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Index Wrap

A sense of profit taking, and equilibrium

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If I were to describe today's session, it would be that of profit taking, and equilibrium, where overly profitable bulls stepped up the pace of profit taking, while some "young bears" begin to look educated.

I don't think today's declines for the major indices had anything to do with this morning's inflation-friendly import/export prices, where December export rises (ex-agriculture) rose 0.2%, matching November gains. The more inflation-friendly import prices (ex-oil), which rose a fractional 0.1%, compared to November's 0.3% gain was a bit of a surprise to economists that had braced for a jump in import prices due to the weaker dollar.

One reason I think today's declines, which had the Dow Industrials (INDU) 10,427.18 -0.55% sliding 58-points lower by the close and trading as low as 10,367, is that a quick check of the Pacholder High Yield Fund (AMEX:PHF) $9.47 +0.95% finds this closed-end "junk bond" fund (full of high risk corporate bonds that might be vulnerable to a weaker economy) trading and closing at new 52-week high in today's session.

My sense/observation of equilibrium comes from the major indices closing near the middle of their daily ranges, with the broad S&P 500 Index (SPX.X) 1,112.22 -0.63% recouping half of its intra-day losses to close just above its WEEKLY Pivot.

"Young bears" might be showing that they've learned not to get overly aggressive with shorting "bad news," as the actively traded NASDAQ-100 Tracking Stock (AMEX:QQQ) $37.94 -0.99% found suspicious support at $37.60, which was Friday morning's non-farm payroll data opening lows. It was late Friday that some "young bears" may have had a chance to cover their newly added shorts in the QQQ after seeing a new 52-week high later that day, and when that opportunity wasn't taken early Monday morning and the highs were tested again late Monday, today's lows were the ideal point to square up before key earnings from Intel (NASDAQ:INTC) $33.59 -1.63%.

Fed Chairman Alan Greenspan and Dallas Fed President McTeer as well as other regional Fed Presidents reiterated that the current high rates of productivity continue to keep new hiring limited, but that productivity will eventually reach a topping point, where the strengthening economy will have business hiring back workers at a more rapid and sustainable pace.

My comments regarding "young bears" is not meant to be derogatory, but it is something to consider when assessing just how a market trades. Everyone wants to short or sell the top, but its usually just one trader that actually gets so lucky. It may well be these "young bears" that have been trying to pick tops the past couple of weeks, that bulls will miss most in the days to come, as it can be the overly aggressive bear that has provided much of the continual stair-stepping-higher trade we've seen the past couple of weeks.

For me, this becomes a rather important reason to have traded bullish the past couple of weeks in the QQQ, where the past couple of days, I haven't had the "urge" to trade the Qs.

Market Snapshot / Internals - 01/05

The major indices recovered nearly half of their session's losses in the final hour of trade, and it was the smaller-cap Russell- 2000 Index (RUT.X) 581.16 -0.3% leading the rebound.

For me, the RUT.X, or smaller caps, are often-times the "least shorted" as few bears like to short the more illiquid small caps, as no bear likes to be caught short (especially at 52-week highs) when liquidity is hard to find.

In yesterday's and today's trade, I just didn't feel the "chase" or eagerness to get long, nor the eagerness to get short. No... a sense of equilibrium.

Pivot Analysis Matrix -

I've highlighted today's lows in the S&P Banks Index (BIX.X) 333.98 -0.83%, where that trade would have been below the BIX's WEEKLY S2. For me, this begins to alert me that there may not be the eagerness to "get long" right now, and that bullish profit taking may be a focal point of market participants near-term.

We see multiple levels of correlation in the DAILY/WEEKLY levels, where we might begin sensing/observation a range develop, after a very bullish couple of weeks.

Dow Industrials Chart - 50-point box

Wow! It has been a while since we looked at a point and figure chart of the INDU, but I've been saving it for a 3-box reversal. Today's trade at 10,400 was enough to have a 3-box reversal showing up on the INDU's chart, and would be the first sign of meaningful selling taking place. The low end of the 21-day Bollinger Band would be back down near 10,000, where I would currently begin assessing pullback risk to 9,950. "Resistance" for lack of a better term would be the recent 52-week high.

Fellow trader Keene Little got a beauty of a bearish gain in the Dow futures today! Congratulations Keene!

S&P 500 Index (SPX.X) Chart - 5 & 10-point box

Traders and investors can begin to pick up on some similarities in the SPX that have been found in the INDU. While we've seen some "slippage" in the INDU in recent sessions, we haven't seen a 3-box reversal in the SPX, and can see it hasn't come quite as close to its 21-day SMA (Avg). I've placed only the MONTHLY R2, MONTHLY Pivot and MONTHLY S2 on the above chart, to simply give traders and investors a feel for a potential MONTHLY range. From the supply/demand perspective (O's and X's) resistance today is, or should be as difficult to assess as it was in September (red 9), October (red A), November (red B), December (red C) and early January (red 1).

NASDAQ-100 Index (NDX.X) Chart - 10-point box

I received several e-mails from QQQ traders about hitting the QQQ with another long in today's trade. I wasn't as "aggressive" or eager. What I'm sensing a bit right now, based on observations, is that we might not be seeing the aggressive short covering, which unfolded above NDX 1,450 and QQQ $36.00. I'm thinking there will be strong support back near 1,460, but "young bears" have probably wised up by now and bulk of near-term shorts are covered. This is one part of "demand" or buying a trader must consider right now, that may be starting to fade a bit.

Jeff Bailey

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