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Index Wrap

Late bounce leaves indices unchanged

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Down, then up, then down, then up again to the close. After some marginal intra-day volatility, the major indices finished relatively unchanged ahead of networking giant Cisco Systems' (NSADAQ:CSCO) $21.80 +1.01% quarterly earnings, where bulls pushed the stock to $23.00 after the company beat Wall Street's consensus estimates by 2 cents a share.

While after-hours trading is not considered a true market response, where all market participants cast their buy sell votes, bulls may have played rope-a-dope for the bulk of the session as the late afternoon rally to the close looks to have accurately forecasted a good report from Cisco.

Cisco (CSCO) reported first-quarter pro forma earnings per share of 17 cents, up from 14 cents a year earlier. Net sales in the quarter rose to $5.1 billion from $4.8 billion a year earlier, where quarterly revenues exceeded the $5 billion mark for the first time in 10-quarter. Chief executive John Chambers cited "strength across our core switching and routing businesses, as well as traction in our advanced technologies." Looking ahead, CSCO's John Chambers seemed cautiously optimistic with guidance for Q2 to see revenues up slightly from Q1 (1-3% sequentially, 10% year-over-year), with gross margins remaining healthy at 67- 69%.

The post 04:00 PM trade action in Cisco (CSCO), which is a component of the S&P 100 Index (OEX.X) 520.25 -0.21%, S&P 500 Index (SPX.X) 1,051.81 -0.12% and NASDAQ-100 Index (NDX.X) 1,429.56 +0.01% helped the S&P Depository Receipts (AMEX:SPY) $105.84 +0.07% and NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.84 +0.9% finish fractionally higher.

As Cisco's conference call comes to an end, the SPY ticks by at $105.94, while the more actively traded QQQ has settled in at $35.90 level, and looks content below its WEEKLY R1 of $36.01.

Today's biggest news may have come out of Australia, where a hike in official interest rates to 5.0% from 4.75% had Australia's All Ordinaries ($AORD) 3,255.80 closing near a one-month low. But tonight's earnings out of Australian-base FOX Entertainment Group (NYSE:FOX) $28.01, which trades as an ADR here in the U.S., helping the All Ordinaries stabilize in Thursday's early trade, with the $AORD down just 3.2 points (-0.10%) at 3,252.60.

Shares of FOX jumped to $29.20 after the media giant reported first-quarter (September) earnings of $0.45 per share, which was $0.16 above consensus estimates of $0.29. FOX officials said "Overall, the first quarter has given us a great start to the fiscal year, and we are well on our way to meeting our growth forecasts for 2004."

Pivot Matrix

Today's trade did see the major indices lower at their DAILY S2's, but buyers were found just above our WEEKLY Pivot, where the proverbial "line drawn in the sand" looks to have ranges defined between the WEEKLY Pivots and WEEKLY R1s.

After monitoring today's trade and seeing a late session rally build, I did profile a bullish trade in the QQQ from $35.74 (15:49:43) with an initial bullish target of $36.45, but after the 04:15:00 PM QQQ close, fine tuned the trade with a target of $36.35, and stop of $35.33, after quickly calculating tomorrow's DAILY Levels.

If I could, I want to quickly take a moment and re-print an e- mail Jim Brown forwarded me from a trader, where I share some of his thoughts, based on observations he makes. The subject line read "I am a Frustrated Short."

I respect the views you all have pertaining to the Equity Markets BUT I cannot see anything in the charts or Sentiment Indicators I follow (Save for the VXO) that lead me to believe a sell off is imminent. Compq held 1940 gap.

Huge support in the 1042-1046 range on ES

60 min Stochastics are in oversold region on SPX and turning up on the COMP. Breadth continues to improve from lows.

5 and 10-day averages of Trin and the Put/call are neutral.

And save for a day or 2 here or there we rally on close.

I have a Strong Bearish Leaning based on the Bullish Percents and Low VXO. But each dip is still bought ferociously.

Short Interest is huge and it's difficult to sell off when everyone who is short covers on each dip and then lays out new shorts.

(The opposite of overhead supply)

Thanks to you all and would appreciate a reply

Some of this frustrated bear's comments, I hope, have been fully addressed in past Index Trader Wraps.

Believe me, there are a lot of frustrated shorts, and as I've discussed in some recent updates, my (Jeff Bailey) bullish thoughts come primarily from observations of building short interest observations, higher lows and higher highs in the daily charts that span a couple of months, that the trader's observations are correct, where there really IS NOT any apparent sign that a sell off is imminent.

Sentiment indicators will frustrate bears when they're low and will frustrate bulls when they are high. Sometimes, I think there is WAY too much emphasis put on sentiment indicators. While they can suggest bullish complacency when the VIX.X, VXN.X or VXO are low, it takes one HECK of a lot of bullish sentiment to have these sentiment indicators low. While the sentiment indicators certainly depict a very HIGH level of bullishness, this has been reflected in price action of the major indices so far. My mindset at this point is that the sentiment indicators should be used by BULLS to understand the market is probably "too bullish" and that a bullish trader should not be complacent! Conversely, a BEAR should simply understand, the market is VERY bullish right now.

As it relates to the bullish %, which is simply a measure of supply/demand for various stocks that comprise the indices, these market internal indicators suggest BULLS are currently in a HIGH risk environment for new bull entries. However, after profiling a BEARISH trade way back in May in a QQQ put, when the NASDAQ-100 Bullish % ($BPNDX) moved above the 70% level, the HIGH RISK for BULLS has remained high since that time, and QQQ/NDX price action has shown market participants WILLING to take on that risk.

We've seen short interest in the DIA, SPY, QQQ build, but as the trader observes, that has equated to larger losing positions, where the pullbacks may not only be met with bullish buying, but BEARISH buying as well, when a new high has been achieved.

Believe me when I say that EVERY bear puts on a trade when he/she believes an old high is in, and that lower lows will be seen. But it is the GOOD trader, that when proven wrong, immediately looks to correct the mistake, especially on the pullback.

It is notable that while bears kept warning bulls earlier this spring that it was dangerous to try and pick lows, some bears have thrown that trading discipline out the window as they attempt to pick the highs. This comment is not directed at the trader that sent the e-mail. I (Jeff Bailey) have picked a few highs, or so I've thought. Similar to the QQQ high of $29.00 back in May.

Tonight's e-mail is timely, and many of the views expressed by the trader, are probably not uncommon among MANY market participants!

I (Jeff Bailey) just "know" that at some point, the high level of BULLISH RISK is going to be removed, and while I know that EVERY trader/investor/subscriber wants ME to tell you when it is going to happen, I just don't know when for certain.

I dare say those that have been calling tops since April, May, June, July, August, September, October, and even today might not know where. Sure.... if somebody continues to call a top, they will eventually be proven correctly.

For me, the best way I know how to trade or investor is to try and control risk. At these higher levels of RISK, I'm quicker to take a profit, and I'm quicker to cut a loss, as I (Jeff Bailey) also sense the major averages are closer to a near-term top, than they are a low.

The Pivot Matrix currently gives us a decent range from WEEKLY Pivot to WEEKLY R1, and with S&P futures (sp03z) settling above the 1,051.20 level again today, and CSCO looking to provide some bullish catalyst for technology stocks tomorrow, I'm going to hold a bullish bias for the indices ABOVE their WEEKLY Pivots, and will await to see just what happens if buyers (bulls or bearish short covering) can push the indices above their WEEKLY R1s.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

Qualcomm (NASDAQ:QCOM) $46.59 -1.54% trades at $47.28 in after- hours trade after reporting upside earnings and providing guidance that was modestly above consensus estimates. One would have to think the QQQ trades higher tomorrow, but first test is for QQQ to break above the $36.15 level, where a rising 21-day SMA and WEEKLY Pivot of $35.03 are deemed support.

The one difference I see in the QQQ chart tonight compared to other indices we look at is Stochastics trying to kick higher, which gives impression that QQQ becomes a "leadership" index near term, where we might look for strength.

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

I hold slightest of bullish thoughts for SPX. The BULLISH side of me wanted to see firmer support at 1,047, but I won't discount the ability of SPX to hold just above the weekly pivot, and stage a rebound into the close, ahead of CSCO's earnings.

S&P 100 Index Chart - Daily Intervals

Support 516, resistance 525. Only higher price action will keep the OEX's MACD above its Signal. With equal highs of 525, I view the OEX with greater bullish caution as it has NOT been able to make a higher high in recent week's trade.

Dow Industrials Chart - Daily Intervals

My (Jeff Bailey's) market psychology was depressed as the INDU traded below the 9,800 level for the better part of today's session. I must admit that it improved late when the INDU was able to claw its way back above 9,800.

One note worthy of pointing out I think is that the INDU didn't come as close to testing its WEEKLY Pivot as the SPX, but gives us a potential "domino effect" to be alert to more meaningful weakness should the SPX, or INDU violate the WEEKLY Pivot.

Jeff Bailey

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