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Index Wrap

That was neat. Now do it again!

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The Santa Claus rally might just be in the setup stage, but traders and investors will want to be sharp tomorrow, as we'll be using some of today's observations as a test tomorrow.

While trading was a bit sloppy within the pivot matrix for the NDX/QQQ, the SPX/SPY and OEX, the progression of the NASDAQ-100 Index (NDX.X) 1,388.96 +0.38% and its Tracking Stock (AMEX:QQQ) $34.56 +0.37% leading today's session weakness and find trade just below their WEEKLY S2s did see a late-session rebound on very week market internals placing a few pieces of candy in a bull's holiday stocking by session's end.

The notably weaker NDX/QQQ trade just below their WEEKLY S2, helped pull the broader S&P 500 Index (SPX.X) 1,059.05 -0.10% below its WEEKLY S1 of 1,055.99, as the staggered trade within the WEEKLY pivot matrix plays itself out. Meanwhile, the Dow Industrials (INDU) 9,921.86 -0.01%, which traded a session low of 9,882.38, didn't quite see a test of its WEEKLY Pivot (9,863.40) with a session low of 9,882.38.

Tonight's wrap is for everyone. It doesn't matter if you're a bull or a bear. It doesn't matter if you believe, or don't believe in Santa Claus.

All you need to do, when looking at the Pivot matrix is imagine the logistics of just how Santa Claus gets to where he's supposed to go.

Rudolph the red-nosed reindeer need to lead the team of reindeer, if Santa's sleigh is ever going to get to where it is supposed to go. As I see it right now, the Dow Industrials are the equivalent of Rudolph.

I can't for the life of me remember all the other reindeer's names, but I see the rest of the team being the S&P 500 Index (SPX.X) 1,059.05 -0.10% and the S&P 100 Index (OEX.X) 525.33 +0.22%.

And at the far end of the line, is jolly old Santa Clause, or at least his sleigh, where the sleigh full of end of year "goodies" is currently weighed heavily with a bunch of technology stocks.

Let's take a quick look at today's market snapshot, where for the most part, the deer looked to be coming down with that flu virus again today, as market internals were rather weak.

Market Snapshot / Internals - 12/10/03

Since I started posting the intra-day advance decline line, I've received a lot of questions as to just how a trader interprets such an indicator of breadth. To tell you the truth, the A/D line has never been one of my "favorite" indicators, but how I find it useful is to thing of bulls (advance) and bears (decline) playing tug-of-war with a rubber band. An INVESTOR will do the same, but most likely with the end of day, or 04:00 tabulations.

Let's use the NYSE 10:00 and 11:00 hour comparison. You can see how the advancer from 10:00 to 11:00 show some addition to their numbers (+98), while the decliners also added to their number (+230). The observation, and perhaps the "feel" for lack of a better word, is that the rubber band was being stretched at both ends, but it was BEARS or decliners that was actually leading, or doing the bulk of the stretching. It would be an ERROR to then simply assume price action will follow, as the major indices are weighted, with some stocks carrying greater weight, but for the most part, the A/D line and 11:00 marks for the major indices did show price decline at the 11:00 hour.

You can make a similar hourly comparison for the NASDAQ breadth and make the notable observation that some indices (NASDAQ Composite, Russell-2000 and QQQ) found greater price movement lower. This may not be a surprise, based on what we've been noticing in the pivot analysis matrix. The NASDAQ stocks (4- lettered stock symbols) have been showing greater weakness of late.

If we move on to 12:00, what happened? Internals weakened further at both the NYSE and NASDAQ, but PRICE action actually saw improvement. In today's market monitor, I commented on this type of internal/price action, which is what traders/investors call BEARISH DIVERGENCE. While price action matters most to a trader/investor, this DIVERGENCE is often times a heads up, that something has got to give!

Moving on to 01:00 PM EST, what gave? By 12:00, PRICE action fell, while A/D lines IMPROVED. Even here, by thinking of a rubber band the A/D line compared to price "feeling" like a rubber band being pulled at both ends, then some tension being released (snapping back a bit, but still weak) and price action fluctuating as that tension is applied, then released.

Again... these breadth indicators are really observed, so that the trader/investor develops a "feel" for what is taking place internally.

NEVER underestimate what PRICE action has on MARKET psychology! Why would a weaker A/D line and higher price action one hour (12:00 for example) find a slightly improved A/D line and LOWER price action the next hour (01:00 PM EST)? I think it is because BEARISH traders see price improvement in a major index/sector, and when they've got a nice gain at risk, they tend to want to lock in the gain. For example, I sell the ABCDE stock short on Monday at $35.00, and see at 12:00 PM EST, I see the major indices holding relatively tough, look at my ABCDE short trading $32.00 -0.05% at the 12:00 PM EST mark, and decide to cover that short and lock in gains. While I alone am probably not dictating ABCDE's price action, there are perhaps other traders thinking, observing some of the same things, and more inclined to book the gain near-term, than risk the stock rebounding with slight price gains, or stability being found in the indices.

I discuss the above, MAINLY for those intra-day traders that asked quite a few questions today. Try and use the analogy of bulls and bears pulling at both ends of a rubber band.

As we get set to look at the pivot matrix, today's trade did see the S&P Banks Index (BIX.X) 328.07 -0.56% finish lower by 1.87 points, where session low of 326.31 did see a test of its correlative levels of support at the 328 levels of DAILY S1, WEEKLY S2, MONTHLY S1. Observation is that while there was most likely some basket buying of banks today, the session low wasn't an exact match, so I'm still not overly aggressive for a bullish entry.

Still... "that was neat. Now do it again!"

S&P Banks Index (BIX.X) Chart - Daily Intervals

I've stretched the BIX.X chart about as vertical as I can to give all of us the observation at what a powerful move this group of stocks has had since breaking above its summer's highs. This isn't a technology sector! But they've traded like it. Look at that 50-day SMA rocketing higher! It did serve as greater support than our Pivot levels. After two days of sharp declines (for the BIX.X) I now begin making some assumptions as to levels I think this sector needs to hold for BULLISH thoughts toward a rebound. I think 325.00 needs to hold support, and sign of strength is above 331. Since the BIX.X did pierce below its MONTHLY S1 and WEEKLY S2, then I will monitor for FIRMING or more anxious buying to show up, should the BIX.X show intra-day support at these MONTHLY S1 and WEEKLY S2 levels.

Let's look at the pivot matrix now, use some of the BIX.X observations, 331 and 325, and see if any of this ties into the DAILY levels, for testing tomorrow. With the oscillators suggesting bullish caution (bullish as MACD is still above zero, and BIX.X is still in a longer-term upward trend, hasn't broken a relative low), this is still a sector that I feel needs to be monitored for support. Remember that long ago we labeled the regional banks as somewhat of a sector, that while interest rate sensitive, gives us a pretty good representation for financials, which make up about 28% weighting in the SPX.

Pivot Matrix -

Underlined in PINK : BIX.X , QQQ, NDX WEEKLY S2s. I think of this as the lower end of a week's range, and all three traded these level, and just below, then closed above these levels as if there was formidable buying triggered at those levels. Today we saw brief violations of those levels. One thing to look for early tomorrow morning, should we see weakness early in the session, is for these levels to FIRM.

Now take note of the NDX's DAILY S2 at 1,376.32. This observation is noted in dashed green, to depict tentative support, but the observation of this DAILY WEEKLY support correlation suggests a level to look for support on a retest.

We've noted how the BIX.X and the NDX/QQQ have NOTHING in common as it relates to stock composition, but these two indices seem to mirror each other in the MATRIX. Note the BIX.X DAILY S1. I highlight this in a PINK box, only because it matches almost to the penny, the rising 50-day SMA. Here too, a level early tomorrow morning to monitor as a support level in the BIX.X, should the BIX.X once again try and violated its correlative MONTHLY S1 and WEEKLY S1. These observations in the BIX.X, with "bad news" in the sector (mortgage refinancing) provides the ultimate test for strength, or stability! I think the BIX.X is going to hold these support levels. Now note the THREE levels of correlative resistance in the BIX.X at MONTHLY Pivot, WEEKLY S1 and DAILY R1. This certainly looks like formidable resistance. My thoughts here are that if the BIX.X tests these levels, it would be a sign of strength considering the news in the sector. If the BIX.X breaks above these levels.... here comes Santa Claus!

The SPY resistance correlations at WEEKLY Pivot and DAILY R1 of $107.18 and $107.15. I view these as near-term resistance, so I'm setting upside alerts there to alert to bullishness building to a higher degree.

Let me quickly mention the OEX! On Friday of last week, I used the OEX break below 524 as a trigger for a QQQ short at $35.08. Folks... the OEX is trading 525.33 at tonight's close, while the QQQ is trading $34.56, where QQQ traded a session low of $34.13 today! This observation and comparison certainly has to hint that there is a underlying bid to the OEX, if not the markets.

This has me VERY ALERT TOMORROW to be monitoring any early session weakness at NDX/QQQ WEEKLY S2, and SPX/SPY WEEKLY S1 for support, and perhaps some strong bounces.

One reason I think the markets have a good shot at a rally, or just don't seem to be giving up some larger declines, is that fund managers may well be trying to protect gains for the year- end reviews. While market internals A/D are weak, my best guess at this point, is that the declines, in stock-related terms are not overly large. Yes, there are some exceptions (WM, AZO, etc.).

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

The OEX has been back and forth its WEEKLY Pivot, but a range from 522-529 (that's 7 points) really begins to show up. This type of range, in my opinion, has to have an OEX trader monitoring a sector like the BIX.X, which has been weaker, as their directional index. As tough as the OEX has been holding around the 525 level, despite the banks weakness, if the banks rebound, then it would have to be my best estimate that the OEX breaks out of this consolidation to the upside.

When I say "The best trade setup for a bullish Santa Claus.... is to buy the OEX 520," what I would look for is ... IF the OEX were to trade back to 520 area, but the BIX.X be holding at or near its rising 50-day SMA and showing stability, then there is very good risk/reward trade setup, for the bullish side. My thinking is that the BIX.X has been weaker the last couple of session, but if it firms, and should the OEX compress lower to 520, then this is somewhat equivalent to pushing/compressing a coiled spring together, where I think there's still enough upside pressure for the end-of-year rally.

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

The QQQ is our weaker major index right now, and today's trade just under the WEEKLY S2 did manage to find enough buying to drive the QQQ back near its morning highs. This was what I would consider the first test of a rather CRITICAL near-term support zone.

I want to quickly put myself in a BEAR's shoes. "Oh crud... did I miss my MAX weekly decline cover point?" I may have, and this is why on any weakness tomorrow, I look to COVER a short back near $34.22, and CLOSE OUT a bearish trade on a break above today's high.

I'm trying to think how I would if I were still short the QQQ and hadn't gotten stopped out yesterday morning. How would I be using a trailing profit stop in that trade to protect the bearish gain after seeing a late session bounce today from the WEEKLY S2?

Dow Industrials (INDU) Chart - Daily Intervals

The INDU is holding very tough after seeing trade at 10,000 yesterday. My main thoughts here are this...

The INDU holding tough keeps market psychology rather bullish. "Hey, it isn't getting sold as hard like NASDAQ Composite (COMPX) 1,904.65 -0.19% did from 2,000 trade."

Right now, the QQQ is perhaps looking for this type of stability from the Dow, to help put a bid under the QQQ and have it firm.

Meanwhile, the INDU is looking back at the QQQ and saying "c'mon you bugger, I can't hold this market up by myself, I need some strength from the bottom!"

Thinking like this is where I now place a greater emphasis on the INDU's WEEKLY Pivot as an important support level, and tie that to the QQQ's MONTHLY S1, which I deem a rather CRITICAL support level near-term.

I'm past deadline. I'll have an SPX chart in the morning, and I will try and get the weekly Mortgage Banker's Association data shown tomorrow morning too. I'm simply out of time!

Still, I think it very important for traders and investors to try and "feel" the trade ahead, make some observations as we have tonight, and then define near-term levels as we get more information, to then act on.

Jeff Bailey

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