Option Investor
Index Wrap

Bears got a little bullish

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The major indices finished mixed in today's session as investors and trader alike, still contemplating yesterday's Fed wording, while being selective with their buying.

For the most part, I think it was bearish traders doing some buying as market internals were weak throughout the session, which often-times hints that recently starved bears were eager to fill their stomachs with some profits.

And a good think too, as I see some good bullish trade entry points for tomorrow, where we might look for a rather strong 3- day rally.

The table will most likely be set early tomorrow, if it hasn't already, when after the close, networker Nortel (NYSE:NT) $6.58 +1.85 jumped 18% to $7.81 over the New York ECN after reporting quarterly earnings.

After seeing the Networking Index (NWX.X) 298.92 -2.78% surge from 260 to 335 (28.8%) over the course of just 11 session, the recent 10% decline along with a little good news in the sector might just fuel a tech rebound in coming sessions.

After writing last nights Index Trader wrap, I did some further historical research dating back to the December 9, 2003 FOMC meeting, and in the Market Monitor, I set up a little test for the QQQ, where today's trade was a test. I'll cover this test in a moment, but lets take a quick look at today's Market Snapshot / Internals.

Market Snapshot / Internals - 01/29/04 Close

Market internals were weak from the 11:00 AM EST mark and remained that way until the close. While I counted 24 buy program premium alerts in today's trade, it wasn't until about 02:00 PM EST that that today's late-session comeback unfolded.

I had no clue until tonight that Jim Brown had just posted (02:01:24) that the FOMC had released their December 9 meeting notes, when seconds later (, I but seconds after that, I see my

I wasn't really paying attention to today's buy/sell program premium alerts, but was resetting them from time to time. It was just a coincidence that I posted an alert at 02:03:41 in the MM, when I then glanced at where the major indices were at that point.

Market Monitor -

Jim gave a quick recap of the 12/09/03 minutes. The rising budget worry is nothing new, neither is inflation. What doesn't make sense to me is why the Committee discussed changing the bias after their recent two-day meeting if the economy is still GROWING SLOWLY. This makes no sense to me.

Anyhow... that was the turning point in today's session. It came JUST AFTER the OEX traded its WEEKLY S2, but it also came just after the QQQ traded its DAILY S1 of $36.72, which was violated briefly with a session low of $36.66. I'll get to this test of DAILY S1 in the QQQ in a minute, but hopefully you will see at the end of tonight's wrap, some of the similarities the past two days (including today) with that of December 9 and 10.

Pivot Matrix -

I had so many requests from QQQ traders to add the Semiconductor Index (SOX.X) to our nightly pivot, that I just couldn't refuse. I really hope traders have a grasp of how the SOX can be correlated with the QQQ, as I won't ever have enough time to discuss all levels.

The main thing I think a trader focuses on tomorrow, aside from the index they are trading, is the SOX.X. Go back and check Tuesday evening's Index Trader Wrap http://members.OptionInvestor.com/Itrader/marketwrap/iw_012704_1.ASP

and understand today's low in the SOX and tie it in with the QQQ. Also make note that the SOX.X has NOT traded its WEEKLY S2, while the QQQ has. Tomorrow, I think a key support level is going to be the DAILY S1s.

While there is a nice after-hours bid in the QQQ to $35.75, tomorrow's GDP report will get a lot of attention.

The trade I would look for from the bullish side is to watch for a "knee-jerk" type of pullback, maybe a kiss of a DAILY S1, and a quick reversal back higher.

Since the SOX.X has been a weaker tech sector of late, it is a bull's focus tomorrow. I think the SOX will rally strong and look for it to test 527 either tomorrow, or early Monday morning.

OK... late last night, I wanted to look back at the 12/09 FOMC statement, but more importantly, try and see how the markets had traded. I looked at the QQQ. Now, I did a lot more than what was eventually compiled on the following chart, but here is a quick recap.

When you look at the following chart, today's "test" would be 12/10/03 on the chart below. The day AFTER the 12/09 FOMC statement.

NASDAQ-100 Tracking Stock (QQQ) - Week of 12/08-12/12

I posted this chart in the Market Monitor late last night. See how the QQQ saw selling on 12/09/03 when the FOMC statement was released? Some comments were that the "considerable period" statement meant economic slowing. On 12/10/03 (think of today's trade) the QQQ had a follow through lower session, up until the last hour, when the QQQ rebounded from its WEEKLY S2 to close back at its session high.

Does this sound familiar?

OK.... yesterday (Wednesday) the QQQ traded its WEEKLY S2, so I had to come up with a test, where my test was to find strength in the QQQ at its DAILY S1. While the QQQ did trade its DAILY S1 today, it was at the same time the OEX tested its WEEKLY S2 (similar perhaps to the 12/10 trade in the QQQ) and also rebounded into the close.

Do you see where I'm taking use here? Or where the MARKET might be taking us? We now have a very good test tomorrow, where I think past history looks to be repeating.

While it feels like the markets are a little weaker today than on 12/10/03, the test of support for tomorrow is really the DAILY S1s, but we do note that the QQQ did NOT trade its DAILY Pivot on 12/11. Right? Right.

What really lead me to this test, is that on the week of 12/08- 12/12, that was the last week, until this week, that we had witness any testing of WEEKLY S2s in our matrix. One thing lead to another when I remember the FOMC had also met that week.

It is so confusing isn't it? One week the market sees selling because Fed language suggests a weak economy. Then 6-weeks later the markets see selling because the Fed hints of rising rates.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

I've market the 12/10/03 date on the QQQ chart as well as today's trade. There is some similarity as it relates to the bars isn't there? I think so. Three day's later, the QQQ spiked higher at the open, then reversed back lower. I think QQQ set up to do the same.

I was also looking for any hints to further institutional activity in the options market. I had just made note in the market monitor that the VXN.X was relatively flat, was updating the most active options in today's trade, when suddenly the Feb. $38 puts moved to the highest volume trade of the day. All be darned if a 14,500 trade in the Feb $38 puts didn't cross my time and sales. Why would anyone trade the $38's? Remember that "floor" at $37. Headed into the close, with the QQQ threatening to close above $37, it may well have been a trade to offset the MONTHLY S2 of $38.25. I think it was a seller of the puts. Why? It doesn't make sense to buy a $38.00 near-month put for $1.25, when the QQQ is trading $37. If I'm a jittery bull in the QQQ, I'm either selling my QQQ at market, or buying a $37 put. Institutions love selling near-month puts and calls, and look for the premium to erode. Even better if the QQQ rallies after a pullback, when premiums (VXN.X) have risen rather quickly.

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

While I think the QQQ might have a bull getting a little more bang for his buck, we can see some similarity to 12/09-12/10 trade as we see today. I like the correlation of support at DAILY S1 and WEEKL R2 and DAILY S2 and WEEKLY Pivot. Bulls could pull a shocker if they're able to reclaim the WEEKLY Pivot by tomorrow's close. If so, then SPX shouldn't trade back below DAILY S1.

Dow Industrials (INDU) Chart - Daily Intervals

While I look at the QQQ and SPX chart, then look at the INDU chart, there's "closer" overhead supply right now in the INDU that found in the SPX and QQQ. INDU stronger in the WEEKLY Pivot for sure as it didn't see a test of WEEKLY S2.

Jeff Bailey

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