Option Investor
Index Wrap

And now the other side of the argument

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When the major indices trade unchanged and in a very tight range, my mind begins to wander and I begin thinking a bit outside the box.

One thing I read in today's market monitor triggered a thought, or at least had me posing a question to myself.

In recent weeks, I've mentioned that I thought we might see some "tax gain selling" in early January, which might have the major indices digesting some gains and pulling back should bulls lock in gains after an enormously bullish year of gains.

But then it struck me!

Jim Brown returned from a holiday vacation and wrote... "I don't want to rein it in, I want to see a good strong exhaustion climax soon. I want all the buyers to get into the market at once and quit waiting for the dip. Once everyone is invested the bulls will run out of steam and we will return to the normal market action. Normal as in several days of uptrend followed by several days of down trend and then repeat."

Hmmmm.... I began to think. This sounds familiar. I've read many "sell-side" calling for resistance at Dow 10,000, Dow 10,100, Dow 10,200, Dow 10,300, and Dow 10,400, where I begin to wonder if its not bulls that are waiting for the pullback but BEARS!!!!!

To Jim's credit, he used the word "buyers," which leaves us to assume that it isn't just a bunch of love-crazed bulls that show up at "the top," but most likely some very wrong BEARS.

Have you seen the short interest on the NASDAQ-100 Tracking Stock (AMEX:QQQ) $36.56 +0.32%? For those that may have missed yesterday's trade, the QQQ broke to a new 52-week high. While fractional gains were seen today, the QQQ traded a new 52-week high of $36.58, triggered a bullish action point I had set for a swing trade long in the QQQ at $36.57, a level I really didn't think the QQQ would trade as the session wore on. Who in their right mind is buying the Q's at their 04:15 PM EST close and at a 52-week high?

I know I ate some mad-cow beef in the last couple of days, but there's got to be some QQQ bears, with December 15, 2003 short interest now at an all-time high of 350 million shares short, that are COUNTING on some tax-gain selling.

But what if there isn't a rush of tax-gain selling? I read through some books on trading and investing, and nowhere did I read that after a large market rise, traders and investors can COUNT on tax-gain selling the first month of the new tax year.

Have I only been looking at things from one side of story? The BEARISH side of the story, which is perhaps COUNTING on tax gain selling?

Market Snapshot / Internals - 12/30/03 Close

The Dow Industrials (INDU) 10,425.04 -0.23%, S&P 100 Index (OEX.X) 549.07 -0.02% and NASDAQ-100 Index (NDX.X) 1,470.01 -0.02% finished lower in today's trade, and if not for a 16-cent move higher in the final 35-minutes of today's session, the NASDAQ-100 Tracker (QQQ) $36.56 would have probably finished today's trade with a loss.

Market internals were not nearly as bullish today as they were yesterday, but NASDAQ NH/NL was almost identical to yesterday's 300:4. The NYSE NH/NL was found fewer new high, but also new lows than yesterday's 614:12.

When the NASDAQ Composite (COMPX) 2,009.88 +0.16% moved below the 2,000 level this morning, just after the release of 10:00 AM EST economic data, it grabbed headlines on CNBC as the NASDAQ Composite rebound to 2,000 was short-lived.

While it may be that BEARS are the ones hoping for a pullback, there were quite a few signs, especially late in today's trade, that some shorter-term momentum bulls are looking to play some historical bullishness for the NASDAQ.

My surprise from today's trade was that NASDAQ turned 1.5 million shares, and the highest full-day session volume since December 19th, when most traders headed out for the holidays.

Pivot Analysis Matrix -

At the conclusion of tomorrow's trade, we'll get new MONTHLY Pivot levels, and right now, its only the NDX/QQQ that hasn't found a trade at its MONTHLY R2.

I've marked tentative near-term resistance for the Dow Industrials (INDU) at its DAILY Pivot and WEEKLY R2. While 10- points apart, its been common to the INDU trade within 10-points of correlative support resistance levels, where the bigger move comes when the INDU trades 10-points below or above a correlative support/resistance level in the matrix.

I was scrambling before the QQQ 04:15 PM EST close to try and quickly calculate today's DAILY Pivot levels. I'd consider firm near-term support building at the correlative DAILY S2/WEEKLY R1 of $36.20, with tentative support early tomorrow at the DAILY Pivot $36.48 and MONTHLY R1 $36.50. Today's QQQ low of $36.30 briefly pierced the QQQ's DAILY Pivot of $36.33, and a 01:10:00 PM EST low of $36.33 had the QQQ trading like it touched a glowing red branding iron.

I tried and tried to convince the bearish side of me to NOT profile/trade the QQQ bullish today. I tried to set an upside action point where I didn't think the QQQ could trade. I tried to make a QQQ WEEKLY Interval chart prove to me that with record high short interest mounting in the QQQ, and it trading a 52-week high, I should not trade the QQQ bullish. I tried to convince myself that LOW volume means lack of buyer, NOT lack of sellers! I tried to convince myself that the QQQ hadn't gotten back above its bullish trend from the March lows.

NASDAQ-100 Tracking Stock - Weekly Intervals

I'd call this my devil's advocate chart of the QQQ. I could come up with a bunch of reasons not to buy the QQQ. One reason I heard to not buy the major indices today and to think about shorting futures or buying puts is that there might be a terrorist attack in the United States on New Years Eve/Day.

I wouldn't disagree with the buying of a protective put to hedge a long portfolio, but if trader's are shorting or buying puts on such thinking, I would consider that to be speculative.

As Jim Brown said... he's waiting/looking for a good exhaustion climax soon and wants all the buyers to get into the market at once and quit waiting for the dip.

Maybe the recent break to new highs on LIGHT holiday volume has just a few buyers showing up, and at a new high where supply should be limited, a euphoric amount of buying might actually see the Q's trade $38.75?

Heck... that might not be a bad idea with a during market hours stop under $36.00 or $36.20!

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

I "dashed pink" the DAILY R1 in the QQQ and marked it on the above chart. As I see it, when the QQQ traded $36.57, and three- cents above the WEEKLY R2, a level I didn't think the QQQ would trade if computers were lined up to sell the $36.54 level, there may not be any levels of resistance until a round-number $37.00 to keep the QQQ in check. While bears question of gains that come on light volume, the light volume simply means there's not a lot of interest or disagreement on price right now.

I do think it important for bulls to keep an eye on the QQQ 19.1% MONTHLY retracement level as it relates to this morning's 09:00 AM EST comments and past observation in the OEX.

Here's what I saw late last night, and it may become an important near-term test for strength for a QQQ bullish trade.

S&P 100 Index Chart - Daily Intervals

Index trader bulls have rotated from an index to a different index in past week's or months, and using another index's rise to alert that strength may build in a lagging index. Past trades have had us looking to buy a QQQ at a pullback low as the INDU/SPX/OEX broke to new highs. The OEX has surged in recent weeks and when I started looking at the QQQ chart, it struck me that the QQQ might actually be where the OEX was at on December 3rd.

Should the QQQ break above its MONTHLY 19.1% retracement tomorrow, it could be a Gone! Goodbye! trade for the QQQ's and a similar sprint higher. Again... I tried to set today's bullish action point in the QQQ where it wouldn't get traded, but all be darned if the QQQ didn't rally late to the action point.

S&P 500 Index (SPX.X) (candle chart) - Daily Interval

I haven't seen one of these funny little candles in the SPX and that interests me a bit. I remember Jonathan Levinson sending me an explanation of what Dragonfly Doji Bearish pattern description a while back, when I asked him just what the heck it was (I think it showed up in a stock we were looking at). Heck, I'm not a candlesticker, but if this is a DDB, then a protective bullish stop under the WEEKLY R2 should suffice. If today's candle is a weird doohickey like the candle which appeared as the SPX would have just broken to a new 52-week high and the current WEEKLY S1 of 1,088.53, then a break above today's high (another 52-week high) might turn out bullish.

Dow Industrials (INDU) Chart - Daily Intervals

The INDU was "very weak" today and fell 25-points. I added a new regression channel to try and give some type of resemblance of near-term resistance at approximately 10,515. Yes, the INDU looks overextended, but it looked ripe for a fall at the 10,350 level and its May 27, 2002 relative high.

Wouldn't it be something if the QQQ were to make a similar move as the INDU did when MACD just kept rising and rising as momentum built at new highs?

Jeff Bailey

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