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Index Wrap

Indices finish lower, but off their lows

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Not one of the equity sectors we follow in our U.S. Market Watch finished today's trade in positive territory as a weekend terrorist attack in Turkey set a negative tone for global equity markets and had the major indices here in the U.S. continuing Friday's slide lower, after many of the major indices had traded new 52-week highs late last week.

Economic data released today, while generally better than economists' forecast proved to sway some investors into buying late in the session, as the broader S&P 500 Index (SPX.X) 1,043.63 -0.63% finished its full session lower by 6.7 points, after trading as low as 1,035.28 just after the lunch hour.

In what would have to be described as a more defensive session largely tied to this weekends acts of terrorism, the U.S. Dollar Index (dx00y) 91.61 +0.18% managed a 0.17-point gain and was able to hold above its multi-year lows 91.01, while Treasury bonds found some defensive buying that held to the close, with the 10- year Treasury Bond's YIELD ($TNX.X) falling 4.5 basis points to 4.188%.

Some comments from the bond pits had traders citing short covering, as today's economic data was generally viewed as positive. One dealer was quoted as saying today's trade in the bond market was "counterintuitive, it has to be ongoing short- covering, outside the flight to quality action overnight." Some players were bemoaning the lack of liquidity and logic of late, while others believe the bond "rally has to fade; it is losing steam," acknowledging "they are still oddly strong. There is no rationale here."

The "lack of rationale" in the bond market was directly tied to today's release of the November New York Empire State Index reading of 41.00, which showed manufacturing activity much more robust than the 28.0 forecast of economists, as well as some sign that business' were turning a little more optimistic on the economy as business inventories rose 0.3% in September, where economists' had forecasted inventories to remain flat. While the rise in inventories might raise some eyebrows of concern that demand was lagging, September sales showed a 0.6% gain after slipping -0.3% in August.

While we might have looked for selling in Treasuries based on the stronger NY Empire State Index, the "flight to quality" trade in bonds becomes even more prevalent when we consider the October Treasury budget range up $69.5 billion of red ink and was $15.4 billion larger than a year ago. The two positives that could possibly have been taken away from this data was that the $69.5 billion deficit was not as large as economists' forecast for $71.0 billion, and that tax receipts in October of $135.8 billion were above the $124.5 billion for October 2002.

I'm not trying to paint an overly optimistic view of the Treasury budget data. But when we consider what the Federal Government does have control over, it might be reasonable for economists or traders/investors to think that receipts, or revenue derived from taxes, is a much larger wild card and dependent on the economy than outlays, or spending, due to government programs.

Still, the increasing budget deficit remains one of the main points of concern, or items most often discussed for the U.S. dollar's weakness versus major foreign currencies and with the Office of Management and Budget forecasting a fiscal 2004 deficit of $475 billion (September 2004), today's gain in Treasuries, which are backed by the full faith of the U.S. Government, give today's trade and gains in Treasuries a defensive look.

If there was one sign of a technical breakdown that I saw in today's trade, it was Monday's trade in Japan's Nikke-225 ($NIKK) 9,786 -3.74%, where near-term technical support above 10,100 was broken and longer-term bullish support to 9,800 was tested by the close.

In a recent November 11, 2003 Index Trader Wrap we reviewed the Nikkei-225's point and figure chart, and I dare say that today's break below the 10,100 level was also a contributing negative for today's trade here in the U.S., and has be taking on a more defensive posture toward the major indices in the U.S. near-term, where I think we need to continue to follow the $NIKK at this longer-term support trend, with near-term resistance building at 10,150, and intermediate-term resistance back near 10,650.

Once we review the Nikkei-225 here tonight, It would be my thought that the WEEKLY R1s in this week's pivot matrix, become rather formidable resistance for the U.S. Indices. Tonight, I've quickly calculated what would be the $NIKK's MONTHLY pivot matrix levels, and what really stick out at me is the $NIKK's MONTHLY Pivot, which is right at the apex of the bullish triangle we had been monitoring as somewhat of a mid-point for the $NIKK. With the $NIKK seeing trade at and below its MONTHLY S1, I'm more cautious toward the U.S. major indices, as I do think the weakness in the Nikkei-225 ($NIKK) will have some negative impact on global markets.

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

Since our last update (11/11/03) the $NIKK did find some buyers up to the 10,400 level, fell back to 10,200 in Friday's session, but showed a rather significant break of what I considered to be important "near-term support" with today's trade at 10,100.

Make no mistake that the U.S. market indices have shown relative strength versus the $NIKK in recent months, but the $NIKK is an index I thought we should keep a close eye on near-term, when the dollar had been weaker against the yen. While it generally accepted that Japan's economy is dependent on its exports to the U.S., and other global economies, today's breaking of 10,150 support has me alert that further weakness most likely impact the U.S. indices, as I think was the case early this morning.

With the $NIKK now making a lower low from its October (Red A) lows, I view 10,650 as more formidable resistance. This is pretty close to not only the apex of the bullish triangle we had discussed as being somewhat of a gravitational point several weeks ago, that may have been the mid-point of a developing range, but would also be a November MONTHLY Pivot.

I have NOT been tracking trade in the $NIKK as it relates to DAILY/WEEKLY/MONTHLY pivot analysis, but place the longer-term MONTHLY levels on the $NIKK chart so that we might begin to get a better "feel" or observation as to further test the thought that the $NIKK's trade may have impact (positive/negative) on the major U.S. indices.

As we quickly review our Pivot Analysis Matrix for the major indices here in the U.S., we will note that today's trade did see the MONTHLY Pivots traded in INDU, DIA, OEX, NDX and QQQ. Only the SPX 1,043.63 -0.63% and SPY $104.93 -0.5% did NOT see trade at their MONTHLY Pivots. The S&P Banks Index (BIX.X) 329.19 - 0.23% did not trade its MONTHLY Pivot either, and I would not expect the BIX.X to trade its MONTHLY Pivot of 321.97, unless the MAJOR indexes were trading their MONTHLY R1s, similar to the Nikkei-225 ($NIKK) did today.

Pivot Analysis Matrix -

One technical scenario for bulls to look for a bullish trade setup tomorrow is for the $NIKK to FIRM in Tuesday's trade, but look for a reversal of this afternoon's late recouping of losses to find the SPX fulfill a test of its MONTHLY Pivot, like the other major indices did and a rebound to build into week's end and option expiration near WEEKLY R1.

I've tried to place two different UPSIDE Nikkei-225 levels for a "dead cat bounce" in the $NIKK, with the 10,500 level being more of a round number level of resistance, where I would expect some bulls that have now seen a break below 10,000, to be more eager sellers on a bounce back to the 10,500 level, which after a TEST of WEEKLY S2's (see SPX WEEKLY S2 and MONTHLY Pivot overlap) a bounce back to WEEKLY R1's in the major U.S. Indices becomes a bull's exit point.

After seeing the Nikkei-225 Index ($NIKK) break below the 10,100 support level, its is also a bounce back to the WEEKLY R1's in the major U.S. Indices, where I would look for a BEARISH entry point.

My ONLY caveat for a bearish trade at WEEKLY R1, is that I would much prefer some near-term weakness to the WEEKLY S2's, otherwise, after seeing a 52-week high in the SPX Friday morning, I would have to assess upside risk to WEEKLY R2.

I can't say that I follow Japan's economy as economists' and market analysts' comments regarding bullish and bearish scenarios as closely as I do U.S. economists/analysts comments, with which I TEST those comments against the technicals in the market, but one comment I have read out of Japan, is that most analysts in that region didn't think the $NIKK would "unravel" below 10,000, but would more than likely develop a range of trade either side of the 10,000 mark, until more clarity was given to the Japanese economy, and strength/weakness of the yen versus the dollar.

Dow Industrials (INDU) Chart - Daily Interval

For those technicians that track relative strength of one security against the other, you will see how the INDU and the $NIKK seem to trade off with each other as it relates to relative strength. In late October, the INDU gave a relative strength buy signal versus the $NIKK and would currently be considered a stronger major index, or market, when compared to the $NIKK. As such, we would look for some INDU leadership to the upside, but to get the move, it is my thought that the $NIKK needs to firm at current levels, at a MINIMUM.

I've added the INDU's MONTHLY S1, where under EQUAL relative strength, gives us the impression of how the Nikkei's trader from here could play a role in how the INDU trades.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 80.00%.

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

The SPX did break below some relatively important near-term support at the 1,047 level today, and while a couple of late buy program premium alerts, which were first seen at 1,040 did have the SPX recovering into the close, I would monitor the 1,040 level early tomorrow for support, but after seeing continued willing seller back near 1,061, would prefer to see a test of WEEKLY S2 and the 1,032 area, then look for a good rebound to build into the week's end toward 1,062.

Today's trade saw a net loss of 5 stocks to point and figure sell signals as the broad S&P 500 Bullish % ($BPSPX) fell 1% to 79.80%. Still "bull confirmed" and would take a reversing lower reading of 76% to achieve a "bull correction" status.

The narrower S&P 100 Bullish % ($BPOEX) saw a net loss of 1 stock to a point and figure sell signal and has the bullish % slipping to 79%. Still "bull correction" status.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

I didn't even attempt to profile a QQQ trade (bullish or bearish) today. Would not rule out a QQQ decline to $33.67, that finds a more attractive bullish trade setup for "one last run" back to $36.00. I say "one last run" as I've been waiting for "one last run" in the QQQ for several months.

What has me getting a little more willing to take a shot at a QQQ chart back near $36.00 in coming sessions is the NASDAQ-100 Bullish % ($BPNDX), which did see a net loss of 2 stocks to point and figure sell signals in today's trade, and has the bullish % falling to 70%. Still "bear confirmed" and $36.00 looking a little more formidable as market participants seem to be showing conviction with their selling near that level.

Jeff Bailey

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