Option Investor
Index Wrap

NASDAQ's pullback has been about average. So far.

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Cautious comments from Cisco Systems (NASDAQ:CSCO) $24.08 -8.82% CEO John Chambers in Tuesday evenings quarterly earnings conference call sparked a strong round of selling in today's trade, where few stocks were immune to the selling and now has the NASDAQ Composite (COMPX) 2,014.14 -2.52% struggling to hang onto a 12-point gain for the month of January.

Not that Cisco's John Chambers should be credited, or hung by bulls for triggering today's selling, but comments regarding some corporate heads still rather hesitant to spend on information technology and hire back workers raised enough doubt among investors bulls to trigger another strong round of profit taking.

We're going to take a quick look at the very broad NASDAQ Composite (COMPX), which has now fallen 140-points since closing at a 29-month high just seven sessions ago.

Not to sugar coat the recent declines and get mulled into bullish complacency, but the current 6.5% decline for the NASDAQ Composite would be considered "average" since the move higher from the March lows.

Market Snapshot / Internals - 02/04/04 Close

Small caps as depicted by the Russell-2000 Index ($RUT.X) 564.03 -2.6% were hardest hit in today's trade, while most stocks with 4 or more letters in their stock symbol and listed at the NASDAQ most likely found a lower trade.

While the NASDAQ Composite (COMPX) has decline 6.5% from its recent highs, the also broad Russell-2000 Index ($RUT.X) has fallen 6.2% since its January 26th and 27th matching highs of 601.50.

While both A/D lines at the NYSE and NASDAQ were bearish, or weak throughout today's session, today's NH/NL ratio at the NASDAQ of 92.2% (106 / 115) was actually stronger than a recent January 29th NH/NL daily ratio of 89.2%. While some bullish leadership is still found, both the 5-day and 10-day ratios are headed lower. Please note. Both the NYSE and NASDAQ NY/NL 10-day ratio point and figure charts would still be in a column of X and have not yet shown a 3-box reversal (charted on 2% box size).

NH/NL breadth at the NYSE showed the daily ratio at 88.3%, where we would have to go back to November 11 and November 17 to find daily NH/NL breadth ratios at such a low level.

The NH/NL breadth data simply suggest that buyers are being less aggressive, or perhaps confident, with the buying of stocks at new highs, while any building of new lows would also suggest buyer are becoming less speculative with bottom feeding.

We should remember that BUYING isn't created from bulls only, but bears, or shorts also.

NASDAQ Composite (COMPX) Chart - Daily Internals

Has the NASDAQ Composite seen its top? This question won't be answered for some time, but I've placed a conventional retracement bracket on the COMPX from its October 2002 lows to the recent highs to simply depict a very large range. Levels that were though to be significant resistance at 2,000 and 2,100 are marked on the chart, where I would have to think that if the recent highs were to hold in coming days, weeks or month, then 2,100 would be a level of trade to currently assess resistance at.

What I really wanted to do in the above chart is go back and look at some of the past percentage declines where the COMPX had traded a new high, but then pulled back. A 7.5% decline was found from a July 14th high to August 8th pullback, which took 19-days to complete.

A similar to current 6.8% decline in mid-September (09/19-09/30) lasted 7-days before a bounce from the rising 50-day SMA was found.

I calculated a 7.5% decline from the recent COMPX high would equate to a COMPX trade near 1,992.

The reason for this exercise in calculating past percentage moves is to try and put things in perspective of how a broader-market index has moved in the past, digested gains, and can become a measurement, or test for current trade. What we might be monitoring for from a percentage perspective is either SIMILARITY to the past, or DIVERGENCE from the past.

How could an index trader use this?

I (Jeff Bailey) have had a difficult time not getting swung out of a good trade, by either having my stop set too tight, based on a finite level of trade. One way a trader might look at percentages is to understand how far the market has declined, compare it to past declines, then look to trade accordingly.

For instance, I'm looking for a bounce to take place in these markets, especially the NASDAQ, and would currently have to assess further downside of at least 1% based on the COMPX trade, where a 3% bounce higher might not be unreasonable.

Traders/investors that may not currently have access to a charting service, but are interested in calculating past pullbacks for indices or sectors they are interested in trading can do so for FREE at www.stockcharts.com.

You do NOT need a login name or password to pull up a "SharpChart" of the S&P 500 Index ($SPX). Once you pull up a chart, click the "annotate" button just below whatever chart you wish to look at, another window should pop up, and you should be able to move your cursor (crosshairs) into that new window and pick the inflection points to be studied. Data should be tracked at the lower part of the chart as the cursor is moved across the screen.

Pivot Analysis Matrix -

I'm running way behind for tonight's wrap, but want to focus on the SPX, which many consider a major market index for determining market directions.

One reason I'm running late on tonight wrap is I went back and reviewed recent sessions trade, where I want to consider the DAILY R1 as a level, which would need to be traded for a first sign of renewed strength. Here's why.

Today (02/03/04) the SPX did not test its DAILY R1

Yesterday (02/03/04) the SPX did not test its DAILY R1

On Monday (02/02/04) the SPX traded LOWER, but did NOT test its DAILY R1 of 1,127.85, then reversed back above its DAILY R1 of 1,134.29 and traded further higher above its DAILY R2 of 1,137.45, but then saw selling late in the session to close just above its DAILY R1 of 1,134.29.

Now, I've drawn green boxes on the SPX at 1,117.21 as a level of correlative support, and also at the MONTHLY S1 and WEEKLY S2.

While I would deem 1,117.00 as a level within the matrix to be looking for support, the 1,103-1,106 level is a further downside risk assessment level should the SPX fall 4.8% from its recent high of 1,155.38.

S&P 500 Index Chart - Daily Intervals

In the lower left part of the chart, I point to a rather sharp pullback witnessed in the latter part of September, where the SPX fell 4.8% over the course of 8 trading days. I will take some time later tonight to go back and review the pivot matrix' for that period of time to see just how the SPX traded. Still, I'm going to assess current downside risk from the recent highs as being 4.8%, where we can use the levels in the pivot matrix as a test.

One thing outside the pivot matrix I see coming into play as a near-term area of support is the extension of our old bullish resistance channel, which served support on 01/29/04 and looks to have held the SPX lows today.

I went back an looked at the 01/28/04 Index Trader Wrap, where for 01/29/04, the DAILY S1 was 1,120.27, and the SPX traded a session low of 1,122.38 that morning before reversing back higher.

If memory serves me correct, current levels of trade around 1,125 was a frequently mention level that related to index option trade ahead of January expiration. This heightens my alert to being at a key level of support in the SPX right now.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals

I marked a 6.72% decline on the QQQ, where from $39.00, today's lows would equate to a 6.85% decline. Most charting services that I've viewed do show the QQQ having traded $39.00, so that is what I'm thinking was the 52-week high. However, intra-day charts have the QQQ trading a high of $38.85 and this has been a point of contention with some traders in calculation of the pivot matrix. While I try and NOT trade everything to the penny, this disparity of the recent highs should be noted.

Note that RYAAY +4.64% was one of today's bigger gainers in the NDX/QQQ. It should also be noted that this stock has fallen sharply from the $58.00 level, where today's gains suggest either short-covering, or value bulls looking for a bottom.

Dow Industrials (INDU) Chart - Daily Intervals

The INDU has been a pillar of strength compared to the NDX/QQQ and just how IBM escaped some of the broader technology selling in today's session is a question I wouldn't have the answer to.

Jeff Bailey

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