Option Investor
Index Wrap

Bulls satisfied, while bears look starved!

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The historically bullish month of December got started off on a bullish note with the major indices closing at their highest levels of the year as the bulk of market participants returned from what was most likely an extended Thanksgiving holiday, where bulls found economic data satisfying, while bears looked starved.

Reports that the Bush administration intends to lift its controversial duties on steel imports, most likely within the week, helped boost global equity markets earlier in the session, while stronger-than-expected economic data added fuel to today's rally on Wall Street.

The news of the Bush administration ending imported steel tariffs 16 months ahead of schedule to comply with a World Trade Organization ruling gave bullish relief to many investors that fear a global trade war is about to unravel, which might not only hurt a global economic recovery, but a U.S. economic recovery as well.

The decision, if made, could also spark a political backlash against President Bush in the pivotal steel-producing states of Ohio, Michigan, Pennsylvania and West Virginia in advance of his reelection bid next year.

Still, sources close to senior Bush advisors concluded the tariffs were causing more harm than good and that lifting steel tariffs would boost his standing with small and medium-sized Midwestern manufacturers, as well as automakers whose profits have been squeezed by the higher price of steel.

The president was expected to sign off on his advisers' final recommendation and lift most of the tariffs by Friday, just days before the European Union was set to make good on threats to retaliate on $2.2 billion worth of U.S. exports.

Some Washington watchers cautioned that President Bush could still make some changes, like keeping some tariffs in place a few months longer.

Steel industry analysts said a drop in the value of the dollar over the past year and rising freight rates out of Europe would help U.S. steel remain competitive even if the tariffs were ended early.

But Leo Gerard, president of the United Steelworkers of America union, warned President Bush could pay a price at the polls in next year's presidential election if he lifted the tariffs.

"Caving into the blackmail of the European Economic Community is not going to float well in Ohio, Pennsylvania, West Virginia, in Illinois and the other industrial states," Gerard said in an industry conference call with reporters.

To soften the blow to U.S. steel makers, the administration was expected to step up enforcement of rules that penalizes steel importers for dumping their products in the United States at below-market rates, and plans to keep an existing steel import licensing and monitoring system in place.

Wall Street applauded the news that steel tariffs may find an early end, and later cheered economic news on the manufacturing front, when the ISM Index jumped to a reading of 62.8% in November, and highest reading since December 1983, as new orders of 73.7% and production of 68.3% were the strongest in 17 years and where still low inventories (50.0%) and rising order backlogs (59.0%) continue to argue for fur further strengthening in production.

While an afternoon report of a shooting at the United Nations headquarters in New York found the major indices trading back from their session highs, later reports that the shooting may have been a suicide and were not terrorist related found the major indices recovering from a late-afternoon lull to finish at their highs of the session, and for the year.

Bears may have been hungry and pressed to close out some bearish positions after the Thanksgiving holiday failed to show any large scale terrorist events taking place, with added reason to cover on reports that the Bush administration may bring to an end tariffs on steel, which would most likely lesson the possibility of a global trade war.

This weekend I was checking short interest data and noticed that on November 15, 2003 short interest on the S&P Depository Receipts (AMEX:SPY) $107.60 +1.08% rose to 115.18 million shares, it highest level this year. The NASDAQ-100 Tracking Stock (AMEX:QQQ) $35.90 +1.46% saw its short interest fall from 333.75 million shares to 314.5 million shares (October's 333.75 million was a yearly high of short interest), while the Dow Diamonds (AMEX:DIA) $99.10 +1.03% saw short interest moving back above the 20 million share mark at 21.54 million shares, up just over 1.9 million shares from October 15th 19.56 million, but still below its August 15th yearly high of 23.31 million shares short.

Bond traders may also have taken some comfort in the news that the U.S. was about to lift tariffs on imported steel after as Treasuries recouped some of their early morning losses by session's end. While the shorter-dated 5-year YIELD ($FVX.X) rose a sharper 8.8 basis points to close with a 3.439% yield, the longest-dated 30-year YIELD ($TYX.X) rose a more modest 3.2 basis points to 5.158%, while the belly of the yield curve had the 10- year YIELD ($TNX.X) rising 7.2 basis points to 4.392%.

The U.S. Dollar Index (dx00y) 90.32 +0.09% showed the dollar gaining strength during the first half of today's trade to as high as 90.54, before settling back into the middle-part of the day's range, with currency traders weighing the negatives of a rising deficit against still strengthening economic indicators and calming geopolitical fears of a trade war.

The December Gold futures contract (gc03z) $402.70 +1.48% closed above the $400 level in today's trade and gained $5.90 with the AMEX Gold Bugs Index ($HUI.X) 255.59 +2.88% surging to yet another all-time high.

One note for traders of gold, which we first discussed in an Ask the Analyst column back on June 22, 2003 regarding a new gold trading security that should catch a gold bugs attention has Merrill Lynch offering the Gold TRAKRS (NYSE:GLD), which will begin trading on December 4, 2003, and is designed to track the spot price of gold. For a copy of the GLD prospectus, traders and investors are invited to visit http://www.trakrs.com

According to the Stock Trader's Almanac, the month of December has been the most bullish month for the S&P 500 Index (SPX.X) 1,070.12 +1.12% where from January 1950 to June 2002 (June 2002 used as end day for publishing of the Almanac deadline for year- end distribution), the Almanac shows the S&P 500 (SPX.X) rising 1.8% and today's 1.12% gain for the SPX looks to have market participants eager to see market history repeat.

While history is no guarantee for the future, November has historically been the second-most bullish month of trade for the SPX with an average 1.6% gain. This past November ended on Friday, saw the SPX rise a more modest 0.71%.

As I was reviewing the Stock Trader's Almanac notes of historical trade for November and looking at the S&P 500 Index with new WEEKLY and MONTHLY pivot retracement levels overlaid, I was expecting, or maybe I should say looking for some selling early this week to WEEKLY S1, to get a good trade setup for a buying on weakness, and looking for the SPX to rebound back to 1,075 this week, while finishing out the month near 1,071 where from its November 28th close would be a nice 1.2% gain. However, as has been the case of late, that would have probably bee been too easy.

I do think today's news that the Bush administration reconsidering tariffs on steel imports was a pretty big surprise to investors/traders as there were some heightened fears that a global trade war was just around the corner. While the Bush administration hasn't made a formal announcement regarding its import tariff policy, I'm somewhat uncertain that a pullback to WEEKLY S1's is now in the cards, and after seeing new closing highs, both the MONTHLY and WEEKLY Pivots begin to provide the look for formidable support.

Pivot Analysis Matrix -

There are what I feel very good support correlations in the WEEKLY S2 and MONTHLY S1 levels, where this weekend I really thought the MONTHLY S1's provided strong technical support on their own merits, where I would expect institutional buying to really kick in at the WEEKLY S1s if the major indices were to edge back lower earlier this week.

Today's trade was MUCH stronger than I had envisioned this weekend when reviewing the new MONTHLY/WEEKLY Pivot levels, and now gives a much more formidable look of support to the MONTHLY Pivot correlations, ESPECIALLY in the S&P 500 Index (SPX.X), as it would relate to short interest being at its highest level this year as of November 15th.

S&P 500 Index Chart - Daily Intervals

Last week I didn't trust the MACD/Stochastics oscillators and that disturbs when now having missed what would have been a very good bullish trade on the move above 1,051, or even a bullish stop on a prior bearish trade from 1,042, when the SPX fell to 1,031 and may have had traders stopped out at 1,055 when the SPX traded a level (1,055) I didn't think it would trade for a bearish trader to still see 1,027. While there is correlative resistance near term in the above MONTHLY/WEEKLY Pivot retracement chart with DAILY R2 also at 1,057.92 offering near- term resistance, I'm hesitant to even try putting on a bearish trade. There may be some traders holding bullish positions that could snug a stop just under the 1,066 level to protect some gains and look for Stochastics to turn back lower to "oversold," where I think the SPX might retreat back to its correlative WEEKLY and MONTHLY Pivots and rising 21-day SMA for another bounce back higher, but this time to its WEEKLY R2 of 1,075.

On the above chart I made some notes as to current oscillators matching those found in early October, where the SPX came within about 5-points of trading its MONTHLY R2. While I can not say that similar trade is going to take place as it relates to Oscillators and MONTHLY R2, it sure has me envisioning an SPX still moving higher, where any pullback to the 21-day SMA finds support buying.

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

I can not come up with any resistance on the OEX except for correlative MONTHLY R1, WEEKLY R2 and DAILY R1 all near 529, but that many levels of correlative resistance in the matrix has often been enough from a bullish perspective to target for near- term gains.

One chart I was looking at in the OEX for a really good bullish trade entry on pullback was at the WEEKLY S1 area based on the above chart, but also this more historical chart of the OEX and usage of conventional retracement, where I think a good pullback entry is found and may still be found in sessions to come.

Here's a weekly interval chart of the OEX.

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

This weekend I spent a couple of hours working with conventional retracement and had a heck of a time getting any retracement to really make sense as it related to the OEX's past and recent trade. The above retracement would tie to our WEEKLY S1 of support and back in June and then again in early August, the tests at 490 also tied in with pivot matrix observations for support. One retracement not show, which some traders and investor might be using is the same lower anchor point to the July 2002 lows, but with upper anchor point edged up to 600, which would have 61.8% retracement at 518.34, but here too, that 61.8% would be broken to the upside, with 80.9% higher still at 559.57.

Point here is that the only resistance I can find for the OEX is from the pivot matrix at this point, and I'm always hesitant to call that resistance formidable, when things are breaking to new 52-week highs.

Dow Industrials (INDU) Chart - Daily Intervals

International Paper (NYSE:IP) $38.75 +4.13% surged 4.13% after an upgrade from Deutsche Securities and lead the list of Dow gainers, while discount retailer Wal-Mart (NYSE:WMT) $54.50 - 2.04% lead a very small list (4) of decliners on what analysts felt was a disappointing "black Friday" sales report.

I'll say this now and test it later, but if Procter & Gamble (NYSE:PG) $97.04 +0.83% closes above $97.25, then it should trade $100.00 and lead the Dow to 10,000.

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

The QQQ backfilled its morning gap higher to $35.47, but that lasted for about 15-minutes as it looked like bears hungrily snapped up the pullback. With that type of intra-day action, I'm looking for support to be firm at $35.14 and the QQQ to challenge the $36.50 level over the next two weeks as MACD now looks to provide upward momentum.

Jeff Bailey

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