Option Investor
Index Wrap

Just as expected

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This morning's release of Q3 GDP data showed the U.S. economy growing at a 7.2% annual rate, which was well above economists' forecast for 6.0% growth. While the rate of growth may have been a surprise to economists, with the major indices finishing relatively unchanged, the MARKET didn't seem a bit surprised.

As economic growth ramped up in Q3, today's release of weekly jobless claims showed new filings for state unemployment insurance stayed below the 400,000 level for a fourth-straight week at 386,000, but still depicted a slow recovery after a long slump.

An early pop higher found immediate selling as the major indices came close to their 52-week highs found two-weeks ago, with only the smaller-cap Russell-2000 Index (RUT.X) 530.37 -0.27% getting a quick glimpse of a new 52-week with a trade above its October 15 and 17 matching highs of 534.25 with a morning high of 536.21.

An earnings disappointment out of Dow component, and world's largest investor-owned oil company, Exxon/Mobil (NYSE:XOM) $36.30 -3.99% did little to bolster bullish gains for the Dow Industrials (INDU) 9,786.61 +0.12%, or the broader S&P 500 Index (SPX.X) 1,046.94 -0.11% and narrower S&P 100 Index (OEX.X) 517.53 -0.21%, all of which XOM is a component. Exxon/Mobil reported net income of $3.65 billion, or 55 cents a share, up from $2.64 billion, or 39 cents, a year ago, but fell well shy of analysts' estimates of $0.62 per share. XOM officials said the earnings shortfall came from its chemical business and weaker than forecasted refining and marketing in the U.S. and internationally.

The CBOE Oil Index (OIX.X) 277.35 -1.49% fell to a three-week low to close back below a trending higher 50-day SMA.

While the major indices had trouble holding their early morning gains to finish unchanged, the AMEX Gold Bugs Index ($HUI.X) 215.64 -3.04% witnessed today's most notable reversal of morning profits.

After edging to a new all-time high at 223.92 in the first 30- minutes of trade, some sector bulls bugged out sending the HUI.X lower by 6.77-point to the close. December Gold futures (gc03z) $384.40 -0.67%, which saw an anticipatory bullish trade to $392.00 just prior to today's GDP release, ended down $2.60. The only "technical" even I saw in play today was when Jonathan Levinson noted the equity weighted Gold and Silver Index (XAU.X) 97.60 -1.85% traded above the 100.00 level, that tick above 100.00 seemed to be a trigger for selling at a psychologically round number.

The stronger than forecasted GDP data saw the U.S. Dollar Index (dx00y) 92.26 +0.43% gaining ground, with current trade above its shorter-term 21-day SMA for this fist time since falling below this simple moving average on September 4, 2003 at 97.53.

Treasuries finished their session lower and YIELDs higher, with the shorter-dated 5-year Treasury YIELD ($FVX.X) jumping 10.2 basis points to 3.283%, while the benchmark 10-year YIELD ($TNX.X) saw its YIELD rise 6.4 basis points by the close to finish with a 4.339% YIELD. The longest-dated 30-year Treasury YIELD ($TYX.X) rose a more modest 3.9 basis points to 5.198%. Today's bond action really saw some flattening of the YIELD curve as if the bond market was saying today's report of Q3 GDP at 7.2% wasn't expected to continue in future quarters.

Let's take a quick look at tonight's Pivot Matrix. Please keep in mind that after tomorrow's close, we will have new WEEKLY and MONTHLY pivot levels. Today's most notable trade was the OEX morning high of 520.99, and exact match with the WEEKLY R1, as if there was a determined sell program, or some type of formidable seller at that level. This becomes a "key level" in tomorrow's trade, from which a trader would measure bullish strength on a break above. While not marked in the Matrix, we once again find correlation in the OEX for support at 513 at DAILY S2 and WEEKLY Pivot. As such, this is a near-term level of support to monitor closely tomorrow.

Pivot Matrix

The S&P Banks Index (BIX.X) 329.57 +0.42% was the only index in our WEEKLY matrix to see a trade at WEEKLY R2. Of the 22 components in the BIX.X, 20 showed gains, 2 showed declines.

Meanwhile, the OEX.X followed the other indices with a test of its WEEKLY R1 in today's trade. I'm marking BIX.X correlative support at DAILY S1 and WEEKLY S1, which may be very correlative to OEX DAILY S2 and WEEKLY Pivot.

While there isn't a single bank in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.39 +0.19%, which got a late 15-minute push into its close from an upside earnings report from component American Power Conversion (NASDAQ:APCC) $17.90 +1.58%, which found the stock jumping to $19.35 in extended hours of trade, I've highlighted the DAILY S1 in the QQQ at $35.07, which is right where I had place a stop in today's bullish profile for a QQQ trade.

Another correlative level of support that I think is important to hold tomorrow can be found in the Dow Industrials (INDU) 9,786.61 +0.12% at the 9,745 level. I like to subtract 10-points as a little fudge room, so I'm setting a downside alert at the 9,745 level in tomorrow's session.

My current mindset, which may not make sense to everyone, is the mindset of a bull trying to inflict as much pain on a bear as possible, in order to trigger short-covering.

Why this mindset? For one, I know that bullish risk is high in the bullish % indicators, but just as I know the indices are either at or near 52-week highs, overhead supply of stock at 52- week highs is limited. But with this mindset, what is a BEAR probably thinking? He/She may accurately be thinking, "hey, all the good news is baked into the cake right now and stocks are headed lower."

From the perception of risk, and taking a bears beliefs to heart, what index might be the more logical one for the bear to be shorting? I think the answer is the OEX. It's full of large cap stock, perceived as being stodgy, and slower moving. Even on a move to new highs, the move will more likely than not, be slower moving in percentage terms, and less painful to a bear should the cake not be fully baked.

My bullish profile in the QQQ is not because I think there is any "great value" to be had, but more likely, some jittery bears. As we neared tonight's close I asked myself, if after seeing today's trade, would I rather be long or short the QQQ? I thought long.

Let's take a quick look at the OEX, as even a QQQ long begins to understand, they need to see strength from the OEX, where today's high at WEEKLY R1 does grab my attention. The 5 largest cap weighted found GE +0.17%, MSFT -2.31%, WMT -0.08%, C +0.59% and XOM -3.99%. According to my Qcharts sort, GE has overtaken MSFT for the top weighted market cap again.

One stock to keep an eye on near-term is Microsoft (MSFT) $26.21 -2.31%, which has been sold lower since it reported quarterly earnings on October 23 and closed that evening at $28.81. That's a 9.9% haircut for what was the largest market cap stock. While a bounce from the 200-day SMA might make technical sense, a continued decline below this moving average and its August lows of $25.43, could well drag the major indices lower, not to mention have negative impact on a technology-bull's psychology.

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

OEX support above 513, but resistance of 521 was firm today. MSFT has been one of the weaker stocks in the OEX, and if MSFT continues weaker, is going to most likely have lingering negative impact on OEX. Conversely, a technical bounce from MSFT at its longer-term 200-day SMA should keep OEX above 513.

Today's trade saw a net gain of 1 stock to a reversing upward point and figure buy signal. This has the S&P 100 Bullish % ($BPOEX) edging up 1% to 80%. Still "bull correction" status and would take a higher reading of 84% to achieve "bull confirmed" status.

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

Oscillators look almost exactly the same today as they did earlier this month as it relates to MACD trying to cross above its Signal, while the Stochastics oscillator is now "overbought." In an upward trending security, I give more weight to MACD and remain bullish the SPX above 1,039, and look for some momentum support from the rising 21-day SMA.

From my personal perspective, I just think it would be difficult to close a bullish trade out here (have not bullish position) and then have the conviction to get back on board on a move above the 52-week high. This may not be appropriate thinking based on a bulls tolerance for risk, or need to book a gain, but would rather play it out, see if bears flinch with a short-cover rally to new highs, and play support at 1,039.

Today's trade saw a net gain of 2 stock to new point and figure buy signals as the S&P 500 Bullish % ($BPSPX) rose 0.4% to 80.00%. Still "bull confirmed."

I really want to commend a trader that sent me an e-mail today, where he saw today's trade as being SIMILAR to that found on October 15 in the QQQ based on the 60-minute interval chart.

This is EXCELLENT and now provides us a near-term look, and swing trader's view of the QQQ. He was looking at the QQQ on a 60- minute interval.

Today, I profiled a bullish trade for QQQ at $35.27, stop $35.07, target $36.20. Once again, I may be off by 2-cents in my stop and bullish target based on tomorrow's DAILY S1 and DAILY R2. (as I was in the SPY) as I look at this chart. Another trader also e-mailed me expression concern over the QQQ 60-minute chart's MACD. This too may be a very good observation, which we will test tomorrow.

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

First the observation of today's trade on the 60-minute interval chart looking very SIMILAR to that found on October 15, when the QQQ spiked higher in the first hour of trade, to get pushed immediately back to that hours low.

See the pink horizontal trend I place at $35.52? That was the "rally high" on October 15, which was tested early the following day as resistance when the QQQ the FAILED that test and turned lower. Two ways a BULL could have protected was to have a really TIGHT STOP under $35.27, or $35.07. Done... that's it and a good test for tomorrow for WEAKNESS.

For DIVERGENCE and STRENGTH, QQQ needs to get above $35.64. Tell you what, I'll set an alert at $35.60, just so I'm alert if the QQQ comes close to $35.64. And maybe I should adjust a bullish stop a little lower than tomorrow's DAILY S1 of $35.07. If I'm going to get short covering rally in the QQQ to TARGET of $35.20, DAILY R2 is $36.18, then it will more likely have to come on a move above $35.64, than a move BELOW $35.07.

And what about MACD. Doesn't look good on the 60-minute chart does it? MACD on this time interval didn't look very good at the left of the chart either, but QQQ price action followed the 21- day SMA higher from $34.50 before the more notable 60-minute interval break of $35.07. The one difference I see in the above chart as it relates to early October (left chart) is our 50-hour SMA is trying to turn higher, but not "ramping" up like it was in early October. So... I KNOW I need HIGHER PRICE ACTION in the QQQ to get that 50-hour ramping higher.

Today's trade saw no change in the NASDAQ-100 Bullish % ($BPNDX). Still "bear correction" status at 78.00%.

I've run out of time, and have been given strict deadline for content delivery. Will follow with an INDU chart in the morning.

Jeff Bailey

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