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Index Wrap

Spring housecleaning for Dow Industrials

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Economic data was generally upbeat and had the major indices finishing higher, with trader's and investor's attention now focused on tomorrow's March nonfarm payrolls numbers.

The biggest news of the session was that on April 8, 2004, the Dow Industrials is going to look a little different, where some spring housecleaning will see the removal of IP, EK and T, and those stocks being replaced with AIG, PFE and VZ, to "better reflect the economy" and the U.S. markets.

Dow components - Current with new additions

I've left our Dow Industrials (INDU) table, sorted by PRICE to reflect its weighting as it currently stands, but at the bottom I added the new components with some general figures such as current Dividend YIELD, Annual Dividend currently declared, and beta's, so traders can get a feel for what's coming in, and what's going out.

Market Snapshot / Internals - 04/01/04 Close

The major indices saw their best levels of trade in the first half of the session, then gyrated a bit after the lunchtime hour. I've marked today's number of new highs at both the NYSE and NASDAQ, which really do suggest there is some bullish leadership starting to show up again, where the number of new highs at the NYSE are the highest since March 8 (208) and the NASDAQ's 180 is also best found since March 8 (208).

BIG bet made toward a Treasury rally:

CNBC's Alexis Glick made comment late this afternoon that a BIG bet, and a bullish one at that, was made in Treasuries today, in the form of a HUGE call buyer in the Lehman iShares 20-year (AMEX:TLT) $88.91 -0.71%. Trader's will recognize this security from the "Beetle's Balanced" portfolio we track from time-to- time, where this security is a basket of longer-term Treasuries.

iShares Lehman 20-year (AMEX:TLT) - Option Chain (sort volume)

Good Gravy! That's a big bet and the volume of 88,963 compared to open interest of 1,625 is notable. While I don't think it was just one trader buying all of today's volume, I calculate roughly a $4.5 million bet [(88,963 x 100) x $0.51] was made that Treasury prices in longer-dated Treasuries are going to rise before April expiration. With this type of trade coming just ahead of tomorrow morning's nonfarm payroll number, somebody made a sizeable bet that the nonfarm number is going to find a bullish reaction from Treasuries. Based on Fed comments that it doesn't feel pressed to raise its target for the fed funds rate until steady improvement is seen in the jobs market, I'd have to think today's call buying in the TLT April $90 calls, which are out the money, has somebody pretty sure the nonfarm data is going to come in below consensus forecast of net addition of 123,000 new jobs.

Ms. Glick also made an interesting comment that Goldman Sachs runs two last minute surveys, one tonight, then another early tomorrow morning before the nonfarm data is released, and this afternoon's survey showed a range of estimate at just +50,000 to +75,000. Well shy of economists' forecast, and some of the "whisper numbers" of 200,000 plus.

Here's a table I've been updating from month to month, which shows some of the major components (not all of them) that are released each month. February's data may be revised when March's numbers are released tomorrow morning, but traders and investors can probably get a feel for what some recent reports have shown. I've also displayed the consensus forecasts of prior reports.

Nonfarm Payroll Table - September thru March forecasts

Upside surprises to economists' forecast were found in the October 3, 2003 (September nonfarm) and November 7, 2003 (October nonfarm) reports, but since that time, the gain in new jobs the economy has created has fallen shy of economists' forecast. The number that really stands out as being weak was the December nonfarm data, where the fractional 8,000 new jobs added was thought to be due to corporations not hiring prior to the holiday season. The February 6 report showed a more notable jump, but was still shy of forecast.

Tomorrow morning, we might not want to just focus on the March figures, but also take note as to any revisions (up or down) to the February data.

In the following chart of the SPX, I've placed horizontal lines at the CLOSE of trade the day prior to the release of the nonfarm payroll figures.

S&P 500 Index (SPX.X) - Nonfarm Payroll benchmarks

It is thought that a MARKET will already have figured out, and accurately priced in most good and bad news. I thought it would be educational, perhaps profitable, to look at where the SPX had CLOSED the night before a nonfarm payroll number was released (observe how the SPX traded into the news), where we can then compare "the news" to economists' forecast, and any type of monthly nonfarm payroll gains.

Some observation that my be important, which I'm just noting for the first time tonight, would start in the lower left corner of the SPX bar chart, where prior to the 10/03/03 nonfarm release, the SPX had traded down, then back up just ahead of an UPSIDE nonfarm report, when compared to economists' forecast. That UPSIDE surprise found the SPX lifting further from the 1,020 level.

I went back an looked at the Pivot Matrix for the evening of October 2, 2003. For the next day's trade, there was overlapping resistance at DAILY R1 and WEEKLY R1 of 1,023.61 and 1,023.41.

Pivot Analysis Matrix - Was for 10/03/03

Trader note: If short, would have been smart to cover on break above 1,024. If long, nice extended rally to 1,053.79 (this would have been shy of MONTHLY R2) until resistance found on 10/15/03.

I would make a similar observation as to the SPX trade pattern prior to the 11/07/03 nonfarm report, where the SPX fell to 1,020 then rallied to the 1,058 level. A rather muted response was found, or so it seemed at the time. I went back and looked at an Index Trader Wrap from the evening of 11/06/03. I'm taking note that on 11/07/03 (the day nonfarm was released) the SPX traded a session high of 1,062.39, where that week's WEEKLY R2 was 1,068.23. The DAILY R1 for 11/07/03 was 1,062.35.

Pivot Analysis Matrix - Was for 11/07/03

Trader note: If short the SPX, then strength above DAILY R1. Otherwise, try and hang tough. If long the SPX, want to see a true bullish market response above DAILY R1.

The night of December 4, 2003, just prior to the 12/05/03 release of November nonfarm payroll data, the SPX closed at 1,069.72 and the next day (day of nonfarm released) fell to the close of 1,061.50. I would note, that on the evening of 12/04/04 Intel (INTC) traded down 3.2% in extended hours after mid-quarter update.

Pivot Analysis Matrix - Was for 12/05/03

The 12/05/03 nonfarm payroll data MARKET reaction may have been skewed, or overshadowed by some of Intel's (INTC) comments, but traders begin to pick up on what I'm trying to do as far as taking some emotion out of tomorrow's trade.

Again.... I can lay out BULLISH and BEARISH market reaction scenarios as to "why" the market did what it did after the nonfarm payroll data is released. I'm trying to outline a potential plan of action, based purely on levels of trade.

Now I want to jump forward to the most recently released nonfarm report, where the SPX seemed to throw a bit of a curve, as the SPX did trade higher, traded a 52-week high that day. That has been "the high" for the SPX. It was the following Monday when the most recent reversal lower was found.

On March 4, 2004, the night BEFORE the nonfarm payroll report, the SPX closed 1,154.87. On March 5, 2004 the day the nonfarm report was released, the SPX saw a rather broad range of trade from 1,148.71 to 1,163.23, and closed at 1,156.86.

That day's trade started out with the SPX trading lower to its session low, then whipping back higher to trade its session high within one hour, then falling back to 1,152.11, then bouncing back higher to 1,160.00 and closing 1,156.86. It was a whipsaw day to say the least.

Pivot Analysis Matrix - Was for 03/05/04

If anything, the March 5 session trade might serve as an observation to not OVERTRADE if planning on entering new positions. Trade, but then observe, and should a non-whipsaw trade bee seen, the position can always be built upon later.

One thing I should make note of, if we're going to use the DAILY pivot levels to manage any type of trade decision for tomorrow, is to understand that the DAILY pivot matrix is derived from the prior days trade.

On March 4, 2004, the SPX traded a rather narrow 5.16-point range.

Today, April 1, 2004, the SPX traded a wider 9.47-point range.

As it relates to the above (03/05/04) pivot matrix, this of that day's DAILY S1 and DAILY R2 range, as somewhat equivalent to tomorrow's DAILY R1 and DAILY S1.

Pivot Analysis Matrix - For tomorrow 04/02/04

I've marked the DAILY S1 and DAILY R1 level for the general observation of "neutral" as we prepare for tomorrow's trade. Note the correlative resistance at DAILY R1 and WEEKLY R2 for both the DIA and OEX.

In my mind, a violation much above these levels, should have traders IMMEDIATELY understanding, or thinking about the possibility for a continued trend toward MONTHLY R1.

In PINK, I've marked the DAILY R1 of 500.36 for the SOX.X, which is a psychological level often mentioned among market participants as a key level for psychology toward the group.

One level that appears to be rather important, if not building some support is OEX 551-550, which is WEEKLY R1 (549.93) MONTHLY Pivot (551.81) have some tie. Please note that the OEX traded UP through its MONTHLY Pivot in today's trade, after closing just fractions below on Wednesday.

Jeff Bailey

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