Option Investor
Index Wrap

This is as bullish and bearish as it gets

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I'm not sure why, but I feel bored. How about you? It's the same thing night in and night out. Tonight, I'm going to change things up a bit, look at some supply/demand charts, and make things look as bullish as I can.

The ultimate test a trader/investor can apply to a security is make that chart look as bullish or bearish as they can, then let the chart, or the market tell them what to do.

First, let's get the basics out of the way and take a quick look at today's market snapshot, where the MOST BULLISH things I observed today was that the small cap Russell 2000 Index ($RUT.X) 598.38 +1.19% broke back above its downward trend in more convincing fashion as if to show the other major indices what resumption of strength all about. The Dow Jones Home Construction Index (DJUSHB) 670.40 +2.57% saw constructive trade and closed at another all-time high.

The MOST BEARISH observations I could make today is that the Dow Transportation Average (TRAN) 2,884.62 -0.11% traded yesterday's lows, and today's market gains came on rather light volume.

Market Snapshot / Internals - 03/04/04 Close

One could imagine that today's light volume trade may have had traders and investors sitting on their hands, waiting to see what, if anything surprising, Intel (NASDAQ:INTC) $29.65 +2.10% had to say midway through the current quarter. Not just Intel (INTC) either as tomorrow morning's February nonfarm payrolls (forecast is for 125,000 job creation) may also be one of those "wait and see" economic reports.

Look at the number, or lack thereof, of new lows on the NYSE, and the steady 4 new lows on the NASDAQ. I can't say for certain, but when I see that, it has to at least hint of short covering, and locking in of gains by bears that don't want to risk those gains. I'm not saying that short covering is only limited to the few stocks that have hit new lows at the NYSE or NASDAQ, but if you're monitoring the "tail" or weakness indicators, then today's new low indications give hint that there wasn't a lot of conviction among sellers today.

Look also at the Russell 2000 Index ($RUT.X) hourly time line. Them little buggers show a trade like an ascending roller coaster, where there were little bumps at the top of each our, but for the most part, show a nice steady build of price gain. Compare that to the Dow Industrials (INDU) 10,588.00 -0.05%, or the S&P 500 Index (SPX.X) 1,154.87 +0.33% and more choppy and bouncing trade, where there wasn't really a lot of conviction shown for the larger cap stocks.

But let's face it. It takes some volume or interest to really get the bigger caps moving and Intel's mid-quarter update and tomorrow's nonfarm payroll data may have provided just enough uncertainty to keep traders and investors from making too many big bets today.

Let's talk real quick about Intel (INTC) and its mid-quarter update. Let's deal with the FACTS first. Since early November, INTC has been finding resistance at $34.00, and the last two weeks has been trading relative lows of $29.00. The FACTS as I know them are that INTC's stock price is down 14.7% from its recent highs. In FACT, INTC is down just about 14.7% since it last traded $34.00 in early January.

Another FACT is that INTC currently trades at $29.11 in after- hours trade, and while after-hours trade is not what I consider to be a true market response, where all traders/investors will cast their votes in the form of buying and selling, the FACTs also show that at $29.11, somebody's still buying above yesterday's close.

Another FACT is that I profiled a bearish swing trade short in the Semiconductor HOLDRS (AMEX:SMH) $41.66 +1.65% yesterday at $41.00, stop $41.85, target $39.25 and all be darned if the after-hours trade low wasn't $41.00, and last tick in after-hours has been $41.40.

Part of me thinks that the MARKET might have factored some "bad news" into the INTC mid-quarter update the past couple of months.

Some fundamental notes had Intel narrowing its Q1 revenue guidance to $8.0-$8.2 billion, which was at the lower end of its previous range of $7.9-$8.5 billion and consensus estimate of $8.27 billion. (Analysts are very smart. Mid-point of $7.9 to $8.5 is $8.2 billion). Gross margins continue to be impressive and are expected to be 60%, plus or minus 1%, which was INTC's prior guidance. Intel added that "demand for the company's Intel Architecture products is consistent with the lower end of normal seasonal patterns and significantly higher than in the same period last year. Demand for Intel's communications products is in line with the company's expectations at the beginning of the quarter. All other expectations are unchanged."

Pivot Analysis Matrix -

I started marking some correlative levels on the pivot matrix for the equity sectors in the matrix, then it dawned on me, that the most important thing I could touch on tonight is the bond market and dollar.

REMEMBER that nonfarm payroll numbers are due out tomorrow morning.

The one thing we made note of in January, when nonfarm payrolls came out, is that the market response seemed to be favorable for the 112,000 jobs added in January (forecast was + 135,000), which was below economists' forecast, but the reaction in equities that session was actually more favorable than some might have thought.

I think the KEY FACTOR for the nonfarm payrolls data (forecasted at + 125,000) is the "not too hot, not too cold, but just right," type of headline numbers.

The thinking is "too hot" may push the Fed to tighten rates sooner than some would like, while a "too cold" number might harm future consumer confidence.

I still think RATE OF CHANGE in Treasury YIELD and the dollar is the main thing to be alert too. I think the 10-year YIELD ($TNX.X) needs to stay between 3.91% and 4.277% if I'm looking for extremes. A QUICK/SHARP move outside that range would most likely see a lower stock trade, as STOCK TRADERS tend to sit on their hands (cancel buy orders) when they see SHARP movements in Treasury YIELD and even the dollar of late.

I think we "know" that stocks can do just fine under a rising or falling dollar scenario, as long as the movement is gradual, and not SHARP.

To get some perspective on where they've been and what economists' forecast, here's some recent history, along with economists' forecast for key payroll data due out tomorrow morning.

Payroll data table -

I'm not an economist, but when I look at the above table, I would think any addition of jobs needs to be ABOVE December's 16,000. If not, I'd have to view that as a negative, as the job market would then have to be considered weaker than December, when at the end of a calendar year, company's tend to limit hiring anyway.

A "too hot" number? That's a tough one. Let's imagine that economists don't have it right and their estimate is too low. It may not make sense to some, but to throw out a number, I (Jeff Bailey) am going to take the difference between December's 16,000 and November's 83,000 (that's 67,000) and add that 67,000 onto the current forecast of 120,000 to come up with a "too hot" number of 179,000.

IF ABOVE 179,000, I'd be alert to a SHARP rise in the DOLLAR and 10-year Treasury YIELD ($TNX.X), which might spook stock traders into selling.

If we as stock market watchers have never seen a stock market shoot higher like a pop bottle rocket, then look for an nonfarm payroll number of 200,000 and a calm bond/dollar trade, and we might just get a fireworks show from equities.

Let's look at some point and figure charts, where tonight, I'm going to change the box size scales, so these may be unconventional box size, to get the charts as bullish and bearish as I can.

Dow Industrials ($INDU) - 40-point scale

The above chart would depict that of an index that has been bullish since it traded 9,920 and triggered a triple-top buy signal. First sign of weakness would be a trade at 10,520. Past sell signals showed a minimum decline of 120-points before a 3- box reversal back higher was found.

S&P 500 Index (SPX.X) Chart - 4-point box

A 4-point box would be a scale a BEAR would like right now. It would show a "sell signal" at 1,140, with firm resistance below 1,160.00. Just like that found in November (red B to red C). Here we see some very similar supply/demand in play, as found late last year.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - $0.25 box

A $0.25 box size chart of the QQQ makes it tough for me to be trying to short the QQQ, as it has pulled back to some major support. The last good trade I had on the QQQ was bullish at $36.25, and the QQQ has given me fits from both the long and short side of the trade. Sign of strength is trade at $37.25, while weakness would be $35.50, as the last time the QQQ traded right ON the upward trend at $33.75, it never went lower.

The point and figure charts are from www.stockcharts.com. You can view some of YOUR favorite charts for FREE. Change the scales up and get them looking as bullish or bearish as you want.

Jeff Bailey

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