Option Investor
Index Wrap

Catching up

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When you spend a week in Northwestern Kansas, you'll catch a couple of stock and bond market updates, but the real focus in on hog, cattle and grain prices.

While farmers cheered my annual arrival to St. Francis, Kansas in pursuit of the elusive wild turkey, they cheered my arrival only because I brought them rain for a second-consecutive year.

If you're a farmer that needs rain and is overrun with wild turkey, give me a call and who knows, we may be able to build a mutually beneficial relationship over the years to come. Farmers need rain, and there's few things I enjoy seeing more than an old boss tom turkey strutting in the wild. My trouble has always been staying awake, and my father and close friend tell me I missed a wonderful picture of an old tom strutting his stuff with tail fanned just 15-feet from where I was catching a mid-morning snooze. Oh well.... Turkey 1, Jeff none.

While I spent most of today catching up on things and still scraping the Kansa mud and dirt from my boots, the major averages finished today's session with gains, but the tone was far from exuberant.

Some of today's hesitation could be blamed on tomorrow's FOMC meeting, which is expected to shed some light on the Fed's plans for the economy and timing of future rate hikes. The question at this point is when, not if the Fed will raise rates, as economic data continues to show growth.

Market Snapshot / Internals - 05/03/04 Close

The Semiconductor Index (SOX.X) 440.87 -0.59% was perhaps today's most volatile sector and action there certainly showed some uncertainty among technology bulls. What appeared to be a stronger-than expected Semiconductor Industry Association (SIA) report earlier this morning had J.P. Morgan raising its 2004 semiconductor sales forecast from a 22% rise year-on-year to 27%, but the SOX.X slipped below last week's low of 441.26 intra-day after Raymond James said one of its recent surveys portends that the PC replacement cycle is winding down.

The broker said that while commercial IT spending has stabilized, the firm's U.S. commercial demand survey suggests that the PC replacement cycle is winding down, where corporate spending on PCs is now being diverted to more expensive enterprise systems (severs/storage), where desktop PCs, which account for 70% of the commercial mix would most likely bear the brunt of a slowdown.

While Raymond James' comments were centered around a strengthening position for Dell Computer (NASDAQ:DELL) $34.89 +0.31%, a status quo comment for IBM (NYSE:IBM) $88.02 -0.17% and more negative implications for Hewlett Packard (NYSE:HPQ) $19.65 -0.25%, the SOX.X faded from its best levels of the session just after 11:00, when the Raymond James comments hit the wires.

I haven't caught up on all of the OI Index Trader Wraps, Market Wraps and intra-day commentary from last week, but one item that caught my attention is that while I was out on vacation, the NASDAQ new high/new low breadth turned notably more bearish on April 29th, and follows similar negative breadth that was found in the NYSE a couple of weeks ago, when Treasuries saw sharp selling after the nonfarm payroll data was released in early April.

One of the key economic reports due out on Friday will be a follow up to March's nonfarm payroll data (+335,000) where economists forecast the economy to have added a more modest 165,000 jobs in April.

Federal Reserve Chairman Alan Greenspan and other FOMC members would have loved to get a look at the nonfarm payroll data before tomorrow's meeting, which has been one of the major economic indicators the Fed has been monitoring for sustainable and steady improvement before it feels entirely comfortable in raising it target for the fed funds rate.

U.S. Market Watch - 05/03/04

I can't say the 9% decline in the AMEX Gold Bugs Index ($HUI.X) over the past 5-days is all that surprising considering the technical breakdown in this sector a couple of weeks ago, but it may well be an earnings disappointment from Newmont Mining (NYSE:NEM) $37.38 -0.05% last week (along with others) that has investor's attention. I note this as the U.S. Dollar Index (dx00y) 90.81 +0.36% is relatively unchanged the past 5-sessions, while both the weighted XAU.X and non-weighted HUI.X have still seen continued declines.

In essence, it would have to be my analysis that while the strength in the dollar the past several weeks has probably been damaging to gold prices and gold equities as momentum players have fled the gold sector, there certainly appears to be some loss of correlation between gold/dollar that had been present for many weeks, if not months.

As discussed in prior wraps, rising energy/fuel prices may have been a negative contributor for many mining company's earnings, and today's trade did find the June Light, Sweet Crude Oil futures (cl04m) 38.24 +2.3% trading a new contract high.

Obvious rotation out of tech took place last week, where energy (OIX.X, OSX.X and XNG.X) have been holding steady, as have drugs and healthcare. Over the past 5-sessions (past two weeks if counting the days), the S&P Banks Index (BIX.X) have shown some stability above their rising 200-day SMA (330.00).

Pivot Analysis Matrix -

I mentioned the BIX.X rising 200-day SMA (considered a longer- term moving average) and make a note that this may be an important near-term support level for the BIX.X in the WEEKLY Pivot Matrix at WEEKLY S1. I'd want to keep an eye on this interest rate sensitive sector tomorrow, as well as after the FOMC meeting tomorrow. A break below this level would have to be taken as a NEGATIVE/BEARISH reaction from market participants toward Fed commentary. I would note that the BIX.X was the ONLY equity-based sector that managed to close above its WEEKLY Pivot in today's trade, and equity bulls may be hiding out in the sector on thoughts that the bulk of selling in the group has been seen.

I also market the SOX.X WEEKLY S2 (410.85) with a PINK box. This is very close to the 412.00 level, which was the bearish price objective we had calculated from the head/shoulder top pattern in the SOX.X.

Semiconductor Index (SOX.X) - Daily Intervals

Here's an updated chart of the SOX.X that we've shown in several updates. Tonight I'm noting that Dorsey/Wright & Associates' Semiconductor Bullish % (BPSEMI) has fallen below the 30% and would now be deemed longer-term "oversold," where from September- December of last year, this bullish % stayed well above 70%, achieving as high a 88% and very "overbought" levels of bullish %.

In the last hour of today's trade, the SOX.X found some buying at its last upward trend from the October lows. I agree with fellow analyst Leigh Stevens comments from late last week that things look oversold near-term, but with broader market internals (bullish % along with NH/NL indications) deteriorating, I think a bounce in the SOX.X back near its MONTHLY Pivot provides another good short, but bears will be willing to cover any decline back near 412.

NASDAQ-100 Tracking Stock (QQQ) Chart - Daily Intervals

Near-term resistance forms at the QQQ WEEKLY/MONTHLY Pivots and while we would expect some volatility tomorrow, if not until the end of the week into the nonfarm payroll data, the NASDAQ-100 Bullish % ($BPNDX) has reversed back lower to "bear confirmed" status and I would view $36.50 as MAJOR resistance for any bounce, and should the SOX.X break below its last upward trend from the October 2002 lows, then QQQ vulnerable to $34.00 minimum and potentially $33.00 into the summer.

I haven't been able to update the other major indices with their new WEEKLY/MONTHLY Pivots, but here's something I'm looking at with LAST WEEK'S and LAST MONTH's pivot retracement still on the SPX.

What I'm doing is comparing some of the NEW weekly/monthly levels present in the matrix, with how the SPX continues to trade against the WEEKLY pivot matrix from 2 weeks ago (for 04/19- 04/23). My thoughts here are that Friday's and today's lows are important near-term support, where if broken, the SPX could dart sharply lower to the currently correlative WEEKLY S1 and MONTHLY S1. Meanwhile, the 04/19-04/23 WEEKLY S1 (1,120.58) is THIS WEEK's WEEKLY Pivot 1,120.46 and near-term resistance.

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

The above chart with retracement show is the same SPX chart I viewed BEFORE I left for vacation, but give me the observation that this 1,106 level is still an important near-term level of support, where if broken to the downside, the SPX becomes immediately vulnerable to its CURRENT WEEKLY S1 of 1,094.71.

It is my thinking that as more and more stocks begin giving point and figure sell signals, then computers should have a sell bias forming at the CURRENT weekly R1, where I do think the SPX should work its way lower.

Near-term resistance on the ABOVE chart would certainly look to be the 1,120.58 level (from two weeks ago), but this is ALSO THIS WEEK's WEEKLY Pivot of 1,120.46.

The observation I begin to get from this type of view is that the WEEKLY Pivot matrix is "working itself lower," while the NEW MONTHLY Pivot retracement is narrowing compared to May (S2 moving up, R2 moving down) as if the SPX is perhaps going to try and establish a summer range from 1,080-1,040.

I'll get all the major indices pivot retracement updated tonight, and post their charts tomorrow, but my basic analysis would be more bearish.

Jeff Bailey

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