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Index Wrap

Quick update on supply/demand as breakdowns underway

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The major indices extended Friday's declines, where the more oversold gold and semiconductor stocks as depicted by the AMEX Gold Bugs Index ($HUI.X) 173.24 +2.63% and Semiconductor Index (SOX.X) 458.90 +0.41% bucked broader sector declines.

Early morning weakness in the precious metals stocks now has Dorsey/Wright and Associates Precious Metals Bullish % (BPPREC) falling to just 14.89% bullish after reaching 92% bullish in January, while the Semiconductor Bullish % (BPSEMI) fell to 21.17%, where both are the weakest and most oversold sectors followed by Dorsey/Wright.

Market Snapshot / Internals - 05/10/04 Close

Market internals were once again weak, where the number of new 52-week lows at both the NYSE and NASDAQ reached numbers not seen since January 21, 2003 when I started keeping daily tabulations for calculation the 10-day Average NH/NL ratios. Since the NYSE NH/NL 10-day Avg. Ratio turned "bear confirmed" at 77% on April 14, it is now at more oversold levels below 30%, while the NASDAQ's 10-day NH/NL 10-day Avg. Ratio is nearing the more oversold 30% level. Both indicators continue to suggest bearish leadership.

U.S. Market Watch - 05/10/04 Close

The AMEX Gold Bugs Index ($HUI.X) 173.24 +2.63% was today's sector winner, and I've marked its session high of 176.09, which came at its WEEKLY Pivot. Trader's will also note that I've marked this morning's 07:30-07:35 AM EDT high in the U.S. Dollar Index, which almost to the penny found session high resistance its WEEKLY R1 of 91.86.

While the S&P 500 Index (SPX.X) didn't quite see a testing trade at this week's WEEKLY S2 (1,079.34) and correlative MONTHLY S2 (1,078.55), I thought it best for put option holders to take advantage of higher premiums as depicted by the VIX.X during today's price weakness. Especially those that had established put positions back in late March when the SPX was rising to the 1,125 level, and continued to trade STRONG to the 1,150 area into early April.

Pivot Analysis Matrix

For the Dow Industrials (INDU) 9,990.02 -1.25%, S&P 500 Index (SPX.X) 1,087.12 -1.05% and S&P 100 Index (OEX.X) 532.68 -0.86%, I did take intra-day highs for deriving tomorrow's DAILY Pivot Matrix values. Most data feeds show session highs for the INDU/SPX/OEX/BIX.X as being close to Friday's close, but this morning's gap lower open would "throw off" these indices from their trackers (ie: DIA/SPY).

S&P 500 Index (SPX.X) - 10 & 5-point box size

It may seem counterintuitive to suggest the covering or closing of SPX puts just as the SPX generates its first "sell signal" since generating a double top buy signal in August at 1,010, but with the SPX pulling into some overlapping support in the pivot matrix at the 1,078-1,079 level, the SPX has been stronger than I expected when I wrote a somewhat bullish end of year market outlook in December (red C) and a little more bullish when I first suggested/profiled a partial position for SPX out-the-money puts in late March and early April (red 4) as the SPX bounced from 1,090. However, the SPX finally looks like it is starting to show some of the impact from its weakening internals as depicted by the S&P 500 Bullish % ($BPSPX).

Other than the placement of this WEEK's and this MONTH's pivot analysis levels, the above SPX chart would be an updated version of the SPX chart I showed for our OptionInvestor.com annual renewal edition.

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

Today's trade (Monday) found a net loss of 27 stocks in the broader S&P 500 Index (SPX.X) generating reversing lower point and figure sell signals. Regardless of what scenario (bullish or bearish) a trader/investor may be following and hopefully TESTING, one could simply view the current pullback or weakness in both the SPX.X itself and the bullish % indications as the MARKET's way of removing bullish risk. Some believe the current weakness is SIMPLY a decline ahead of the "summer doldrums," while there are some that feel the Fed's "measured approach to interest rates is totally going to backfire...."

I (Jeff Bailey) feel the MARKET is once again systematically reducing risk, and the recent highs found for the major indices will be violated to the upside by year's end. President Bush's tax cuts and the Fed's stance on interest rates certainly looks to have had a deflationary impact on things. Not only the S&P 500 Index (SPX.X), but its bullish % too.

In the meantime, internals and externals look weak, and a defensive posture is warranted.

Dow Industrials ($INDU) Chart - 50-point box

The INDU traded both its WEEKLY S2 and MONTHLY S2 and shows weakness within our pivot matrix, and now tests its longer-term bullish support trend. Months ago we noted similar tests of trend in Japan's Nikkei-225 ($NIKK), where the $NIKK violated its bullish support trend by 150-points, or 100-points before seeing some impressive bounces from trend.

I'd look for a near-term oversold bounce in the INDU near its MONTHLY Pivot as an excellent put opportunity, then look to target 9,250-9,400 into the summer.

I've found the Dow Diamonds (AMEX:DIA) $99.91 -1.22% can give traders/investors a better feel for bullish and bearish vertical counts. In March of 2003, the DIA achieved a bearish vertical count of $74, and after generating a bullish vertical count to $105 in March of 2003, the DIA traded as high as $107.92 on February 19, 2004. It would currently take a trade at $95.00 (INDU 9,500) for the DIA to generate a double bottom sell signal.

What I think we might look for is the DIA to see a trade at $99, maybe $98, THEN see a 3-box reversal back up, where a reversal back lower generates the "sell signal" to establish a bearish vertical count to better assess longer-term downside risk.

NASDAQ-100 Index ($NDX.X) Chart - 10-point box

In today's 03:15 PM EDT we took a look at the QQQ Daily Interval Chart where the QQQ ended up closing right on its WEEKLY S1. In the 11:00 intra-day update, we looked at the Semiconductor Index (SOX.X), which was showing some strength above its WEEKLY Pivot, which has me looking for that strength to spill over to the NDX/QQQ. I think there's a bounce in the making for the NDX back up near its WEEKLY R1 1,436 and WEEKLY R1 of 1,427, but with the current bullish % reading of 34% showing greater internal weakness than that found when the NDX recently traded 1,370, I could then see a nice tie with NDX back lower at 1,331, when the SOX.X trades its current head/shoulder top pattern objective of 412.

According to Dorsey/Wright and Associates, their Semiconductor Bullish % (BPSEMI) has fallen to 21.17% and would now be considered longer-term oversold. When we first began discussing the head/shoulder top pattern in the SOX.X, we thought the "timing" might be right for the SOX.X to achieve that objective as the bullish % reached levels below 30%.

We may be seeing some "oversold" relief buying in the semiconductor sector right now, where perhaps the "capitulation" move to its bearish h/s objective comes on the first Fed rate hike in June.

Jeff Bailey

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