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Index Wrap

Two points for bullish caution

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I would never want to be accused for only looking at the market from a bullish points of view, and while much of today's action hints that a reversal back higher is in the making, there's two main points I would draw an bull's attention to.

If there is one thing bulls and bears have learned the last three years, it is that we should never take anything for granted, and ALWAYS expect the unexpected.

In the never-ending game of analyzing a market, we should always be digging for clues. Bullish and bearish!

If there were two things I saw in today's trade that would have a bull not feeling overly confident by today's close, even though some of the tests outlined for today's trade did show signs of a rebound in the making, similar to that found on August 11, 2003, it would have to be the TWO largest weighted stocks in the S&P 100 Index (OEX.X) 565.86 +0.38% trading against the broader daily trend as both General Electric (NYSE:GE) $32.97 -0.93% and Microsoft (NASDAQ:MSFT) $26.70 -0.66% were left out of today's more bullish session.

It would be a prudent point that Microsoft (MSFT) has under performed the gains seen for the major indices since the recovery lows of 2003, but my general thought in today's trade was "if the market is certain of a rebound, then both stocks should find buying."

So certain was I in this line of thinking that I profiled a bullish day trade in shares of General Electric (GE) at $33.12, stop $32.90 (session low had been $32.92), target $33.55, after a buy program premium alert was found, where I thought that might be the making of a late session bullish move to the close, which would certainly have GE at least closing in on yesterday's close of $33.28.

I had also stipulated via a trader's e-mail that I would ONLY hold GE overnight, if the S&P 100 Index (OEX.X) 565.86 +0.38% looked to close above its DAILY R1 of 566.16.

The OEX added test was largely based on the thought that a greater probability of an August 11, 2003 type of reversal day was to be confirmed by the close, that a good test was to have the OEX finishing above its DAILY R1. The OEX didn't, and I think bulls can thank GE and MSFT for that.

However, nothing could have been further from reality as the session prolonged, where GE then found a steady seller(s) on a post-buy program observation, where my day trade was closed out for a loss at $32.97.

Like you, I HATE losses, and the price of the loss should at least serve as some type of education.

My education is that something is going on, of which I'm not fully certain of. While I would tend to think that BOTH of these VERY LIQUID stocks may have served as a some type of hedge instrument ahead of tomorrow morning's weekly jobless claims (forecast is 345,000 versus prior week's 344,000) and January's durable orders (forecast +1.4% versus December's +0.3%).

Again... I would have NO proof that stocks like GE and MSFT would be used as some sort of a hedge into the report, but if an institution, maybe a hedge fund, was looking for a couple of stocks to cover a broader market trade (GE) and technology (MSFT) then both of these VERY LIQUID stocks might have been today's "stocks of choice" for a hedge.

Still... if broader market bulls were certain of a near-term bullish outcome, I would have thought there would have been enough conviction by bulls to have both these stocks trading higher today.

Tomorrow, should we see a flat open, I think it in a trader's best interest to keep an eye on these two stocks. Remembering that hedges can come off as quickly as they're put on. The hedges can also be built further.

Before I continue, I would also be remiss if I didn't make special note of this morning's 09:00 AM EST update, where we cover the various major index bullish %. Both the very broad NASDAQ Composite Bullish % ($BPCOMPQ) and narrower NASDAQ-100 Bullish % ($BPNDX) now show their bullish % charts in columns of O.

In last night's Index Trader wrap I did make some observations as to the point and figure charts of stocks that had given point and figure sell signals the past 6 session (CTAS, INTU, GENZ, PDCO, INTC, IVGN, LVLT, SNPS, YHOO). All showed sell signals of 1 box below the prior column of O, as of Tuesday evenings close, where that action didn't seem to depict an all out "get rid of it" type of trade.

Those that have been with OI since last summer have seen these bullish % charts stay at these more extreme, or high levels of bullish %, to only see a brief decline, then turn back higher, as if a stock that gives a sell signal had been previously deemed a bargain by hungry bulls.

Again... this doesn't mean history will repeat, but history is the best teacher of what to be monitoring for.

Market Snapshot / Internals - 02/25/04 Close

Today's "comeback sector" has to be the Dow Jones Home Construction Index (DJUSHB) 592.88 +0.82%, where after a weaker than forecasted existing home sales for January (6.04 million versus 6.25 million forecast and December's upwardly revised 6.47 million) all be darned if the DJUSHB did fall back to test a rounding lower 50-day SMA and the base of our bullish regression channel, to then close back at its highs of the session!

I've got to give some credit to those "gold bugs" out there that defended the AMEX Gold Bugs Index ($HUI.X) 221.67 -1.18% lows found on Monday (217.10), in the face of today's strong dollar rally, which had the U.S. Dollar Index (dx00y) 87.21 +1.24% whipping back higher and erasing all of yesterday's dollar weakness. Today's low in the $HUI.X was 217.30.

While swing traders may have gotten a nice gain in a short I had profiled in the Market Monitor late yesterday in Newmont Mining (NYSE:NEM) $42.32 -1.46%, Newmont bulls also defended the sector bellwether at Monday's lows.

April Gold Futures (gc04h) contract - Daily Intervals

I had some questions regarding my recent seesaw bullish, then bearish swing trades, and thought I show the April Gold Futures (gc04h) chart, which along with the U.S. Dollar Index (dx00y) and the dollar's sudden volatility has really been creating some volatility in the sector. The above chart is shown in the same technique of fitting the 38.2% retracement level of a retracement bracket, after anchoring to a relative high settlement. It has always amazed me at how a futures settlement can seem to be so important. So far, gold futures traders have been able to keep the April contract in the 395.70-398.00 area, but that 406.90- 407.90 level begins to loom as resistance.

I'm a firm believer that STOCKS tend to lead the commodity itself. Newmont Mining (NEM) found so much resistance back at its 50-day SMA, that I have a more bearish view of gold right now.

For those trading or investing in GOLD stocks, I think it important to still view the commodity itself, as this is where a mining company's revenues/earnings are directly tied to.

June Palladium Futures (pa04m) Contract - Daily Intervals

Now we take a quick look at Palladium, and its June futures contract. Palladium has also shown some recent volatility and trade similar to gold, as the dollar fluctuates. A slight difference between gold and palladium is that gold is a precious metal, which may show greater price action relative to the dollar, while palladium is an INDUSTRIAL metal, which is used by industry in the manufacture of equipment. Copper is also an industrials metal.

The reason I discuss GOLD and PALLADIUM tonight is to give us a perspective of dollar versus economy.

There is some concern that should the dollar rise it may choke off some economic growth here in the U.S., as the dollar's rise would make U.S. exports less competitive against foreign goods and services. INDUSTRIAL metals like palladium and copper provide somewhat of a comparison test against gold, which might be more greatly influenced by the dollar's strength/weakness, whereas the industrial metal complex gives some insight into how strong or weak demand is, based on the economy.

Three stocks I think of when discussing gold, palladium and copper are Newmont Mining (NEM) $43.13 -1.46%, Stillwater Mining (SWC) $12.20 -1.29% and Phelps Dodge (PD) $84.24 +1.17%.

Pivot Analysis Matrix -

I can't say that I heard anything new from Mr. Greenspan's testimony today, and for the most part, the major indices traded within yesterday's (Tuesday's) range.

I felt great pressure building in today's trade, and I think two lines have been drawn in the sand for the major indices. One line is at the highs of today's trade, and the other line in the sand is at today's lows.

The reason I felt "great pressure" building in today's trade probably goes back to the August 11 observation, where the bulk of today's trade hints that a rebound in the markets is in the making, but this is where I think today's lows must find support, and bulls need to see a follow through upside day.

There really seems to be some tight correlations at the WEEKLY S1 and WEEKLY Pivot levels.

A negative that I saw, or at least I view it as a negative (bearish) is that the Dow Industrials (INDU) did not see a trade at their DAILY R1. Perhaps MSFT and GE trade had something to do with that, as these two stocks are components of the INDU.

In PINK, I highlighted the QQQ WEEKLY S1, where today's low in the QQQ found buyers just above. Is this a sign of bullish optimism? Or is it a sign of jittery bears ahead of tomorrow's economic data, looking to take profits near-term profits, instead of risking them? We'll find out tomorrow is my thought.

I've also highlighted tomorrow's DAILY R1. I currently have an open order for a swing trade long in the QQQ should we see trade at $38.73. I showed this chart of the QQQ, an intra-day chart, in today's market monitor. While $36.73 is my bullish action point, if triggered, the first test of strength would be a QQQ move above $36.78.

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

Again... the major indices traded within Tuesday's range, with the exception of the Russell 2000 Index (RUT.X) 579.04 +1.25% seeing a nice move back above its 50-day SMA (see last night's Index Wrap for chart).

The QQQ, which has been the notably weaker index may be the focal point for traders to at least be monitoring tomorrow, as well as its parent index, the NASDAQ-100 (NDX.X).

I think the 60-minute interval chart really begins to bring into focuse how the $36.78 overlap of WEEKLY (blue) 61.8% retracement and the MONTHLY 61.8% retracement of $36.77 will be a greater technical test for renewed strength. This $36.78 level seems to have been a level of past support, when broken now becomes a focus for near-term resistance. Not the strength the QQQ found in prior moves above this level, where the move found an almost immediate move higher to the current weekly pivot of $37.10.

In my opinion, if your a swing trade bull, you aren't looking for $37.10 as a target. No... you're looking for a move of something at least similar to that move above $36.78 on February 6th, where the QQQ ran to the current WEEKLY R1 of $37.66.

A test for strength tomorrow would be a QQQ trade above $36.78, that DOES NOT FAIL back below the WEEKLY S1. And that becomes "the line in the sand" for support.

Jeff Bailey

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