Option Investor
Index Wrap

Mixed trade on strong February durable goods

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The major indices finished today's trade rather mixed with decliners outnumbering advancers, where technology shares showed some sign of life after February's durable goods orders, which rose a stronger-than-expected 2.5%, suggested increased factory production.

Orders for durable goods, which are made to last at three years, were lead by aircraft, computers and motor vehicles.

A 9.9% increase in transportation equipment drove the advance, chalking up the largest rise since July 2002. Excluding transportation, new orders fell 0.3% in February, the first decline in three months.

Demand for military aircraft surged 61.1% after a 37.3% fall in January and civilian aircraft gained 33.8% after a 32.5% decline. Demand for motor vehicles was up 5.0% from a 4.4% retreat in January. If there was any question that transportation-related components can be volatile on a month-to-month basis, January and February's comparisons give observation of how volatile some of the transportation components can be.

New orders for computers and related products rose a seasonally adjusted 2.1% in February. In the past year, new orders for IT products rose 19.6%. By comparison, new orders for all durable goods have increased 8.0% for the previous 12 months.

Orders for communications equipment continued to climb in February, increasing 5.5%. In January, new communications- equipment orders soared 65.1%. Economists say as the economy grows and businesses expand, they need new telephones and communications equipment to equip new offices and factories.

Non-defense capital goods excluding aircraft, a proxy for business spending, was up 1.1% in February after dipping 0.3% the month before.

Market Snapshot / Internals - 03/24/04 Close

The Semiconductor Index (SOX.X) 468.14 +2.19% exerted itself as today's sector winner, and helped boost the tech heavy NASDAQ-100 Index (NDX.X) 1,381.86 +0.86% to an 11.82-point gain. Market breadth at the A/D line was notably negative at the NYSE, while NASDAQ's A/D finished fractionally negative with decliners outnumbering advancer by an 8 to 7 margin. This tells us that buyers were very focused in today's trade, and not a broad-based round of buying.

Pivot Matrix -

We'll look at my QCharts U.S. Market Watch table in a minute, but some notes I made intra-day, and on the above Pivot Matrix table is today's high for the SPX came just under its WEEKLY S1, while the Semiconductor Index (SOX.X) 468.14 +2.33%, which can be a key sector for NDX/QQQ trade, did see trade at its WEEKLY Pivot, which does begin to suggest the making of a near-term rebound for technology shares. With the SOX.X having been one of the weaker technology sectors in recent weeks, today's relative strength versus other sectors, may indicate that some bears may have been doing some short-covering in today's session.

U.S. Market Watch - 03/24/04 Close

I say "short-covering in the semiconductors" largely because the Networking Index (NWX.X) 255.17 -0.49%, which finished down fractionally, didn't seem to get nearly the bullish response from the February durable goods data as the SOX.X did.

I thought the financials (red squared) really kept a lid on bullishness for the SPX and OEX, and would note how in the past 20-days (20-day Net %), we're starting to see some "equalization" of percentage losses among technology and financial, as the past bullish leadership from financials may well have been pulled lower by weakness in technology.

I get the observation from today's trade, when making the simple comparison between the NYSE Composite ($NYA.X) 6,375.67 -0.66% and the NASDAQ Composite (COMPX) 1,909.48 +0.4%, that recent week's leading weakness in the COMPX, was still playing itself out today.

Could it be that we're about to witness a trade, where the COMPX, or 4-lettered stocks, start a rebound, while some of the 1, 2 and 3-lettered stocks listed at the NYSE still see decline, where percentage losses between the two start to narrow?

Never say "never," but I would have looked, or at least be looking for better A/D breadth than what the NASDAQ showed today.

NASDAQ-100 Tracking Stock (AMEX:QQQ) - Daily Intervals

For a third-straight session, the QQQ are showing some daily low support near its WEEKLY S2, and perhaps some relative strength as it relates to the WEEKLY Pivot levels. After the closing bell, shares of SOX.X component Micron Technology (NYSE:MU) $15.81 -0.06% fell to a last tick of $15.20 after reporting quarterly earnings. I mention this as it might dampen some of today's enthusiasm toward semiconductors at the open, and might have the QQQ a little weak back toward its DAILY S1 of $34.08, but if buyers (bears short covering too) believe the QQQ is somewhat oversold, I'd look for some type of support at that $34.01-$34.08 level, where a move back above $34.38 builds thought a bounce is underway, where trade above $34.76 gives some more meaningful sign of strength. An eyeball target for a good oversold bounce in my mind would be something near $36.00.

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

CNBC's Alexis Glick made comment of some unusual, or heavier than normal put selling in the SPX today, and I made some notes in the Market Monitor on her comments. I posted today's top three most active options in the SPX, where the VIX.X 4.16% decline with 1,100 puts (SPTRT) being most active, married with some out the money calls, might suggest some option trade, where traders are looking for a rebound. If so, keep an eye on tomorrow's DAILY S1 of 1,086 and VIX.X. If the VIX.X jumps higher and SPX breaks 1,086, then SPX could unravel further lower. Conversely, and SPX above 1,100 with imploding VIX.X and still heavy put selling, could certainly suggest a rebound in the making. I could perhaps tie a QQQ $36 and SPX of 1,123 together, which we all remember were last month's "Max Pain" levels, where I would have to think formidable resistance to a bounce would be found.

Now... I'm going to try and outline what I think might be the setup for a near-term "bear trap" type of move, which might be set up perfectly in the Dow Industrials (INDU).

Here's what I'm thinking.

Just as we heard that Dow 10,000 would be formidable resistance as the INDU approached this level from the lows, we've heard, or I've been hearing, Dow 10,000 major support.

On Monday, and then again today, the INDU found support at ... you got it... 10,000. Now that all bulls have been told that 10,000 is support, it might be a "trick" that it gets broken intra-day, then reversed back higher. How else do you get a bull to finally give in that break the psychological support level?

Dow Industrials (INDU) Chart - Daily Intervals

"Be Alert" is a trade scenario that traders might be cognizant of near-term. The INDU hasn't actually traded 10,000 at this point, and it might not, but I would have to think there are a lot of bullish stops, just ripe for the picking, on an intra-day break below 10,000, and a reversal back higher, once the stops are cleared out. A bullish trader that would want to play this type of trade could do so, but then follow with a stop just below the day's low, but where bullish entry wouldn't be taken until a move back above WEEKLY S1, or DAILY Pivot (10,554 + 10 points = 10,564).

Jeff Bailey

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