Option Investor
Index Wrap

Guinness Stew

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It was a little bit'a dis, and a little bit'a dat as the major indices danced in contorted fashion after the Federal Open Market Committee announced its decision to leave its target for the fed funds rate at unchanged.

Like a good bowl of Guinness Stew, full of rump steak, 2 cloves of crushed garlic, beef stock and a 1/2 teaspoon of thyme, it took traders a while to chew through just what the Fed was saying in its brief March statement released late this afternoon.

Bond traders seemed well versed in Fed lingo, as modest selling turned into a strong round of buying in the Treasury pits, almost as if a Leprechaun waved cast a magic spell over traders, sending the benchmark 10-year Treasury bond's YIELD falling 8.0 basis point by the close to finish with a 3.688% yield, its lowest closing yield since July of last year. Homeowners that have been waiting to refinance their mortgages; today might be your lucky day.

But it took a while for stock traders to figure out, or react to what the Fed was saying, when a slight change of tone, or wording was found in the Fed's comments regarding jobs.

"The evidence accumulated over the intermeeting period indicates that output is continuing to expand at a solid pace. Although job losses have slowed, new hiring has lagged. Increases in core consumer prices are muted and expected to remain low.

After thinking about things for 20-minutes, stocks turned notably red, with the major indices darting back near yesterday's lows, where the tech-heavy NASDAQ-100 Index (NDX.X) 1,407.07 +0.51% actually violated those lows, but like a good Leprechaun, kissed its WEEKLY S1 like a Blarney Stone, to then finish a shade of shamrock green by the close.

A good Guinness Stew indeed, as intra-day traders will be taking a swig from the keg before adding the main ingredient. Twelve ounces of Guinness!

Fellow analyst Jane Fox may have said it best in this afternoon's Market Monitor... "Dear Diary - do not trade on Fed meeting days. I was not able to get a winning trade all day (well a few, but not many) even with this wonderful volatility.

I (Jeff Bailey) will raise my glass to Jane's comments, and it was probably a good thing for me, that e-mail server problems kept the IT department and myself pre-occupied this afternoon, or I'd be sipping some Guinness with a neck brace around my neck.

Market Snapshot / Internals - 03/16/04

Advancers held their ground over decliners at the NYSE for the full session, but our four and five-lettered friends listed at the NASDAQ showed little sign of bullish life after the first 90- minutes of trade. New high/new low indications continue to deteriorate at both the NYSE and NASDAQ, where today's 29 new lows are the highest number of new lows since November 19, 2003, when on that day, there were at least 117 stocks at the NASDAQ hitting new highs.

NYSE and NASDAQ NH/NL Indications - 02/11/04-03/16/04

On Tuesday of last week (03/09/04) we noted that the 5-day NH/NL average ratios were just about to cross back below the 10-day NH/NL average ratios. On Friday, the NASDAQ NH/NL 10-day ratio reversed back lower into a column of "O" on its points and figure chart (we chart 2% box size) and with today's trade complete, the NYSE NH/NL 10-day ratio has reversed into a column of "O," where both begin to suggest intermediate to longer-term loss of bullish leadership.

NASDAQ Composite 52-week High/Low - (10-day Avg) 03/16/04

Here's a hand charted point and figure chart of the NASDAQ Composite 52-week High/Low (10-day Avg.), where using the 3-box reversal technique of charting, I'm simply charting the NH/NL 10- day average of NASDAQ Composite NH/NL indications. This gives the trader/investor at just how darned bullish, the NASDAQ Composite has been since March of last year, how this indicator of bullish leadership has stayed at such "overbought" levels above 70% for months, but is starting to lose some of that bullish leadership of late. The reason I show the above chart, is I received several e-mail from a few investors, that were becoming interested in some longer-term QQQ LEAPs calls. I would WAIT to buy any type of longer-term LEAPs calls on the QQQ right now, and look for more "oversold" risk levels at or below 30% in both the NH/NL indications, and the bullish % charts themselves.

I'll show the NYSE Composite 52-week High/Low 10-day Avg. in tomorrow evening's wrap, but due to time constraints, I've got to move on.

Pivot Analysis Matrix -

Is a St. Patrick's Day bounce in the making? It looks like there's potential, but I would think any type of bounce is going to be highly tied to this week's option expiration.

Here's an option chain of the QQQ for March expiration that I put together at tonight's close, where I've sorted by open interest, similar to that shown in this weekend's Ask the Analyst column.

QQQ $34.94 - March Option Contracts - 03/16/04 Close

Comparing the above option chain to that shown in this weekend's wrap, I quickly sorted the March expiration by Open Interest, and for graphical purposes, placed RED (falling open interest), GREEN (rising open interest) and BLUE (unchanged).

ONLY with a mindset of how an options market maker can try and make as much money as he/she can into Friday's options expiration, I quickly look to see what options holder has the greatest amount of PROFIT RISK into Friday's expiration.

Despite today's gyrations, both the $35 PUT and CALL option holders don't know what to do, and I've highlighted today's "AvgOHLC" box, which gives the average price that those options would have traded today. This develops a near-term "collar" of roughly $0.36 either side of the $35 strike. Or gives the observation of such a collar.

Certainly a $35 call buyer has some risk, but a market maker knows that there's roughly 131,144 contracts that might be profitable right now, where some bigger fish might be fried, or INFLUENCED should a QQQ rally unfold toward $36, which would have the $36 PUTS and $37 PUTS seeing some profit erode. Note though, how open interest has been falling since last week.

My thinking right now, is that the QQQ is collared from $35.36- $34.64, where it might take a trade either side of this range, to really bring in some more extreme movement in the QQQ.

It would also have to be my thinking that if a QQQ market maker is out to try and make some additional money before expiration, then it would serve him/her best to try and go after the March $36 and $37 put holders, and the only way to do that, is to try and stage a short-term bounce back higher.

Now... with that said, Alexis Glick, CNBC's trading correspondent (formerly head of floor operations at the NYSE for Morgan Stanley), said that most of the institutional trader's she has talked to have largely positioned themselves flat at this point into expiration, and that it would take some type of "extreme" move outside of a near-term range, to really see any type of volatility be found into Friday's expiration.

With that comment in mind, lets quickly look at the major indices bar charts.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Bar Chart

There's nothing bullish I could point out in the QQQ, to suggest a rebound at this point. The only thing I see that could possible trigger a bounce would be option expiration related.

One thing I will do into an expiration, is monitor the NASDAQ-100 Market Volatility Index (VXN.X) 27.34 +0.77% for any DIVERGENCE from QQQ trade. For example, if QQQ is trading lower, but I see VXN.X falling, I would quickly turn to the Option Chain, similar to that show above, and look for anything suspicious. If I saw a heavy volume trade in the March $36 puts and $37 puts, and some heavy volume, but to a lesser extent in the $35 calls, that might hint of an option expiration bounce. I would be pressed to think the QQQ could muster a move much above $35.81.

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

St. Patrick's Day fell on a Monday last year, and Triple Witching was 4-days later. The SPX saw a dip lower open, and Irish bulls sang the SPX higher into the close, with an impressive trade that encompassed a range of 827.12-862.79. I'd have to say it will take some Irish luck to see such a performance tomorrow.

Dow Industrials (INDU) Chart - Daily Intervals

One of Ms. Glick's comments caught my ear, as it related to this week's expiration. She thought that a trigger for a rebound would most likely take a "key stock like MMM" breaking out of a recent range. I think what she is talking about is a LEADING, or STRONGER stock breaking out of a range, to catch trader's attention, which would be some DIVERGENCE from recent weeks. Last week I touched on Procter & Gamble (NYSE:PG) $103.06 +0.52%, where after giving upside guidance to earnings and trading a new 52-week high just four sessions ago at $107.21, has now come right back to the price level where bullish guidance was given.

Jeff Bailey

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