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Index Wrap

Indices finish higher on valuation concerns

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The major indices pushed to new 52-week highs after Nokia (NYSE:NOK) $20.47 +13.9% upwardly revised its fourth-quarter earnings outlook, while shares of Sun Microsystems (NASDAQ:SUNW) $5.51 +10.42% lead a broad list of NASDAQ gainers after Banc of America Securities upgraded the stock to "buy" with a price target of $6.25 on the belief SUNW is a leveraged play on improving enterprise spending in 2004, and that valuation is reasonable at 1.1-times sales.

UBS revised its 12-month target for the S&P 500 Index (SPX.X) 1,131.92 +0.49% to 1,200 from 1,150 due to greater confidence in an economic expansion, and to reflect a higher 2004 earnings estimate.

A quick calculation on my part would have UBS saying there may be an additional 6.01% upside from current levels for this year. Since the SPX has exceeded its bullish vertical count of 1,105, a quick check of the narrower S&P 100 Index (OEX.X) 562.88 +0.63% shows its current bullish vertical count at 595. Considering a potential 2004 trade at 595 from current levels would equate to a 5.7% gain, it may be that UBS's fundamental analysis is worth noting.

Networkers ($NWX.X) 292.43 +6.04%, Combined Telecom (IXTCX) 197.74 +2.48%, Semiconductor (SOX.X) 545.01 +3.39% and Disk Drives (DDX.X) 143.38 +2.86% all moved higher. Airlines ($XAL.X) 65.12 -2.34% were notable decliners after JetBlue Airways (NASDAQ:JBLU) $25.67 -11.23% and Frontier Airlines (NASDAQ:FRNT) $12.00 -18% fell on mixed December traffic reports.

The Dow Jones Home Construction Index (DJUSHB) 543.99 -4.45% was today's sector loser as homebuilders saw selling, with backlog concerns being cited. A quick look at Stockcharts.com's $DJUSHB point and figure chart does show this index having triggered a spread-triple bottom sell signal at 550.00 on January 5th, and an alert to weakness. A quick check of my $DJUSHB bar chart with 2 fitted retracement shown in prior Index Trader Wraps has today's lows entering an important near-term zone of support and base of bullish regression channel. A break much below the 525 level could have this index vulnerable to 482 and June highs.

Dow Jones Home Construction Index ($DJUSHB) - Daily Intervals

Homebuilder Index (DJUSHB) traded base of a bullish regression channel taken from March lows. First sign of weakness on the above chart would be trade below 525, where DJUSHB becomes vulnerable to 482.00. The point and figure chart's bullish support trend currently resides at 445.

Market Snapshot / Internals - 01/08/04 Close

Volume levels continue to build Lucent (NYSE:LU) $3.88 +10.54% and Nortel (NYSE:NT) $6.13 +7.92% were the most actively traded stocks traded in today's market and turned 254.8 million and 156.7 million shares respectively and most likely boosted total NYSE volume rates to its highest level since I started keeping daily tabulations on May 2, 2003, when this impressive bull market had just gotten underway.

Pivot Matrix Analysis -

The S&P Banks (BIX.X) 338.35 -0.19% found important support at the 337 level again today, and today's fractional losses may have kept the SPX/OEX firm enough to get a test and close above correlative WEEKLY R2 and MONTHLY R1, which based on the pivot matrix, could have the MONTHLY R2's in play as a next level higher. Still, I think the SPX/OEX needs this group, along with other financials to get that type of impressive move higher, and the trigger point may be the BIX.X back above its WEEKLY Pivot.

Swing trade bulls in my QQQ trade will note DAILY R2 and MONTHLY R2 of $38.26 and MONTHLY R2 $38.25. This is our swing trade target and I'm looking to take gains there if traded. To protect gains from bullish re-entry of $34.41, I'm moving stop higher to $37.70, but should we see the QQQ slowly edge higher toward target, I will most likely start moving stop higher. QQQ is $38.00 in after-hours, which gives an additional $0.25 upside to target. Doesn't make sense to risk much more than that right now, but I think bears will be willing to pay the piper at $38.25.

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

Santa Claus has been very good to traders in the New Year and it may be destiny calling the QQQ to our current bullish target of $38.25. I noted a BIG volume spike intra-day, that came out of nowhere, and following action has me thinking there was some type of "eagerness" to buy the QQQ there, which I do think was shorted to the market, which had to be bought back by the close, thus the "reason" the Q's continued to trade higher lows and close right at the high. We'll find out tomorrow, but a stop just below DAILY S1 should protect bulls.

S&P 500 Index Chart - Daily Intervals

The SPX just keeps getting more extended, but its been bulls profiting and bears losing. Bulls shouldn't be complacent, but I'd look for a bullish trade to unfold on a break above 1,132.00, for what could be an impressive display of short covering. Protect it with a stop below 1,129.

Dow Industrials (INDU) Chart - Daily Intervals

INDU trying to break above the bullish wedge. The INDU traded similar this summer, but came back into channel as it built a sideways base for about 3-months. Similar trade might have INDU trading 10,682 near-term, where bulls can protect with a stop at 10,465.

Again... resistance levels can be broken, especially when stocks/indices trade yearly highs were supply of stock is limited, but in what looks to be a slightly extended market, can still trade bullish, just trail with stops.

Jeff Bailey

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