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Index Wrap

Nikkei-225 faces first test

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Finally, some not so strong economic news!

I've got 2.5 hours to cover Japan and the U.S. so put your thinking caps on and hopefully you've been following along prior Index Trader Wraps and some of today's intra-day commentary regarding the S&P Banks Index (BIX.X) 329.95 +0.06% and Dow Transportation Average (TRAN) 2,927.24 -0.88%, which in my opinion shows the rubberband of two economically relevant sector being stretched in two directions, where the major indices that you may be trading, finished today's Veteran's Day session fractionally lower.

In this morning's 09:00 AM EST update, we noted that Japan's Nikkei-225 Index ($NIKK) 10,207 -2.83% fell 297 points after economic data in that country showed private machinery orders falling 1.6% in September (compared to August). While I'm not cheering some weaker economic data out of Japan, it provides a good test for a major equity market, which may have impact on future trade here in the U.s.

After investors and traders here in the U.S. have been inundated with more upbeat economic news in recent weeks and months, recent trade has shown the major indices depicting more of a hesitant bullish trade than a more euphoric type of bullish reaction to stronger than expected economic data like Q3 GDP ramping to 7.2% and nonfarm payrolls showing the economy adding more than 100,000 new jobs the past two months (while not strong for jobs growth on historical standard, much stronger than economist' forecast).

It would be difficult to draw too many conclusions from today's trade when the Treasury bond market was closed in observance of Veteran's Day, and perhaps the 1.27-point narrow range in the S&P Banks Index (BIX.X) and 42-point range for the Dow Industrials (INDU) 9,737.79 -0.19% gives some confirmation on how equity traders will look to the bond markets for some decision making impact.

I quickly went back through some prior Index Trader Wraps to see what nights we discussed the Nikkei-225, and found an article on October 8, 2003. I know that I wrote an update on the Nikkei-225 regarding the apex of a bullish triangle that developed after October 8, but with minimal time allowed, I just haven't been able to find it at this point. Still, the October 8th article and the support zone identified in that article is what I think traders and investors need to be monitoring once again. My thought tonight is that there has been some slightly negative news out of Japan on the economic front, and it may be important to monitor that MARKET'S response.

Nikkei-225 Index ($NIKK) - 50-point box

In tonight's chart of the Nikkei-225, we still show the zone of support at 10,150 holding, and can perhaps begin tying some of the concerns regarding the strengthening yen versus the dollar expressed in the October 8 wrap, with more data learned today that heavy equipment orders fell 1.6% in September.

I've made some additional observations tonight in regards to long columns of X's (demand) and O's (supply) really becoming prevalent in recent weeks, and coming within a range of 10,150 to 11,150, as if this market (the Nikkei-225) just doesn't know what to think!

My analysis is that the apex of that bullish triangle has tended to be more of a gravitational point of resistance in recent weeks at the 10,700 level, and that the Nikkei-225 is now at a pretty important level of longer-term horizontal support, where if broken to the downside, has the $NIKK vulnerable to the 9,750 level.

My thoughts based on what I've seen is that Japan's economy is more dependent on the U.S., than the U.S.'s economy is on Japan. I say this in part because Japan's government has been more concerned in keeping its currency weak against the dollar, in order to help maintain its exports to the U.S.

While this may be very simplistic in thought, I'm going to also go out on a limb and say the U.S equity markets tend to be a leadership market for the Nikkei-225, where Japan's equity markets have tended to find strength from the U.S.

From a U.S. equity index perspective, the main concern, or monitoring that needs to be done right now, is to monitor the Nikkei-225 for strength or weakness from what looks to be a rather important level of support.

One thing I do NOT want a trader to think is that if tomorrow morning we wake up and the Nikkei-225 has closed at 10,100, that this immediately means "SHORT THE U.S EQUITY INDICES BECAUSE THE NIKKEI-225 IS FALLING APART!"

Let's not do that, and lets not also say that we BUY the heck out of the U.S. Markets if the Nikkei-225 rebounds overnight to 10,750.

Let us instead use the Nikkei-225 directional trade and RATE OF CHANGE as an influence on our trading strategy.

In this morning's Market Monitor, I tried to do just this with the bearish profiling of the NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.06 -0.36%, at the $35.20 level, just after our market open, with the thought that there was more of a negative bias to the WEEKLY S2s after seeing Monday's trade, and then seeing the Nikke-225 declines this morning.

Humph!.... After seeing today's tightly traded range, I wonder why I traded at all with the bond market closed, where for the better part of the day, the QQQ's along with the major indices traded relatively unchanged.

I can tell you this. Having traded both bearish and bullish the major indices in recent week's, I've yet to find an "easy" trade, where from the get go, I think to myself.... "you were exactly right, so sit back because this is so easy!"

I think I know "exactly" what a bear wants to see. He/she wants to see the Nikkei-225 fall lower, the S&P Banks Index (BIX.X) reverse lower, and the Transports (TRAN) 2,927 -0.88%, after testing the 3,000 level, continue lower and break below its bullish regression channel.

In today's 01:00 PM EST update, I discussed the S&P Banks Index (BIX.X) with main observation being that while some of the other major indices in our WEEKLY Pivot Matrix traded their WEEKLY S1's, the BIX.X had not, and to see the major indices trade their WEEKLY S2s, then I would look for the BIX.X to at least pull back to its WEEKLY S1. With the BIX.X just sitting there like a 200,000 pound vault today, as the session wore on, it began to seem unlikely that the major indices were going to test their WEEKLY S2s.

In the 03:15 PM EST Update, I quickly reviewed the Dow Transportation Average (TRAN) 2,927.24 -0.88%, which by golly saw a session low of 2,925.28, as if there might have been some buyers at that 80.9% retracement level and mid-point of regression.

While this will seem crazy right now, I'm going to mention it anyway. IF the Nikkei-225 were to trade lower to its bullish support trend (blue +s), I'm not going to be a bit surprised if the TRAN is at the lower end of its upward regression channel around the 2,800 level, where we also see a rising 50-day SMA on the TRAN. On the upside, if the Nikkei-225 rebounds back to the highs, I'm not surprised to see the TRAN pressing higher at 3,050.

Here's a quick look at the Pivot Analysis Matrix

Pivot Analysis Matrix

I'm going to immediately tie in the observations from the Nikkei- 225 with the major indices finding today's lows of the session coming at or near their WEEKLY S1s.

On a Nikkei-225 break further lower, then WEEKLY S2s are in play, with even greater focus being given to Thursday and Friday's economic data at this link.

If the Nikkei-225 were to rebound tomorrow, my thoughts are that the WEEKLY S2, if not the WEEKLY S1s which were not tested, become leveraging points of support for bulls, and I would close out my still bearish profile in the QQQ. With little QQQ correlation in the DAILY/WEEKLY matrix, a QQQ trader would most likely view the correlative resistance at NDX WEEKLY S1 and DAILY R1 as their upside risk assessment levels, especially when we now see Stochastics nearing the "oversold" levels, where in times past, the NDX/QQQ has found rebounds back higher.

Again.... I think the Nikkei-225 becomes an important observation near-term.

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

Holding a bearish trade in the QQQ now feels like its a race against time, or Stochastics approaching the oversold level. I've marked somewhat similiar Oscillator setups found today as that dating back to late-September where the QQQ fell more sharply below its 21-day SMA (the QQQ did close below its 21-day SMA today) and had the QQQ falling to test its rising regression channel and 50-day SMA, which today's chart would be right near the $34.50 level.

The "best" bullish trade I would look for is the Nikkei-225 to rebound tomorrow, the QQQ fall back to $34.62 and then look long from that level. But PLEASE wait for us short-term bears to cover first!

If the Nikkei-225 breaks further lower tomorrow, the QQQ vulnerable to $34.49-$34.62 level.

Today's trade saw a net loss of 2 stocks to point and figure sell signals and this has the NASDAQ-100 Bullish % ($BPNDX) reversing into "BEAR CONFIRMED" status! I don't have time to show this chart, but you can view it for FREE at wwww.stockcharts.com. If looking to buy weakness back near $34.62, PLEASE do so with SMALL positions in the once again "bear confirmed" status. While this bullish % has been oscillating between bear confirmed and bear correction status in recent weeks, its the time a bull LOADS up on a bullish position, and the bounce doesn't come.

This is why we're trying to add in the S&P Banks Index (BIX.X) and Dow Transports (TRAN) as some sectors to be monitoring against!

I do think that if $34.49 in the QQQ were broken, that a good bounce from $33.67 would be found, and that bounce would bring the QQQ back to the $34.50 level. There's still quite a few shorts in the QQQ, they've seen the recent 52-week high, and the bulk should be looking to square up positions at $33.67 as a bulls safety net.

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

The SPX found support in our near-term support zone of 1,042- 1,045 and with Stochastics nearing oversold, my MAX bearish decline would be to WEEKLY S2 and rising 50-day SMA. A couple of weeks ago, some bulls may have been in the SPX from the 1,030 level and understand the strength that was seen from the 1,035 zone and after a new 52-week high, would deem this pretty firm support.

Today's trade saw no net change in the broader S&P 500 Bullish % ($BPSPX). Still "bull confirmed" at 80.6% and would take a reversal reading lower to 76% to see "bull correction" status.

The narrower S&P 100 Bullish % ($BPOEX) saw no net change today and still remains "bull correction" status at 80%.

Dow Industrials Chart - Daily Interval

The INDU finds its Stochastics first to reach the "oversold" level where we would now be looking more closely for a level to see a bounce back higher. I would begin looking very closely at WEEKLY S2 of 9,700, and monitor the TRAN and BIX.X for some confirming strength, or firming. If Dow 10,000 is in the cards, the INDU really needs to hold the 9,650 level and MONTHLY Pivot.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPIND). Still Bull correction status at 83.33%. On Monday, shares of Altria (NYSE:MO) $48.70 gave a point and figure buy signal, which had the Dow's bullish % gaining 3.33%.


One of the most-asked questions this week has been what type of impact the current mutual fund scandal, regarding "late trading" of mutual funds, and some $14 billion worth of liquidations at Putnam Funds is having on the major indices, and market psychology.

While it is impossible for me to present any quantitative data on this topic, to back up my thoughts, I do think it could be having some impact on the major indices from a sell side of the trade, but also on market psychology.

From the sell side of things, most reports I've read is that Putnam (considered a LARGE mutual fund family) has seen roughly $14 billion in investor redemptions since the fund family was cited as being one of the more active participants in illegal after-hours trading of its funds. However, reports also note that Putnam's fund managers (like most fund managers from any mutual fund) will keep anywhere from 1% to 3% of a funds assets in cash in order to meet normal levels of redemptions from its investors, and the reported $14 billion in net redemptions at Putnam currently equates to about 5% of the fund family's total assets managed.

Today we noted that Microsoft (NASDAQ:MSFT) $25.81 -0.77% broke back below its longer-term 200-day SMA of $26.00 in today's trade, a notable break after the stock had been finding support at this key longer-term moving average for the past eight trading sessions. In today's Market Monitor at OptionInvestor.com, I saw several comments about General Electric (NYSE:GE) $28.11 -0.21% testing its longer-term 200-day SMA of $28.05 in today's trade.

What comes to mind is that these two VERY LIQUID STOCKS are probably holdings at Putnam, if not most mutual funds, and if I (Jeff Bailey) were a mutual fund manager at Putnam and having to meet redemptions, I'm probably turning to some of my more LIQUID large cap stocks like a MSFT or GE to sell in order to meet redemptions. Please note, I'm only suggesting MSFT and GE are being sold because of their LIQUIDITY, and it would be an error to interpret my comments as either bullish or bearish these two VERY liquid stocks.

Can the redeeming of cash by investors at Putnam and other mutual funds have negative near-term impact on the major averages? Certainly they can as both MSFT and GE are the two largest market capitalization stocks in the cap-weighted S&P 100 Index (OEX.X) 518.66 -0.02%.

While some of the funds being investigated for illegal after- hours trading of their funds have seen withdrawals, other funds seeing notable net inflows were reported as being Fidelity, VanGuard and American Funds, so one might think that some of the redemptions being seen from other fund families are immediately finding their way back into the markets.

I can only make a guess on market psychology, but if I owned a mutual fund, in a family of funds mentioned as allowing illegal after-hours trading of their funds, I would first have to consider any tax consequences of liquidating those funds and triggering a taxable event. At this same time, I'm probably aware that when the fund manager is selling some of the holdings in the fund to meet redemptions, he/she generating a taxable event for me regardless of what I do, or don't do. My best hope if holding one of these funds is that he/she is selling their losers (losses) in equal amounts as their winners (profits) as to not generate an overly surprising taxable event at the end of the year (if the mutual fund were held in a taxable account).

From the psychological side of things, I don't see any of this mutual fund scandal being positive for the markets. The reason I say this is if an investor just so happened to plow every dollar they had into an equity fund in March, there may be a high odds chance they decide to take the money out of the mutual fund cited for illegal after-hours trading, and park it back into cash.

Jeff Bailey

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