Option Investor
Index Wrap

Two DOWn and one to go\?

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The Dow Industrials (INDU) 10,623.62 +0.9% closed at new 52-week highs with 24 of its 30 components showing gains by the close and still looks capable of challenging its March 2002 relative high of 10,673.

The Dow Transportation Average (TRAN) 3,063.60 +1.44% also broke to new 52-week highs, breaking above it March 2002 relative high of 3,051, which for market theorists that believe the transports lead an advance, bodes well for broader market bulls.

Dow Transportation Average (TRAN) - Daily Intervals

It makes no sense that the TRAN can be breaking to new highs and what has been near-term resistance of 3,051, while crude oil futures are at contract highs of $35.00. Unless of course, the MARKET believes the economy is heating up, where transports would benefit from rising demand for transportation services.

The above daily interval chart of the TRAN is the same chart we looked at in prior Index Trader Wraps, including the November 6, 2003 wrap at this http://members.OptionInvestor.com/Itrader/marketwrap/iw_110603_1.ASP

Stronger than expected December housing starts and building permits, combined with a 30.4% jump in the Mortgage Bankers Association weekly Market Composite Index of mortgage loan application helped fuel a bullish round of buying in the homebuilders, with the Dow Jones Home Construction Index (DJUSHB) 579.75 +4.97% closing back at its rounding lower 50-day SMA of 580.78, but still off its all-time highs of 622.40 set on December 1, 2003.

After-hours earnings from homebuilder Ryland Group (NYSE:RYL) $79.43 +6.61% and bullish forward guidance may well have bulls saying, "Two DOWn and one to go" for three Dow-related indices to be trading new 52-week highs in the days to come.

After the close, Ryland's (RYL) shares rose to $81.37 after the company reported Q4 (December) EPS of $3.29 per share, which was $0.39 better than consensus. Revenues rose 15.3% year-over-year to $1.07 billion versus the $1.03 billion consensus. RYL said fiscal 2004 EPS will "exceed $10.00 per share," which would be above consensus of $9.54.

Ryland was just one of many companies reporting quarterly earnings after the bell. Jim Brown made some notes in the OptionInvestor.com market monitor on quarterly earnings, guidance and after-hours movers.

Market Monitor - After hours (01/21/04)

Dow component AT&T (NYSE:T) $21.25 -1.84% looks to be following last week's lead from IBM (NYSE:IBM) $97.70 +0.61% and moving its quarterly earnings announcement date sooner than expected.

The plethora of earnings announcements and after-hour action saw the S&P Depository Receipts (AMEX:SPY) $115.10 +0.78% edge up 3 cents to 115.13, the Dow Diamonds (AMEX:DIA) $106.30 +0.79% rise 25 cents to $106.54 and the NASDAQ-100 Tracker (AMEX:QQQ) $38.38 -0.41% gain 13 cents to $38.51.

Market Snapshot / Internals - 01/21/04 Close

It was a potluck session with the NYSE Composite ($NYA.X) 6,658.32 +0.89% and its 12:00 A/D line turning positive that seemed to fuel a recovery. The INDU turned positive just ahead of the 12:00 mark and may have bolstered bullish psychology. Trade volumes at both the NYSE and NASDAQ were brisk, nearly an exact match to Tuesday's trade.

Pivot Analysis Matrix -

I've marked today's highs in the SPX, SPY, OEX and BIX.X to draw attention to trades at WEEKLY R1s for the SPX, SPY, OEX and BIX.X, where the BIX.X also traded its MONTHLY R1 for the first time this month. The S&P Banks Index (BIX.X) 349.48 +1.56%, KBW Bank Index (BKX.X) 1,003.04 +1.63%, Broker Dealer (XBD.X) 734.28 +1.63% and S&P Insurance (IUX.X) 316.13 +1.47% all rounded out a bullish session for financials.

Ahead of tomorrow's economic data, its may well be the stacked pivot resistance at INDU MONTHLY R1, WEEKLY R1 and DAILY R1, which is the key level of resistance in the indices, and if today's fractional gains for the INDU, which built stronger toward the close gave a lift to market psychology and helped lift the NASDAQ Composite and NDX/QQQ back to finish just fractionally red, a break above INDU 10,700 could further fuel gains in the major indices.

Dow Industrials (INDU) Chart - Daily Intervals

One thing I saw on an intra-day basis and commented on in today's 01:00 PM EST update was in regards to market psychology getting a bullish lift should the INDU make a move back above the 10,578 (10,588 to add 10-points). I've marked some benchmark levels of where the SPX/OEX and QQQ were trading when the INDU made its break.

Now... the reason I discuss the TRAN tonight is to try and make note of how the TRAN has broken above its March 2002 relative highs, and if we believe that the transports are an indicator for leadership, we can further tie that sign of leadership from the TRAN to the INDU, where the INDU March 2002 relative high was 10,673.

From a purely psychological standpoint, should the INDU break above its MONTHLY R1, then next bullish level higher would be its WEEKLY R2.

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

This morning, if it not for some strength in the homebuilders and financials holding tough, I thought for sure we would see a test of correlative 1,132 support in the SPX. While we saw some buy/sell program premium alerts in today's trade, we never got a chance to see what might take place at the 1,132 level as buyers were evidently too aggressive.

As a side note, the March 2002 relative highs on the SPX was 1,173.94, which would be well above our current WEEKLY R2.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals

There were definitely some technology stocks that got hit lower in today's trade, but for some reason, the QQQ stopped dead in its tracks at $38.00.

Just after the QQQ printed the $38.00 level I made some notes in the Market Monitor regarding a check of the QQQ option chain. Most active options were Feb. $41 calls, but I made special note of the Feb. $38 puts and April $36 puts as the then #2 and #3 most active options. I thought this $38 and $36 trade, where both options were priced at about $0.90 each might have institutions buying the Feb. $38 puts, but selling the $36 puts. Thought would be, a "no risk" trade, with determination to buy $36 into April expiration.

Late in the session, a subscriber noted that the $38.00 low on the QQQ was also the "5-DRT" support from this weekend's Ask the Analyst exercise.

I profiled a bearish trade for a loss today, then got back on the bullish side with a day trade long and managed to end the session break-even. However, in after-hours, I did profile the QQQ as a swing trade long/bullish at $38.51, stop $37.95 and target of $39.20.

I think there may have been some shorts added today, and today's BIG volume might give a good squeeze to the upside near-term, if Tuesday's highs are taken out.

Jeff Bailey.

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