reversal in the current downward momentum to build back higher over the next several sessions.

I see that NASDAQ is beginning to report short interest data, and short interest on the QQQ has built to a record level and up from its September 15 level. I've tried to mark the 15th of the past two months on the QQQ chart, and September 15 close would be right back near $33.43, which I've marked in dashed blue on the QQQ, where I would expect some short-covering after seeing a new 52-week high. In fact, I would have expected some short-covering to take place at current levels of trade.

One suspicion that begins to eat away at the bullish side of me is some observations or reports dating back to October 15th. Do you remember the report of a large put buyer that day in the QQQ, at what has been the recent relative high? We made note of this in the October 15 Index Trader Wrap "Priced to Perfection" http://members.OptionInvestor.com/Itrader/marketwrap/iw_101503_1.ASP and tonight I mark $34.75 as resistance, where on any rally/rebound to that level, I would now become VERY aware that an overly smart bear might now be waiting. This $34.75, was also marked as a near-term "support" level in that wrap, thus it catches my eye again tonight.

Right now, I become very "jittery" as a bull, and I think other bulls will be too, after seeing a negative reaction to MSFT's earnings, and I would certainly expect short-term bulls and perhaps some very committed bears to be looking to sell any near- term strength in the QQQ back near $34.25, if a bullish catalyst doesn't present itself soon.

If the QQQ trades sideway in the first half of tomorrow trade and can't get back above the $34.00 level, I'd tend to error on the side of caution with any bullish positions taken at $34.20 at this time.

I'm also going to note that eBay (NASDAQ:EBAY) $54.28 -2.33% did trade close to its recent quarterly earnings low of $53.70 with a low trade of $53.79 in today's session, and I didn't sense much urgency from buyer in the stock today as it now closes below its still trending higher 50-day SMA.

Today's trade saw a net loss of 2-stocks to new point and figure sell signals in the NASDAQ-100 Bullish % ($BPNDX). Still "bear correction" status at 75% and would take a reversing lower reading of 72% to achieve "bear confirmed" status.

With the thought of the Bullish % eventually reversing back into "bear confirmed" status, and looking at the QQQ chart above, do you see the potential for a continued QQQ decline to $32.62, a rebound back to $34.75, setting up a head/shoulder top?

I would at least use this potential pattern to begin assessing future trade in coming weeks and months in the QQQ.

Remember! If you hold some calls in the QQQ currently, there is NOTHING wrong with also establishing a put position and creating a straddle, strangle or spread on the QQQ for near-term protection. With the bullish % still high, I would think it best for a spread to have the put expiration to be beyond the call expiration.

S&P 500 Index Chart - Daily Interval

I struggled with today's bullish profile in the SPX, and wondered if I should profile a bullish trade today, or wait until tomorrow. I made the decision and can't now regret it.

I will stick with my convictions and observations in today's trade as long as the SPX can hold above 1,020.65 level, with about 1.5 points of fudge factor to the downside of say 1,019 on the SPX. In today's 01:00 PM EDT update, I posted the SPY chart, and profiled stop of 102.20 would be just under the SPY's MONTHLY 38.2% retracement.

Today's trade saw the broader S&P 500 Bullish % ($BPSPX) see a net loss of 4 stocks to new point and figure sell signals. This has the bullish % slipping lower by 0.8% to 79.20%. Still "bull confirmed" status and would take a reading of 76% to reverse into "bear confirmed" status.

The narrower S&P 100 Bullish % ($BPOEX) saw no net change and still remains "bull correction" status at 79%.

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

Today's gains in the drug stocks and DRG.X +1.59% may have been short-covering related, which was spurred on by LLY $65.10 +7.1%, but may have been just enough to have the OEX holding its WEEKLY S2. With some of the "negative" tone that seems to be coming from earnings, the lowering of a bullish target into the 520-522 area might be a smart move. Picking a stop point is difficult, but my scenario for a similar mid-September trade did NOT include the violation of the 50-day SMA, so would stick with a stop just under at 510. I'm not going to play the game of lower support levels to justify a bullish stance.

Dow Industrials (INDU) Chart - Daily Intervals

I was surprised that the Dow would even finish higher after the drubbing Asian markets saw overnight. Stochastics approaching oversold, but I get the feeling that 9,500 is important support for the bounce, and Dow may show its leadership above 9,650 and WEEKLY S1 tomorrow.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 83.33%.

As I close, Japan's Nikkei-225 ($NIKK) is showing a 67 point gain at 10,402.38. Session low and high have been 10,371.78 and 10,480.53.

Jeff Bailey

Index Wrap Archives