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Index Wrap

Dynamic!

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If the first two weeks of 2004 are going to be any indication of what lies ahead the remaining 50-week of this year, the word that will best describe 2004 is "dynamic!"

Tonight's after the bell news and also sent traders scurrying and wondering what's next.

In a blockbuster banking merger announcement, Dow component JP Morgan (NYSE:JPM) $39.25, the nations 2nd largest bank by assets ($792 billion), said it was buying Bank One (NYSE:ONE) $45.22 +1.36% in a deal valued at $60 billion. Bank One is the nations 7th largest bank if measured by assets ($290 billion). Shares of Bank One (ONE) jumped to $49.74 in after-hours trade, while JP Morgan (JPM) traded lower at $37.82.

Bank One (ONE) is a component of both the more money center KBW Bank Index (BKX.X) 977.57 +0.81% and more regional S&P Banks Index (BIX.X) 336.71 +0.81%, while JP Morgan (JPM) is a component of the KBW Bank Index.

The news may well fuel further bullish speculation in the group after last year's announced deal with Citigroup (NYSE:C) $50.00 +0.80% buying FleetBoston (NYSE:FBF) $43.08 +1.19%.

"It's a huge deal that's going to create a lot of rumors in bank land tomorrow," said Mark Fitzgibbon, an analyst at Sandler O'Neill & Partners. "If it's priced at that level, both stocks will go down. If it's a merger of equal type deal it will be better received."

The deal is the biggest for J.P. Morgan since Chase acquired J.P.Morgan in December 2000 for $33 billion. It would be the biggest financial services deal since the $70 billion deal combining Citicorp and Travelers Group in 1998.

From commentary that I've heard and read tonight, the deal is being received much more favorably by Wall Street banking analysts than the Citigroup/FleetBoston deal, where many analysts felt Citigroup paid too much for fewer synergies.

While JPM is a component of the price-weighted Dow Industrials, there was also a rather dynamic event that took place after the bell with IBM (NYSE:IBM) $90.31 +0.68 announced it was moving up it quarterly earnings announcement. IBM said it would announce quarterly earnings after tomorrow's close, instead of Tuesday, January 20th.

CNBC co-host of Kudlow & Cramer, James Cramer said his research shows there's been a lot of January $90 call writers in the stock of late, and that tonight's news out of IBM most likely portends positive news of some sort, and that heavy seller of $90 calls, which thought that quarterly earnings took the stock out of play for gains much above $90 ahead of Friday's expiration may bring bulls back to the table to either save heavy losses in naked call writing, but also, institutional bulls in the stock that may want to save underlying positions in the stock, rather than risking upside gains should IBM have overly positive news to deliver in their quarterly earnings. Shares of IBM jumped to $91.61 over the New York ECNs.

But there's always some negative news to be delivered, which makes these markets so dynamic.

Shares of Intel (NASDAQ:INTC) $33.90 -0.59% fell to $32.45 in after-hours trade after the company reported quarterly EPS of $0.27 per share (ex-items), which was 2-cents better than consensus estimates, on revenues that rose 22.1% year-over-year (+12% from last quarter) to 8.74 billion (consensus $8.64 billion). The negative after-hours reaction seems to be coming from INTC's comments regarding forward looking gross margins of 60%, which fundamental analysts say is at historical peak levels. What I'm (Jeff Bailey) getting from these fundamental comments and some downside reaction, is that INTC has squeezed just about all costs it can from the system, and further growth now become more dependent on sales, where some fundamental analysts see the stock fairly priced at current levels.

Internet conglomerate Yahoo! Inc. (NASDAQ:YHOO) $48.39 -0.84% fell to $46.55 in after-hours trade when the company reported Q4 (December) earnings of $0.11 per share, which was in line with consensus of $0.11. YHOO said revenues jumped 78.9% year-over- year to $511.3 million versus the $495.5 million. Forward guidance has YHOO seeing Q1 (March) revenues of $475-$505 million, which surrounds consensus of $495 million and fiscal 2004 (December) revenues of $2.12-2.25 billion, also surrounding current consensus of $2.18 billion.

Positive and negatives I'm hearing from the fundamental side is that they are impressed with the revenue side of things, but disappointed that YHOO wasn't able to send more money to the bottom line.

The NASDAQ-100 Tracking Stock (AMEX:QQQ) $38.08, which gained 13- cents during its regular session fell to $37.77 in extended hours.

The S&P Depository Receipts (AMEX:SPY) $113.50 +0.83% gained $0.94 during its regular session and saw trade at its WEEKLY R1 of $113.40, but has slipped to $113.09 in extended hours.

Meanwhile, the Dow Diamonds (AMEX:DIA) $105.67 +1.12% gained $1.17 by the close and also saw trade at its WEEKLY R1 of $105.63, but has slipped fractionally lower at $105.51 in extended hours.

I make note of the SPY and DIA trades at WEEKLY R1s, as they are the first index-related securities in our pivot matrix to trade these levels, and may once again be viewed as "leadership" type indices.

Market Snapshot / Internals - 01/14/04

Market internals at the A/D lines snapped back strong today and NH/NL indications continue to show bullish leadership at both the NYSE and NASDAQ. One thing I do see is rather steady volume at the NYSE in recent session, but today's 2.07 billion shares traded at the NASDAQ, while brisk, is the lowest volume levels seen since traders returned from an extended Christmas-New Years holiday.

I may well be seeing this NASDAQ volume only because I've sensed some "lack of interest" in trading the QQQ this week, but here too, with NASDAQ volumes edging lower to the 2.0 billion mark, it may well be that other market participants aren't as interested in 4-lettered stocks as they are the 1, 2 and 3-lettered variety at the NYSE.

One thing I made a note of late, just prior to the closing bell, was that while today's 111.19-point gain in the Dow Industrials (INDU) is an impressive snap back after a 3-box reversal on its point and figure chart, the INDU's point and figure chart, which is designed to chart more meaningful fluctuations of 150-point moves, did not quite get a trade at 10,550, as its session high of 10,548.51.

All I (Jeff Bailey) do at this point is make the observation, and simply understand that as of tonight's close, there just wasn't enough demand to get the reversal back higher, and only makes me (Jeff Bailey) a cautious bull.

For traders to get a feel for selling and buying, in combination with the point and figure charts, I like to use the analogy of a thinking about trying to shove a carrot into a blender/juicing machine.

Yesterday's observation was that the INDU showed a 3-box reversal, which indicated meaningful selling. Try to sense that as the blener/juicer blade has been at HIGH revolution in recent weeks, but the 3-box reversal lower was SELLERS shoving a carrot has hard as they could into the blender.

Now think about today's gains in the context of that SELLING pressure being eases, the blender/juicer now lets the motor and the blade come back up to HIGH revolution.

The question now is.... are there any more carrots?

I'm very proud of one e-mail I received from a trader, that picked up on EXACTLY the point I wanted to try and get across last night.

He wrote... Now that the DOW has a 3 box reversal, is it probable(?) that the other indexes will follow? My thinking is that by creating a column of O's and then turning up into a new column of X's, there would be some rational relative point that each would give a sell signal. If the DOW were turn up into a column of X's without the others forming a column of O's, a downturn would have the DOW's sell signal coming at a much higher (relatively) level. Is this thinking plausible or are things more independent than I think?

This trader now begins to sense the supply/demand relationship of what drives market prices! He's got the "inchworm" thought process down exactly as it should be. He's building a test for early signs of any type of observable near-term shift from STRONG demand, turning toward SUPPLY beginning to outstrip the recent STRONG DEMAND build.

This trader is "on alert" and looking for signs that recent gains are at risk.

It is ENTIRELY probable and plausible that we begin seeing, what the trader above is sensing. That's one of the things I LOVE about point and figure charts.

I DARE any trader to hand chart a few favorite stocks or indices that you follow more closely, and after HAND charting them for a week or two, tell me, or any of your trading buddies, that you don't have a MUCH BETTER FEEL for how that security is trading than you do right now.

It's so darned fast and easy, it's ridiculous! Look at today's high and today's low, check the direction (X's or O's) the chart was in at the prior day's close, and make your chart entry.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - $0.25 box

Last night I showed the NDX point and figure chart. Here... if I change the box size (scale) on the QQQ to $0.25, it looks pretty darned similar to the NDX chart.

One e-mail I got today was from a trader that said he's had a $20,000 lesson while trading the QQQ.

Don't laugh! I know traders that learned with $50,000 before they stopped what they were doing, back tested "what went wrong" on a point and figure chart, made the adjustments, and then got back on the right track.

I DARE any trader to go buy some graph paper like Charles Dow used, set it up at $0.25 box increments, and start hand charting the QQQ.

I profiled February $36 QQQ PUTS just below QQQ $36, as I thought I observed resistance. But when resistance was broken to the upside, I have since profiled two swing trade longs in the QQQ, and amazingly, both of them would have been profitable if taken.

On the above chart, the first sign of any weakness would be a 3- box reversal to $37.50. If a supply/demand trader where to SHORT the QQQ, the first sign of renewed strength would be $38.50.

This gives the trader/investor an observation of supply/demand in the QQQ right now. Where's resistance? I don't know, I'm left to guess. Where's support? Boy... I'd have to say $36-$36.25 where the QQQ launched like a Jack-in-the-box.

Let's move onto the Pivot Matrix where we try and figure out where institutional computer SHOULD be selling, and where they SHOULD be buying.

If you're a QQQ trader, what's your impression of supply/demand at tonight's close. Who, or what is currently in control? I (Jeff Bailey) have to say DEMAND (X). If you disagree, then you must also believe that SUPPLY (selling) was in control at $36.25, $36.50, $36.75, $37.00, $37.25, $37.50, $37.75, $38.00 and $38.25.

Pivot Analysis Matrix

Boom! Just like that, after the S&P Banks Index (BIX.X) traded WEEKLY S2 and began to look like it might be leading a decline in the pivot matrix for the SPX/OEX a potential catalyst appears with JPM buying ONE.

I don't KNOW if this provides a new upside catalyst for the BIX.X, which could now lift the SPX/OEX to new highs, and correlative 1,133 SPX resistance, but its the place to be looking. I see BIX.X resistance lined up at 337-338 and the only way to get the BIX.X above those levels is with buying in banks, where roughly 25% of the SPX/OEX weighting comes from financials.

While after-hours indications aren't necessarily a "true" market response, as all market participants aren't around to trade, I see NDX MONTHLY R2 and DAILY R1 as correlative resistance. Does everyone remember Friday's intra-day trade and recent session's trade? We KNOW there's some type of selling at/around this NDX/QQQ MONTHLY R2 don't we? That's the near-term level of resistance.

IBM is not a component of the NDX/QQQ, but there may well be technology stock implications come tomorrow afternoon. Still, from tonight's after-hours trade, the NDX/QQQ doesn't appear to be getting any help out of INTC and YHOO.

Also trading lower in after-hours is QLGC $50.36 (unch) at $46.07 and AAPL $24.20 +0.33% at $22.85. Both are NDX/QQQ components. Understand, that current after-hours trade may have quite a bit of the "near-term" downside being taken out of the stock already, so if looking short, don't get overly excited.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

With INTC and YHOO earnings out of the way, we might now begin viewing a range trade on the QQQ from $38.25-$37.55. I'm a tempted short, but stop has to go just above the highs. Biggest fear of the QQQ short has to be what IBM is going to day, and implications should the banks catch fire, send the SPX/OEX to new highs, and pulls Q's along for the ride.

Using the QQQ PnF chart I showed earlier, I also point to the $36.33-$36.44 "zone" on the above chart, which is currently derived from the WEEKLY (blue) and MONTHLY (red) pivot retracement. Q's look kind of "neutral" don't they, but holding at the upward end of an incredibly bullish trend.

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

The focal point in the MATRIX as well as the SPX itself is the 1,131-1,133 level of near-term resistance. The SPX traded strong above its WEEKLY Pivot today, and the intra-day reverse head/shoulder pattern we discussed in our intra-day commentary saw the SPX not want to come back to 1,120.75 to develop the symmetrical reverse h/s pattern, as if buyers were too aggressive.

The red downward trend was a trend I had placed on an intra-day basis from the January 8 highs, which was broken to the upside today. Again... sign that the overriding trend must still be more bullish than bearish.

Dow Industrials (INDU) Chart - Daily Intervals

Oscillators are "mixed" with Stochastics saying look for a bounce, while MACD is saying time for a rest. More heavily price weighted IBM trades up in after-hours, while smaller price weighted JPM and INTC trade lower.

Bulls may let bears have it here with a strong round of buying, where yesterday's lows are now viewed as support, from which aggressive, but disciplines bulls will leverage from.

Jeff Bailey

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