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Index Wrap

Market is most oversold I've seen in 20-years!

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While most traders and investors view the U.S. Fed as being a powerful voice, where words can have great impact on financial markets, could it have been the stodgy words from Barton Biggs that had stocks reversing losses to their close?

In a CNBC television interview, at approximately 02:00 PM EST, Mr. Biggs said he thought stocks were the most oversold he's seen in 20 years, and that he expected a rebound in prices any day.

Now, I will admit to having chuckled to myself when Mr. Biggs made those comments, as my personal favorite indicators for really judging how "oversold" a market was still had the S&P 500 Bullish % ($BPSPX) well off its July 2002 low readings of 12% bullish, and that was less than two years ago.

For the record, I'm not sure I'll ever see the S&P 500 Bullish % ($BPSPX) reach 12% in my lifetime, but when using the term "oversold" in the scope of 20-years, I'm not sure what indicator(s) Mr. Biggs might be using to have made such a call.

Still, we'll take some notes and derive some scenarios as to how we might profit from such thoughts.

You know me, I MUST test everything I read or hear, so I thought I'd snoop around for an indicator that Mr. Biggs might be using to have made his "oversold" comment. I think I found it, you'll recognize it when I show it too you, but I may have also stumbled onto something that I hope some of our fellow analysts at OptionInvestor.com might be able to shed some light on.

I'm not a follower of the Trin or TICK, but sometimes they are used as indicators of market internals to identify near-term points of reversal to trend. Inflection points if you will.

Trin is an indicator that combines the component of volume to advance/decline statistics. The formula is rather simple where we would divide advancing stocks by declining stocks to generate the numerator of the equation (A). Then divide the upside volume by downside volume for the denominator of the equation (B). Trin is equal to A divided by B.

If my math is correct, the LOWEST the Trin could read is 0.01, and would come under conditions of BULLISHNESS or BUYING, while higher values would be found under conditions of BEARISHNESS or SELLING.

Got it? For you and I, the most difficult thing to ever really monitor over time (seconds, minutes, hours, days, weeks, months) is upside/buy volume versus downside/sell volume, which eventually creates the supply/demand relationship. Still, we know that if at any point in time you have 1000 shares for sale at a given price, and only 500 shares willing to be bought, then more than likely price will have to fall.

The TICK can either be an upward or downward movement in the price of a security. A tick can also be defined as the smallest movement a stock can make, i.e. $0.01.

If my math is correct, the tick can move either side of 0.00

Now, I heard several "market calls" for the market having found its bottom during the declines from 2000 to 2002 using the Trin. The best one came when the bullish % indicators were below 30% and reversing up to "bullish phases" like "bull alert" and "bull confirmed" status.

But there may have been some DIVERGENCE between these two indicators in today's session, prior to Mr. Biggs' comments, where I've asked fellow analysts at OptionInvestor.com, that might follow these indicators to comment on.

I'm not a follower of either of these indications, but there was some squirrelly action between these two indicators during today's session, which may indeed point to some type of near-term inflection point, for a rally.

Market Snapshot / Internals - 05/12/04

The reason I looked at the TRIN today, was to see if it was at readings not seen in 20-years. It wasn't. The QCharts symbol is $TRIN, and I'm showing a session high reading of 3.61 today, which is high on a relative basis, but I'm showing it reached a high of 11.76 in June of 2002, and another spike high reading of 13.09 in March of 2001.

Still, I looked at hourly readings of both the Tick and TRIN, and we can follow the Tick reading on an hour-by-hour basis and see some very BEARISH readings at 12:00 (-665), while the TRIN was rising, which is more BEARISH. What caught my eye (when trying to figure out what Mr. Biggs was seeing to indicator oversold) is some squirrelly indications between the Tick and TRIN at around 01:00 PM EDT. While the TRIN did show a lower reading that the 12:00 benchmark, it wasn't nearly as notable a change as what took place in the tick.

Hmmmm... think about TRIN and its use of VOLUME.

Moving to 02:00 PM, the Trin is back on the rise, which is BEARISH and reaching a rather high level, and while the TICK does fall off sharply, the TICK is still positive at 4.

Certainly these hourly readings are at a specific point in time, but their rather NOTABLE (in my opinion) differences, are worthy of note, which draw attention to this time period, and perhaps level of trade.

We now know what took place AFTER these squirrelly indications, and I'm going to outline what looks to have been a pretty NASTY looking bear trap.

Scenario Stated: A near-term bear trap was created today (or bullish capitulation point), when the S&P 500 Index (SPX.X) traded briefly below its MONTHLY S2 of 1,079.34, with a session low of 1,076.32, which now set the stage for an index expiration rally back to SPX 1,125 and its "max pain" option expiration gravitation point.

Oh Shoot! I promised to show an indicator that Mr. Biggs might have been speaking of that was at "oversold" levels not seen in 20-years.

NYSE and NASDAQ NH/NL Breadth - Daily, 5-day & 10-day Avg. Ratios

Mr. Biggs didn't say what his indicators were, but perhaps one of them is the NH/NL Breadth and ratio indications. The LOWEST ratio you can achieve is 0.00, while the HIGHEST ratio you can achieve is 100.00.

On Monday (row 333) both the NYSE and NASDAQ daily ratios were pretty low. I'm not sure if the daily ratio for the NYSE (column AB) was at levels not seen in 20-years, but its pretty close to 0.00. Heck, the NYSE 5-day NH/NL average ratio (column AC) at 3.7% is pretty darned low relative to a scale of 0.00 and 100.00. Good Gravy! It was 95.7 on April 2 (Row 308, Column AC).

While we chart the 10-day NH/NL average ratios on our point and figure charts, I'll show the 5-day and 10-day average ratios to get a feel for any shorter-term (5-day) signals for change in bullish leadership, should they cross above the 10-day average ratios.

Anyhow... maybe Mr. Biggs is using some observations from the NYSE NH/NL indications for his statement that stocks are "oversold" right now, this his expectations for a rebound.

Let's get back to my scenario of a bear trap today, which lends itself to a bounce back toward 1,125, which is this month's "Max Pain" index option expiration level for the SPX.

S&P 500 Index (SPX.X) - 60-minute intervals

I wanted to show a 60-minute chart to provide some detail, but also allow for some perspective as it relates to the month of May, our MONTHLY Pivot of 1,121.61, which is pretty close to this month's calculated "Max Pain" level.

Do you see how either a "bear trap" or some near-term bullish capitulation could have been found just below our WEEKLY S2 and MONTHLY S2?

Bear trap created by the bear that has been waiting to see if the WEEKLY S2/MONTHLY S2 and Monday's lows were firm. But under ANY bearish scenario, comes in and shorts the "failed bounce" on Tuesday. If I (Jeff Bailey) were holding May SPX puts with an 1,100 strike, which I bought back in early April, and didn't close out on weakness on Monday, I'm now thinking that might have been a good idea, as it looks like this trade has the possibility of going "poof" with one-week until expiration. (Watch the VIX.X tomorrow, if it SPIKES lower, and puts are most active, then could be seeing an unwinding of put options).

Near-term bullish capitulation could well be visualized if buyers were buying Monday's lows, even yesterday's rebound, then they see TUESDAY's lows violated and think "oh no, I've got no support below me" and they capitulate.

Maybe this is why the TRIN, which does incorporate VOLUME was more steady than the Tick, which only measures buy/sell trade.

Who/what in their right mind is buying SPX as it breaks a relative low, where support is then hard to find.

Computers don't have minds. They're unemotional. Maybe they need to square up some things into next weeks index and stock expiration for May?

NASDAQ-100 Tracker (QQQ) - 15-minute intervals

I wanted to use the QQQ with volume turned on to show that I don't really see any notable volume variations, other than to see some volume builds around the May 10 lower and today's trade just as Monday's lows are being violated, but volume is rather light right at the WEEKLY S2, when suddenly the QQQ catches a pretty darned good bid.

I outlined where my Market Monitor swing trade long from late Monday at $34.75 was stopped out this morning (Just under the little zone near $35.00, and even I wasn't convinced that a move was underway back above WKLY R1, but decided to get back long the QQQ at $35.07 with a bullish profile in the Market Monitor, stop right back under that $35.00 level, with a target into next week of $35.75.

As a note, this month's QQQ "Max Pain" calculation is $36.00.

I should note that the little green and red arrows on both the SPX and QQQ are how I think we might look for these indices to trade tomorrow and into next week.

I will say this. I WISH the SPX, or SPY was trading lower price values and would be more acceptable for swing trading the underlying security for a short-term move higher. I think the SPX gives a much better "trap" type of pattern as it closes above Tuesday's highs, while the QQQ is still below Tuesday's highs.

In today's Market Monitor, I made quick note with the S&P Banks Index (BIX.X) 332.50 +1.28% edged into positive territory.

In today's 03:15 PM intra-day update, I showed a screen capture of my U.S. Market Watch, when most sectors were still red, and the BIX.X was up 0.49%.

Continuous CRB Index (cr00y) - Daily Intervals

Earlier this morning, after the import/export prices were released, a trader/investor asked for the ticker symbol for the Continuous CRB (Commodities Research Board) symbol, which is $CRB. The above chart is from QCharts (cr00y). We've seen a similar looking pattern in the AMEX Gold Bugs Index ($HUI.X) where I still think this equity sector, as well as gold is telling us something about inflation not running rapid.

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

I thought the AMEX Gold Bugs ($HUI.X) might see a good continuation bid take hold, and it still might, but gold stocks which were this morning's sector winner, ended up challenging the Semiconductor Index (SOX.X) 461.90 -1.75% for today's sector loser, and only two equity-based sector to post a loss of 1% or more.

Some traders and investors are now saying that gold may not be the indicator for inflation, and that broader commodities are the better indicator.

No problem. We can track the CRB as an indicator for commodities.

Pivot Analysis Matrix -

I didn't have time to look for any new support/resistance correlations with the new DAILY levels, but some quick notes have me seeing the BIX.X closed just under its WEEKLY Pivot, a level it has not been able to trade.

What could have the BIX.X bidding above its WEEKLY Pivot? I'm thinking a decline in Treasury YIELD should the market think the Fed is on track with its recent statement.

Now, I'm also noting that since Friday's nonfarm payroll numbers, when the 10-year YIELD jumped to a YIELD high of 4.794% (47.94) there has been some formidable buying to keep yield under the 4.80% level. I can't really figure this out, other than to think that commodity prices might be set to pull back, abate some fears about inflation, where this has some buyers in Treasuries sticking around, which might also explain some of today's bid in banks to their highest level of the week.

Jeff Bailey

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