Option Investor
Index Wrap

Bullish rotation builds, with Internets breaking out

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The very broad NASDAQ Composite (COMPX) 2,111.78 +1.19% closed at a 52-week high for the fifth time in six sessions after taking a breather Friday afternoon, as market participants eagerly await quarterly earnings from semiconductor giant Intel (NASDAQ:INTC) $34.15 +0.52% and Internet conglomerate Yahoo! Inc. (NASDAQ:YHOO) $49.74 +3.36% Wednesday afternoon.

The CBOE Internet Index (INX.X) 182.33 +3.5% was just the latest technology-related sector to exhibit signs of bullish rotation taking place, after digesting gains in prior weeks. RealNetworks (NASDAQ:RNWK) $6.69 +9.3%, Juniper Networks (NASDAQ:JNPR) $23.72 +7.8%, InfoSpace (NASDAQ:INSP) $24.86 +5.11% and DoubleClick (NASDAQ:DCLK) $11.12 +4.9% and Check Point Software (NASDAQ:CHKP) $18.88 +4.02% round out the INX.X top 5 percentage gainers, with InterActive Corp. (NASDAQ:IACI) $32.27 +0.27% bringing up the rear of 13:0 positive breadth.

CBOE Internet Index (INX.X) - Weekly Intervals

The INX.X looks to extend last weeks break higher from a nice 12- week base of congestion and moves above the mid-point of a bullish regression channel, where bullish resistance not unlike what the Dow Industrials (INDU) 10,485 +0.25% are currently testing, looks to have the INX.X making way to the 200 level in coming weeks. I've shown a relative high of 188.87 dating back to 2001, but we've found old relative highs serve more as near- term gravitational points than any type of resistance.

CBOE Internet Index ($INX.X) components (AMZN, CHKP, CSCO, DCLK, EBAY, ELNK, IACI, INSP, JNPR, MNST, RNWK, TWX, YHOO).

Market Snapshot / Internals - 01/12/04 Close

As the CBOE Internet Index (INX.X) approaches its July 2001 relative highs, the broader NASDAQ Composite (COMPX) 2,111.78 +1.2% shows resiliency at the 2,100 level, where 2,005 was the COMPX's July 2001 highs. Market internals showed a bullish A/D line all day, and built gradually more bullish toward the close.

Pivot Matrix -

With this being option expiration week, I grow a bit suspicious yet again of any option activity we might pick up on to sense direction near-term. One item I'm noting is tomorrow's DAILY Pivot of 1,125.33 in the SPX, where today, option action shows we may be seeing some option-related rollover to March contracts from the 1,125 January strikes. I'm alert again for the "sell the puts" and "buy the calls" trade we've been picking up on in recent weeks, but today's Market Volatility Index (VIX.X) 16.82 +0.41% and fractional 0.07 point move gives little tell, or hint as to potential institutional bias. Still, with the SPX session low holding above its WEEKLY pivot of 1,120.75, traders might want to have a close eye on the Jan. and March 1,125 option strikes tomorrow, using a sharp VIX.X move of 2% or more as a heads up for institutional action, where the path of least resistance would still suggest higher prices.

S&P 500 Index (SPX.X) Option Chain - Sorted by volume

I've sorted my QCharts SPX option chain by volume and we can see that the March and January 1,125 strikes were all the most actively traded.

Based on HL Camp & Company's buy/sell program premium levels, I counted 19 buy program premium alerts at $-0.54 and zero sell program premium alerts at $-2.14. It wasn't until just before today's close that the SPX.X 1,127.23 +0.47% really showed any move above the 1,125 level, but this action gives hint that with a sharp decline in the VIX.X tomorrow, should we see the SPX Jan. 1,125 puts lead the most active volume, limited overhead supply of stock could bring a powerful rally into Thursday's index expiration.

S&P 500 Index (SPX.X) Chart - Daily Intervals

First sign of any "weakness" I might see in the SPX is a decline back below the WEEKLY Pivot in the SPX, and today's lows came just shy. I've pointed to the 12/15/03 bar on the above chart, which marked the Monday prior to December's index expiration, where we did a pretty good job sniffing out some bullish institutional activity in the options market after a "key reversal day" of 12/15/03. It wasn't until the 12/17/03 Index Wrap that we sniffed things out, and by my count, I'm a day early in tonight's comments. Easy trade here and if another bullish unwinding is about to take place, the SPX shouldn't violated today's lows, or the WEEKLY Pivot, and if institutions start selling 1,125 puts and buying out the money calls, the VIX.X should drop like a rock and a bullish move above SPX 1,133 could see another wave higher to 1,144.

Financials traded mixed today with the Brokers (XBD.X) 677.75 +1.04% and Insurance (IUX.X) 311.59 +1.25%, while the S&P Banks Index (BIX.X) 336.80 -0.06% and KBW Bank Index (BKX.X) 976.23 -0.01% traded relatively unchanged. The BIX.X traded a double top 52-week high of 343.82 and 343.81 on December 31 and January 2, and now test their rising 21-day SMA. Friday's high of 340.11 found sellers, but I've got an upside alert set there, and one thing BEARS don't want to see is the banks to rebound, from what looks to be "oversold" levels relative to the SPX/OEX.

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

I've left the OEX's 05/17/02 relative highs of 553 on the above chart to simply show that "resistance" levels that are horizontal in nature may not necessarily be providing as much resistance and some bears think they do, as not that many old bulls still hold stock from those levels. With the OEX having pierced above its MONTHLY R1 last week (Thursday), this hints near-term anyway, that there may not have been too much institutional computer selling at that level. First sign of weakness might well be viewed as the 553 level.

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

Ugh! The QQQ hasn't traded below a prior days low in six sessions, and the WEEKLY Pivot begins to look like near-term support. After-hours trade is $38.40 and somebody seems eager to buy. If Q's jump out of our bullish wedge, further short covering could build to WEEKLY R2.

Dow Industrials Chart (INDU) - Daily Intervals

The INDU continue to show some lag compared to the other major indices, and a rising 21-day SMA closes in on price action. A spike to 10,650 would take INDU out of its channel where multiple levels of pivot matrix reside. Right now, as long as INDU hangs around 10,500, it provides positive psychology to market participants.

Jeff Bailey

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