Option Investor
Index Wrap

Intra-day swings with a new twist

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The major indices saw a second consecutive session of volatility, where a delayed January report on inflation showed January producer prices rising 0.6%, with a 4.7% jump in energy more than offsetting a 1.4% decline in food prices.

That news set a negative tone early, and much of yesterday's gains were erased, where in the case of broader technology, losses were found by mid-session.

But stocks reversed from their lows, to finish back near unchanged levels on news out of Pakistan, that Pakistani troops believed they had surrounded a key al-Qaida target, Ayman al- Zawahiri. As I write tonight's Index Trader Wrap, there has been no further clarity to these reports.

Suffice it to say, if today's economic data and this week's Triple Witch expiration wasn't ingredient enough for a volatile and uncertain trade, then some potentially positive news on a geopolitical scale added a little more spice to what we've been seeing of late.

Market Snapshot / Internals - 03/18/04 Close

A/D lines at both the NYSE and NASDAQ finished negative, but it is notable how improved the A/D indications became when news out of Pakistan hit the wires. It is always difficult to measure what it would mean if a key al-Qaida target was captured as it relates to any economic factor, but it would certainly have some type of positive impact on investor and consumer psychology.

Of late, I started to wonder how many Corporate CEO's might have had a stack of IT spending, or new job hiring approval forms on their desk, ready to sign, but with recent terrorist bombings in Spain, and a change of that country's government, with some citing those very terrorist attacks as reason for the change in government, hasn't had some CEO pushing the pile of approval forms to the side, while they await some type of clarity on things, before increasing expenditures.

June Light, Sweet Crude Oil futures (cl04m) - Daily Intervals

Energy prices were a key reason for the rise in January's producer prices, so I thought I'd quickly review a chart of the June Light, Sweet Crude Oil futures (cl04m). A quick check of this commodity's point and figure chart hints at a potential bullish price objective of $40.50. OPEC has been stringent with increasing its supply quota's, and a recovering global economy has increased demand. That type of equation makes for higher prices, where Treasury Secretary John Snow said he is really becoming concerned with the high price of energy, as it acts like a tax that can stall spending in other parts of the economy.

Pivot Analysis Matrix -

The only thing I would say in regards to the pivot matrix, was an observation I noted in today's market monitor, just before the news out of Pakistan hit the wires. I was noting that the QQQ was edging up from its lows of the session, after just dipping below its DAILY S2, while the other indices had edged up from there lows of the session, after trading near their DAILY S1s. Tracker's have DIA "Max Pain" at $105, while QQQ "Max Pain" is $36. The Q's certainly seem to want to trade closer to the $35.25 level, where inflections of $0.25 either side seem to gravitate back toward $35.25.

AMEX Gold Bugs Index ($HUI.X) - Daily Intervals

The $HUI.X was on the verge of what seemed to be a break above its downward trend, when wouldn't you know it, the news out of Pakistan had gold stocks backing off their best levels of the session. The dollar was weak today, with the U.S. Dollar Index (dx00y) 87.64 -1.12% currently trading down 1.00 point, while higher producer prices in January brought some thought to inflation.

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

The S&P 500 Index (SPX.X) traded within yesterday's range, where this quarter's "Max Pain" level of 1,125 serves up resistance. An intra-day observation would have found the SPX hitting its session high of 1,125.50 at 03:35 PM EST, well after the news out of Pakistan was in the market, but sellers were firm at 1,125.

In last night's Index Trader Wrap, I said I wanted to begin monitoring the Market Volatility Index (VIX.X) 18.53 +2.31% in coming weeks, as I made a note to myself on Monday, when the VIX.X kissed the 21.22 level, to begin tying in some longer-term observations with the VIX.X, and the S&P 500 Bullish % ($BPSPX).

Market Volatility Index (VIX.X) - Weekly Intervals

I've shown this chart of the VIX.X over the years, where I like to set my retracement from 40.00 to 16.78, where I've found this retracement, which breaks up the range in levels, to tie in rather well with what we will see in the S&P 500 Bullish % ($BPSPX). After trading well below the 16.78 level, the VIX.X was able to come up at touch a level higher at 21.22, where this can become an alert towards a shift from call buying to put buying. It also comes as some of the bullish % charts have either shows weakness, like both the NASDAQ-100 Bullish % ($BPNDX) and NASDAQ Composite Bullish % ($BPCOMPQ), with some softening showing up in the S&P 500 Bullish % ($BPSPX).

S&P 500 Bullish % ($BPSPX) - 2% box size

You could probably turn the S&P 500 Bullish % Chart ($BPSPX) upside down, and see great similarities between it and the Market Volatility Index (VIX.X) shown above. However, each tell a similar yet different story. While internals at the S&P 500 have been softening of late, it would currently take a reading of 72% for this market indicator to turn "bear confirmed."

With all the quarterly expiration option action we've been seeing, the VIX.X can be difficult to interpret, but I would have to think that institutional hedging, and buying of puts would be alerted to if the VIX.X moves above 21.22, especially if the S&P 500 Bullish % ($BPSPX) falls to "bear confirmed" status at such a high level of bullish risk.

From past index trader wraps, and some focus I've been giving to option-related activity, there certainly seems to be a lot of interest around the SPX 1,125 level, as if it is a point of equilibrium where there is a heck of a lot of option action taking place, as if bulls and bears are very busy with some hedging activities.

The SPX Bullish % ($BPSPX) tells us that while internals are still strong, but softening, there's a lot of bullish risk that can still be taken out of this market. The VIX.X becomes useful in understanding what types of premiums options are fetching, where premiums will rise (VIX.X will rise) when premiums rise. That is often when the demand for puts starts to increase, and supply of STOCK begins outstripping demand.

Jeff Bailey

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