Option Investor
Index Wrap

A little bit of this and that

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Traders returned from a 3-day weekend to see the major indices trade mixed.

I can't argue that today's mixed trade was attributed to some "sell the news" on stocks that had made nice bullish runs ahead of earnings, and when earnings were released, bulls paid themselves in the form of profit taking.

I thought the same thing as some traders and investors noted in today's session. Last night's Iowa caucus results showed Democratic Senator John Kerry beating former Vermont governor Howard Dean by a better than 2-to-1 margin. An overwhelming victory that may have some market participants thinking that President Bush's run for a second term might not be the cakewalk some have predicted if Mr. Dean were to win the Democratic nomination.

Some market analysts and election watchers felt that should an "unelectable" Howard Dean win the Democratic top spot to run for President against incumbent George W. Bush, that a "more certain," or predictable economic policy be in place for another 4 years, with President Bush winning.

John Kerry's Iowa caucus win now opens up what many see as a three-man race between John Kerry, John Edwards, and Howard Dean, where Howard Dean was viewed as the likely frontrunner to face President Bush in this fall's election.

The most basic thought as it relates to this year's presidential election was that Mr. Dean's platform and President Bush's platform were about as different as oil and water. However, more similarities were found with Mr. Kerry's and Mr. Edward's platforms regarding economic policy as with President Bush's. Certainly there are differences, but Mr. Dean's platform is vastly different.

If bulls were dealt any type of blow in the past 24-hours, I'd have to say it was the Iowa caucus results.

Some fine tuning after last week's index and stock option expiration may have also taken place in today's trade. Late last week we saw the INDU, SPX, OEX and NDX see what I considered to be a rather "unnatural" trade, and despite some rather strong market internals, these indices that will hold heavy option- related interest traded lower, while the very broad NYSE Composite ($NYA.X) 6,599.48 +0.48% and NASDAQ Composite (COMPX) 2,147.98 +0.35% seemed to reflect today's internals.

Considering the weighted nature of the INDU, SPX, OEX and NDX/QQQ, which can be influenced by option-related action, today's 1.28% gain in the smaller-cap Russell-2000 Index (RUT.X) 597.98, which tends to be less influenced by option-related action hints of some near-term unwinding of options.

The Market Volatility Index (VIX.X) 15.21 +1.4% jumped to 16.13 intra-day, to then close at its lows the session, but up from Friday's 52-week closing low of 14.98.

Some option traders said call buyers were abundant, and while this may be true, I would have thought the VIX.X would have fallen. A cursory check of the SPX option chain shows the March 1,125 call (SPTCE) most active at 8,556 contracts (OI=62,216) with the February 1,050 puts (SPQNJ) trading 6,875 (OI=34.579).

Market Snapshot / Internals - 01/20/04 Close

Large caps weighed on the major indices today as the INDU, SPX, OEX and QQQ all finished lower, despite positive A/D breadth at both the NYSE and NASDAQ. NASDAQ's 571 new 52-week highs is the largest number of new 52-weekers since I've been keeping nightly hand counts (01/21/03), and surpasses the 505 new highs found on September 3, 2003. Current 10-day average NH/NL ratio at the NYSE is 99.3% and 98.7% at the NASDAQ.

The Oil Service Index (OSX.X) 100.30 +4.71%, AMEX Gold Bugs Index ($HUI.X) 229.73 +3.9%, Natural Gas Index (XNG.X) 227.09 +3.03%, North American Telecom (XTC.X) 642.74 +2.09% and Health Provider Index (RXh.X) 390.21 +2% were sectors posting gains greater than 2%, while the S&P Retail Index (RLX.X) 373.58 -1.00 % was the only equity index/sector I show falling 1% or more.

Pivot Analysis Matrix -

Please note that today's U.S. Dollar Index (dx00y) 86.63 -1.17% high/low/close was taken from my Qcharts daily snapshot bar. I was not able to see intra-day charts as many data feeds looked to be non-existent, which sometimes happens with Monday being a holiday. Some currency traders also made mention that the dollar was under selling pressure today as a result of "uncertainty" regarding the Iowa caucus.

I've highlighted in PINK the INDU's daily low of 10,519.49 and closely matching trade at its WEEKLY Pivot of 10,523.08 and also the INDU's WEEKLY high last week of 10,600.74, which I would point out did not see trade at its MONTHLY R1 of 10,682.46 this month (January). What these two simple observations do is have us understanding/observing that the INDU is a lagging major index right now as it relates to levels in our matrix.

The price-weighted INDU showed 4 of the 5 highest priced INDU components (PG $98.67 -0.33%, IBM $97.10 +1.86%, UTX $94.80 -2.76%, CAT $82.15 -2.36% and MMM $80.41 -5.93%) trading lower in today's trade, with MMM and UTX having reported quarterly earnings in today's trade. Both MMM and UTX traded 52-week highs on Friday, and today's selling certainly suggests some "sell the news" on a near-term basis.

I wanted to quickly check both stock's point and figure chart bullish vertical counts to try and get a feel for "why" these stocks saw a more notable round of selling today. MMM's PnF chart shows a bullish vertical count of $95, which is currently in play unless the stock would generate a double-bottom sell signal at $75, while UTX has exceeded its bullish vertical count of $85, where first sign of weakness would be a double-bottom sell signal at $92.00.

This cursory check of supply/demand for two of the more heavily price-weighted Dow components does hint that stocks are running into earnings, but seeing selling on profit taking once the fundamental analysis is proved correct, and gives some near-term focus to the INDU WEEKLY S1 and WEEKLY R1/MONTHLY R1 as formidable near-term support/resistance levels, with resistance looking more formidable at the 10,680 level.

Tomorrow, Dow component JP Morgan (NYSE:JPM) $39.09 -0.45% is slated to report quarterly earnings with consensus of $0.77 per share on revenues of $8.131 billion.

Dow Industrials (INDU) Chart - Daily Intervals

While the INDU showed intra-day support at its WEEKLY Pivot, even a bull might want to see more of a pullback to give upside to a 10,680 target. The shorter-term 21-day SMA is rising near the WEEKLY S1 of 10,445, where MACD and Stochastic oscillators suggest a pullback is likely. I've tried to tie in MMM and traded near $77-$78 from its point and figure chart, where one of the INDU more heavily price-weighted components might pull back to, where a rebound back higher in MMM has the Dow firming around its WEEKLY S1 for a bounce back higher.

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

Based on work we've done to develop a bullish or bearish bias for the markets, if not the S&P 500 with the e-mini futures (es04h) in recent months, I (Jeff Bailey) can't really be skewed from a bullish bias in the SPX unless we were to see a break below the 1,129 level in the SPX itself.

Some of today's buy/sell program premium alerts, most of which were sell program premium alerts, came before the lunchtime hour, and this observation is what has me thinking that we saw some "unwinding" of short-term option expiration activity today. Just as we saw a lot of program trading late last week into index expiration eventually develop further gains from the SPX from the 1,125 level, I think today's sell program premiums found, had institutions unwinding some near-term hedges and selling back futures as index values and individual stocks may now have been delivered against prior-written calls that institutions had sold.

E-mini S&P Futures (es04h) - Daily Intervals

I showed this chart weeks ago, and it has been rather amazing how the futures market has seemed to trade the levels of blue and purple retracement we put together using the "fitted" retracement technique. I'm not trading futures, but use this chart to develop an overall trading bias with the thought that institutions will heavily use futures to hedge positions and offset any call and put writing activity.

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

I looked at the OEX's top 10 weighted market cap stocks all day today, and they showed a very mixed trade by their close.

GE +0.02%, MSFT +1.04%, XOM +0.93%, PFE -1.34%, C -0.42%, WMT - 0.99%, INTC -0.85%, CSCO -0.92%, AIG -1.01% and IBM +1.86%. (sorted by market cap)

NASDAQ-100 Tracking Stock (QQQ) - Daily Interval

Today's trade at $39.00 wasn't a "bad tick." I thought for sure it was after reviewing the QQQ this morning. NASDAQ hasn't updated short interest on the QQQ, SPY or DIA for January 15 dates, but the QQQ trade at WEEKLY R1 suggests shorts are quite jittery. $36.25 begins to look like formidable near-term support.

Jeff Bailey

Index Wrap Archives