Option Investor
Index Wrap

Like watching the Thanksgiving turkey thaw

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We've seen some rather tight intra-day trading ranges in the past, but today's trade for the major indices was about as eventful as watching a Thanksgiving turkey thaw out, prior to being stuffed and stuck in the oven for Thursday's Thanksgiving feast.

Don't mistake my boredom for disappointment, but I find it a tough turkey to swallow that an upward revision to Q3 GDP to 8.2% from it previously reported 7.6% annual growth rate and a November consumer confidence reading of 91.7, which was well above economists' forecast of 85.0, and October's 81.1 reading didn't find more of a market reaction, up or down, than was seen today.

While most Washington watchers began to predict a more certain passage of the Medicare drug bill yesterday, which was passed earlier this morning, the narrow passage of the bill drew mixed comments from drug and healthcare analysts on Wall Street, as investors struggled with deep-seated disagreements about the future of the U.S. healthcare system, which faces both rising costs and serious gaps in coverage.

Conservative Republicans fear that the expansion of Medicare will lead to its future bankruptcy, with the system predicted to run out of money by 2026 without further increases in payroll taxes.

Some Democrats warn that the cost-cutting measures included in the legislation will lead to the privatization of Medicare. And they fear that big drug companies and private health insurance companies will be the main beneficiaries.

I don't want tonight's Index Trader Wrap to turn into an ins-and- outs of the Medicare drug bill, but in the spirit of the holiday's, when I try to read up on just what the Senate voted on today, it was like looking at a fruit cake and wondering just what all was in it!

Not that the bill was analogous to a fruitcake, but if I had to look at a fruitcake, and understand its ingredients, then type out a recipe for its duplication, I'd be telling a lie if I were to say I fully understand what companies will benefit or suffer most.

While I've always thought the President of the United States George W. Bush, or even past Presidents have a difficult and stressful job, and by many accounts are faced with very challenging decisions each day, I dare say a fundamental analyst asked to ascertain what company's are going to be the true benefactors or losers of the Medicare drug bill are faced with equally challenging tasks in the weeks, months and years ahead.

To think today's passage of the Medicare drug bill, which brings sweeping changes to the Medicare program is just drug or healthcare-stock related, traders and investors should think again.

For instance... I didn't know that Congress just promised an $86 billion subsidy to big companies to ensure that they continue to offer health-related benefits to their retired workers.

Did you know the bill also gives an extra $25 billion to rural hospitals? Some Washington watchers made note of this feature in the Medicare bill as a way for Congressmen and Senators from smaller Western states to gain votes from their constituents.

In a controversial move, the bill also prohibits the Federal government from negotiating discounts with drug companies, or restricting the number of drugs that will be eligible for coverage. This is a major difference when compared to the European health care system.

To me (Jeff Bailey), it would appear on the surface that the U.S. government has taken an open wallet approach to drug benefits. Doesn't it?

Pharmaceutical Index (DRG.X) Chart - Weekly Intervals

I do wish I were smart enough to give a definitive answer on whether or not today's passage of the Medicare drug bill will be bullish, neutral or bearish for drug stocks. My thinking based on what seems to be an open wallet type of approach from the government and the prohibiting of government officials negotiating discounts on drugs, would be positive catalysts, not negative.

The test for such thought would be for the DRG.X to trade above 330, and not trade below 300.

I've drawn very basic, yet effective trends on the DRG.X chart, that show the DRG.X trying to move higher from a BIG wedge, where in April of 2002, the DRG.G moved lower from a BIG wedge near the 360 level.

I'm quickly noting that according to Dorsey/Wright and Associates' sector bullish %, their Drug Bullish % (BPDRUG) is currently "bear alert" status at 54.35%, so I would want to at least see the DRG.X make a bullish move above 330 near-term or get a bullish reversal back higher in the sector bullish %, before getting to aggressive from the "buy side" in this sector. In June of this year, the sector bullish % and reached 80% its bullish % chart. That's probably the same time the DRG.X spiked to 350 for the week of June 15-20.

I would note that the Pharmaceutical HOLDRs (AMEX:PPH) $75.00 -0.68% look very similar to the DRG.X, where a DRG.X 330, looks to be equivalent to a PPH $80.00, and DRG.X 300.00 equivalent to $72.00.

While I'm sure I haven't fully answered trader's and investors e- mail regarding the Medicare drug bill's future impact on drug stocks with any certainty at this point, I've set up some tests for future trade, and with analysts, lawmakers, and citizens somewhat perplexed as the bill, the market's will eventually decide, and I would think the DRG.X eventually breaks above or below the 330-300 range.

Moving on to today's trade, I'm left to believe that after monitoring and attempting a day trade short in the QQQ from $35.20, which was eventually stopped out at $35.42 after continually fine raising a bearish target and lowering a stop loss, that tomorrow's trade may be very similar, but perhaps just the inverse, where tomorrow's trade could well see a round trip within the DAILY S2 to R2 range.

Before we start, I want to quickly make note of some intra-day observations as to today's trade.

First observation this morning was made before the 09:30 AM EST cash open, when just after the 08:30 AM EST release of the Q3 GDP data, the NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.18 (unch) trading a pre-market high of $35.55, which is this week's WEEKLY R2 of $35.55. During regular market hours, the QQQ traded a high of $35.45, which was a penny below its DAILY S1.

If the phrase "trying to pick up pennies in front of a bulldozer" were to ever make any sense, then today's tight range of trade in the QQQ was certainly such an attempt with my QQQ bearish trade.

A second observation is that the S&P Dep. Receipt (AMEX:SPY) 105.99 +0.37% did trade its WEEKLY R2 of $106.26 with a session high of $106.42. The S&P 500 Index (SPX.X) 1,053.89 +0.17% came close to its WEEKLY R2 of 1,058.09, when it traded a session high of 1,058.05.

With these observations in mind, I begin to thing that there is going to be selling prior to the weekend at the WEEKLY R2s, and other than trying to get a potentially decent day trade tomorrow, a swing-trader that has been contemplating taking an extended holiday and coming back to these markets next week, might want to weigh the alternatives between frustration and relaxation here tonight.

I view today's economic data as largely being bullish. With a tendency for the major indices to also trade bullish into a Thanksgiving weekend, and after seeing today's trade, I would look for a potential short-term bullish trade back near the WEEKLY R1s, and just the inverse of today's trade, a strong close back near the WEEKLY R2s.

Let's take a look at the pivot matrix, where after Friday's trade, we will get new MONTHLY and WEEKLY pivot analysis levels.

Pivot Matrix -

Today's trade was "boring" yet I was actually glued to my charts despite the rather tight range of trade, as if expecting something to actually take place and some type of tradable move actually take place.

While I do not perceive any "fireworks" the remainder of the week, it never hurts to be prepared. But with the bond market closing an hour early tomorrow and Friday at 02:00 PM EST, the tendency among stock traders/investors is to do little unless some type of major surprise from economic data, or geopolitical events moves a trader from their easy chair.

I did think some of today's slight weakness in the U.S. Dollar Index (dx00y) 91.48 -0.12% and some buying in Treasuries with the 10-year YIELD ($TNX.X) edging down 4.1 basis points to 4.186% was going to have a more negative impact on stocks, which I would have to confess never really played out during the session.

Here's a last look at today's NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.18 (unch) intra-day trade, which I'm also going to show with some of Monday's late session trade, which to me, looks like a potential gravitation point for early tomorrow, where WEEKLY R1 marks the spot of Monday's consolidation, where a QQQ pullback to that level, might find support, where a late afternoon rebound might then take hold for a rebound back to the WEEKLY R2. I've left today's 5-minute retracement brackets on the QQQ chart, just to show how tight the bulk of today's range was, as if the MARKETS were determined to not go anywhere in today's session.

NASDAQ-100 Tracking Stock (AMEX:QQQ) Chart - 5-minute intervals

I don't want the Index Trader Wrap to appear as though its a "day trading" wrap, but today's tight range of trade, and Thursday being a holiday, I'm not expecting a major market move.

My thoughts this morning after seeing a QQQ pre-market trade at $35.55 find immediate selling had me thinking the market was saying... "no no you don't, not yet" and after setting up my 5- minute retracement brackets, I thought the QQQ could be shorted at $35.20 after seeing trade just below the $35.20 level in the first 40-minutes of trade. I had also made note of a couple of sell program premium levels, that had me suspicious to some institutional computers set up to do some selling just below the WEEKLY R2s. My initial bearish target was $34.76, with stop at $35.51. As the session progressed, I kept raising target and lowering stop.

I've pointed to some of Monday's late-afternoon consolidation near the WEEKLY R1, which was eventually broken to the upside on Monday, when the bond market closed at 03:00 PM EST. This might be an area of consolidation, where if tested tomorrow, finds a bullish bounce into the close.

The thin red downward trend on the QQQ chart was a trend I had in place from a relative high point of 11/12/03. Today's "test" of that trend at the session high of $35.45 was the first successful BEARISH test of that trend, and I'll continue to monitor that trend's progression is sessions to come.

Tomorrow, that trend may once again be of use should the QQQ find buyers to its DAILY R1 of $35.39, as extension of that trend to the far left of the chart, would be pretty close to $35.39 when the clock strikes 4:00 PM EST.

While the QQQ and NDX traded a tight range today, there was actually some surprising action taking place in the internals. Today's trade saw a net gain of 4 stock to point and figure buy signals, and all be darned if that wasn't enough to have the NASDAQ-100 Bullish % ($BPNDX) reversing back up to "bear correction" status. Since July (red 7 on PnF chart) we have now seen this bullish % move like this.... "bull confirmed", then turn lower to bull correction by August (red 8), then further lower to "bear confirmed", then reverse back up to bear correction status by early September (red 9), then back lower to "bear confirmed" by October (red A) then back up to "bear correction", then back lower to "bear confirmed" and now back up to "bear correction."

S&P 500 Index Chart - Daily Intervals

Last week I did NOT think the SPX should trade above the 1,055 level, and while 3.05 points isn't all that much above 1,055, it is enough to calm any overly bearish thoughts toward the major indices.

As a note to just what a plunge in the Market Volatility Index (VIX.X) 16.71 -4.18% can do to an index option trade that was put on in a Dec. 1,040 strike when the SPX was trading 1,042, that option (SPQXH) was purchased at $18.70 and now trades with a $9.70 bid and $10.30 ask.

The SPX put/QQQ long "hedge" trade discussed this weekend currently shows a BOTTOM LINE loss of $440.00.

I'm running way late on my deadline, so better type quick. Today's trade saw a net gain of 4 stocks to PnF buy signals in the broader S&P 500 Bullish % ($BPSPX) and has the bullish % edging up 0.8% to 79.4%. Still "bull confirmed" status.

The narrower S&P 100 Bullish % ($BPOEX) saw no net change and still remains "bull correction" status at 78%.

Dow Industrials Chart - Daily Intervals

The one note I would make in the INDU is related to today's trade and INDU closing right on its shorter-term 21-day SMA which now starts to trend higher. This is very similar to early October, where when the INDU broke above that 10/02/03 day's trade, the INDU sprinted higher to challenge its prior relative higher.

This may need close monitoring tomorrow, as the INDU can be important for market psychology.

Today's trade saw no net change in the very narrow Dow Industrials Bullish % ($BPINDU). Still "bull correction" status at 80%.

Jeff Bailey

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