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Index Wrap

Fickle on oil

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Stocks ended today's session fractionally lower with the broad S&P 500 Index (SPX.X) 1,088.68 -0.25% closing down a modest 2.8 points, but well off its session highs of 1,105.93 as an intra- day reversal high in oil prices had investor sentiment souring late in the close.

There were some good arguments made that today's reversal for equities was driven by May's stock/index option expiration. I can't provide any proof to the contrary.

However, from today's intra-day commentary and observations I made in today's Market Monitor, which I hope followed some of the things we've discussed in recent Index Trader Wraps, I truly believe it was today's upward reversal in oil prices, which began at 10:30 AM EDT, on the DOE's weekly inventory report, which dampened investor's bullish sentiment, where as the session wore on, positive sentiment turned notably more negative.

I should admit, that after writing last night's Market Sentiment section "Pay at the pump" I may tying too much of today's trade to what I saw (because I was alert to it).

Some recent thoughts were that the Airline Index (XAL.X) 49.67 -0.93%, which traded as high as 52.44 in today's session, seemed to find some strength yesterday from a Reuters report that spot jet fuel prices had fallen $0.08 in L.A. When did the Airline Index (XAL.X) see a notable giveback of gains today? At 10:35 AM EDT, just as June Crude Oil futures (cl04m) $41.59 +2.59% traded their session low of $39.90 the XAL.X traded 52.32, when oil reverse up, the Airlines reversed down.

I know this to be true as I had profiled a bullish trade in regional air carrier Frontier Airlines (NASDAQ:FRNT) $8.80 -4.24% this morning at $9.35 (target was $9.75), saw it rise to $9.60, then see my stop loss triggered at $9.20 at 11:45 AM EDT.

The trade made sense in my opinion as oil was lower at the time of profile, the Airline Index (XAL.X) was leading sector gains from the open.

Was Frontiers (FRNT) trade option expiration related? I'm not sure, but I doubt it.

There was another bit of bad news in the airline sector when S&P revised Continental Airlines (NYSE:CAL) $9.48 -3.26% outlook to "negative" from "stable," citing the potential impact of high fuel prices on the carrier's cash holdings over the long term.

There were also several reports that major air carriers were mulling the idea of higher ticket prices to offset higher fuel prices.

Oh.... I'm just now seeing that this afternoon Reuters reported that jet fuel prices jumped $0.09 in the L.A. spot market. Hmmmm, they fell $0.08 yesterday.

Hint.... energy prices may be volatile in coming sessions.

Market Snapshot / Internals - 05/19/04 Close

At 11:00 AM EDT, the CRB Index was up 1.64 points, which would have had the CRB trading 268.69 (lets say 269 for round number). I'm thinking, OK.... I see June Crude Oil futures (cl04m) rising and this might be a NEGATIVE for market SENTIMENT. Hey, market internals look strong, and price action for the major equity indices is holding tough. OK, MARKET might not be that concerned with oil prices, and maybe it has factored all this in.

At 12:00 PM EDT, the CRB Index was up 3.05 points, which would have had the CRB trading 270.10. Hey, now wait a minute. Last week you thought a decline in the CRB was going to be good for Treasuries (see yield fall on renewed buying) and now the CRB is back above 269. Ooooo, I see the 10-year YIELD is steady, but yield still up 4.4 basis points at 4.784%. Hmmmm.... this is back above that correlative YIELD resistance of 4.756-4.766 in the DAILY R1 and MONTHLY R1 pivot matrix levels.

Higher CRB and HIGHER Yield might bring negative sentiment toward equities if thoughts of inflation suddenly become the day's mantra.

Now, I've said before that I'm not a TRIN trader, but I've made note that at 12:00 PM EDT, the TRIN was pretty darned low at 0.37. Look at 01:00 PM EDT when TRIN rising a bit to 0.43 and look where it ended the day at. Again, these are FINITE readings at a minute in time, but you still get some perspective of what's going on.

Look at the NASDAQ NH/NL indications. Earlier this morning I noted that new highs outnumber new lows, and its been awhile since we had seen this. Follow those numbers as the session progresses. Also get a feel for the NYSE NH/NL readings. Remember, they are more "oversold," but also WEAKER than the NASDAQ NH/NL ratios have been. Tie these observations/thoughts into the bullish % readings. Just because something is more "oversold" doesn't necessarily mean its going to be the strongest.

Could it be that the CRB gave trader/investors a couple of hours of "heads up" to eventual weakness for equities? It could have.

I will admit though, unless other market participants had their heads in the sand from 11:00 AM EDT and didn't at least notice the rise in oil prices and potential negative implications toward market sentiment, then I could see how the sudden decline from about 02:00 PM EDT to the close could be viewed as May option expiration related.

Heck, the S&P 100 Index (OEX.X) 532.28 -0.28% did close back below its May "max pain" level of 535, and still remains pretty darned close to this theoretical value.

C'mon... admit it. When the SPX.X was trading 1,105, weren't you at least wondering if the SPX "max pain" of 1,125 was in play by tomorrow's close?

Hang in there (grin). Tomorrow's another day, and SENTIMENT could shift quickly based on oil's movement.

U.S. Market Snapshot - 05/19/04 Close

In PINK I highlight the CRB. Right now, I'm simply thinking 269. Above 269 and thinking NEGATIVE/BEARISH sentiment toward stocks. Below 269 and thinking POSITIVE/BULLISH sentiment toward stocks.

In dashed red is June Crude Oil futures (cl04m). Since I can't really find "a level" (it may be $41.00) that becomes a SENTIMENT swinger, I still monitor to see what impact it might be having on the CRB.

Got it?

All right then.

Oh... some comments I heard on CNBC that are at least worth mentioning and might help keep us all honest in our trading.

One guest this afternoon, Jim Steel (didn't catch spelling of name or commodity firm he was with) said that most oil traders believe that oil has at least $6/barrel priced into its price right now. My current thought is that it might keep at least that much built into it, as the June 30 deadline for turning over the government to Iraq approaches.

As it relates to GASOLINE PRICES, where today's trade saw June Unleaded Gas futures (hu04m) $1.448 +4.5% jumping to a new contract high, energy tycoon T. Boone Pickens said that he believes gas prices are high because there has not been a new refinery built in the U.S. since 1976. Mr. Pickens said that the Saudi government has offered to build refineries here in the U.S., at their own expense, but due to such stringent state and local restrictions/ordinances, no permits for the building of energy refineries have been approved, despite applications being submitted.

Heck.... just north of Denver, CO, there are several refineries and when I drive through that area, I can visually understand why there's probably a "not in my backyard" stance for the building of refineries.

Hey, once you go into one, you'll never want to leave as the technology is so fascinating, if you're into that kind of stuff.

I digress.

Back to the 10-year Treasury YIELD ($TNX.X).

And here is where the 10-year YIELD ($TNX.X) comes into play. Look at today's YIELD low. 4.772%. I keep hearing bond market traders saying that 4.75% is a level of focus for determining BULLISH and BEARISH sentiment toward Treasuries, and perhaps thoughts of INFLATION above 4.75% right now. OK, 4.75% isn't that far from the $TNX.X MONTHLY R1 of 4.766% and all be darned if it isn't close to our MONTHLY 19.1 percent retracement of 47.51 or 4.751%.

Now, check this out, and how I think we can be using the CRB 269 as an indicator of "inflation sentiment," but really use the 10- year YIELD ($TNX.X) and RATE OF CHANGE along with our pivot matrix levels to get a view of what the MARKET'S view is on today's rise in oil prices.

10-year YIELD ($TNX.X) Chart - Daily Intervals

The MONTHLY R1 (47.66 or 4.766%) was a level of near-term YIELD support last week after recent nonfarm payroll numbers were stronger than expected for a second-straight month. On Monday, I think some of the geopolitical news, along with a CRB below 269 helped spark buying in the bond, driving yield back below the MONTHLY R1 (or 4.75%). Today... CRB back above 269.

Get the feel of this on a near-term basis?

OK, now rest your mind for a minute, close your eyes and imagine your driving a sports care along the Pacific coast and envision you foot on the gas pedal as you apply pressure for speed, then let up on the pedal as you approach a curve. Accelerate and decelerate. Go ahead, close your eyes and think of this. Then open them so you can read on.

Now look at the WEEKLY (blue) retracement levels. Think of these as the speedometer of your car, but in relation to the bond market's views on futures Fed tightening, think of the RATE OF INCREASE in YIELD from tonight forward, in relation to the CRB and/or oil prices, as being the BOND MARKET'S view of what the Fed is going to have to do with its interest rate policy. At the same time, not last Friday's bond YIELD high, and put that into perspective of today's YIELD high.

Remember, that June oil and unleaded gasoline are at/near all- time highs.

Treasury YIELD could exceed recent highs tomorrow, but if that is equivalent to the RATE at which the Fed might be having to move, then that's the Fed's foot on the gas pedal to raise rates to get this robust economic growth under control, until production can catch up with demand.

Try and digest the above commentary. Then read the following excerpts from posts I made in the Market Monitory today, and see if some of this makes sense, but then try and see if the various pivot matrix levels, under times of sentiment shift, can then be used.

To be truthful with you, when the markets opened for trade today, and when the SOX.X broke above its WEEKLY Pivot and MONTHLY Pivot, I thought for SURE that we were going to see WEEKLY S2s on or before Friday's close.

That is... until I saw oil prices rising and the CRB back above 269.

Options Market Monitor posts - 01:19 PM to 02:40 PM

The above posts were some things that were running through my mind earlier this afternoon, largely based on some things we've discussed in prior Index Trader Wraps.

If I could describe in words what I think a trader/investor's mindset should be right now, it to realize that MARKET SENTIMENT around oil prices if not their impact toward the "inflation scenario" is going to be the big driver.

Sentiment is nearly IMPOSSIBLE to predict the future outcome, and makes it VERY DIFFICULT to then try and pick any type of sustainable market direction, without volatility (mood swings from shifts in sentiment) then being found.

As I review the above posts in the Market Monitor that I made, what traders (you and I) need to be doing is to try and utilize the bond market (10-year YIELD), the CRB Index ($CRB.X) as a measure for what VISIBLE impact, sentiment (which seems to be driven by up or down oil price) is going to have on equities.

Personal Comment: If I hear of ONE MORE SCENARIO given (bullish or bearish), WHICH HAS NO WAY OF BEING TESTED or followed, I'm going to scream!

As I currently see it, and most simply stated, is if the CRB Index (cr00y) is ABOVE 269, then be ALERT for negative impact from SENTIMENT (more sellers than buyers of equities). If the CRB Index (cr00y) is BELOW 269, then be ALERT for positive impact from SENTIMENT (more buyers than seller).

Then, ONCE ALERT, begin seeking out LEVELS for RESISTANCE to trade BEARISH against, on thought that NEGATIVE SENTIMENT will eventually unfold. If the CRB Index falls BELOW 269, then begin seeing out SUPPORT to trade BULLISH against, on thought that POSITIVE SENTIMENT will eventually unfold.

It SHOULD BE these market environments (where shifts in sentiment create sudden moments of uncertainty) that an OPTIONS TRADER that DOES NOT USE STOPS, but at the same time DOES NOT OVERLEVERAGE in the trade, can still take some "heat" that comes with near-term volatility and eventually profit.

I WILL ADMIT that things were NOT LOOKING GOOD for my past profiled 1/2 position in the DIA July $100 puts at 12:00 PM EDT, but a put option holder, in the scope of just 2-hours, may now view things differently.

With the CRB Index (cr00y) back above 269.00 as a dividing point between NEGATIVE and POSITIVE sentiment, DIA puts aren't looking all that bad again.

Here's a completed look at the Semiconductor Index (SOX.X) trade so far this week, where I try and test my thoughts toward CRB 269 and SOX.X, then I'll bring it together with the QQQ and my Market Monitor observations/thoughts.

Semiconductor Index (SOX.X) - 10-minute intervals

The SOX.X looked well on its way to a trade at WEEKLY R2 as it sprinted above its WEEKLY R1, then MONTHLY Pivot. Maybe the WEEKLY 19.1% retracement was going to be sold regardless, but I've tied in the point in time with the DOE energy data was released. I also checked intra-day time intervals when the CRB moved above 269. I really wasn't until later in the afternoon that I began thinking.... CRB is above 269, so is there some level of trade in here that institutional computer might be programmed to now be selling, where the actual trigger is set up based on CRB ABOVE 269?

In PINK I mark some personal thoughts, and since we do have some young readers, I won't quote all verbage, but as the QQQ traded within 2-cents of my bearish stop, the SOX had edged above 470.02. I can laugh now, but I wasn't laughing as I thought a break much higher was going to have the QQQ triggering my stop.

It was amazing to then have things unfold as I thought they might with CRB having moved above 269, when suddenly, the sell program was generated, sending the SOX.X back below its MONTHLY Pivot.

While the above chart is 10-minute intervals, its rather impressive on a 5-minute or even 2-minute interval chart, as when the SOX.X came back to test that MONTHLY Pivot, it was like a tidal wave of sellers were just licking there chops to sell that level after the break lower.

NASDAQ-100 Tracker (QQQ) - 10-minute intervals

It was CRB above 269 which had me setting up QQQ bearish trade. I saw some resistance selling start to hold at the WEEKLY R1. AFTER I profiled bearish trade, it dawned on me that the "reason" QQQ support seemed to be coming from nowhere at $35.31, was most likely tied to the SOX.X finding support, or buyers, above its MONTHLY Pivot. I was thinking... "If only the SOX.X would break below its MONTHLY Pivot, then the QQQ should fall to my day trade target."

Dow Industrials (INDU) Chart - Daily Intervals

The Dow Industrials (INDU) looked ready to rock in today's session. One of its "generals" and General Electric (NYSE:GE) $30.25 -0.59% had gapped higher, clearing its 21-day SMA, 50-day SMA and 200-day SMA at the open. However, not unlike the INDU itself, GE reversed from a session high of $30.90 to finish in negative territory.

I commented to one DIA and eBay (NASDAQ:EBAY) $79.29 +0.26% put position holder that it was days like today, that an options trader that DOESN'T overleverage, and DOESN'T use hard stops, is glad they don't.

I'll say this. If the INDU Bullish % ($BPINDU) falls back near 30% before July option expiration, then I'll be quick to cover, and be ready to start looking at some calls. ESPECIALLY if the CRB is below 269, and oil has removed $6 per barrel in geopolitical risk.

Pivot Analysis Matrix -

In PINK, I mark some of today's highs, that did not see trade at either WEEKLY R1s, or in the case of the 10-year YIELD ($TNX.X), its WEEKLY Pivot.

I would enter tomorrow's trade (with continued testing) with the current thought that as long as the CRB Index is above 269, the institutional computers may be set to sell near WEEKLY R1's.

This selling could increase, should 10-year YIELD move above its WEEKLY Pivot of 48.12, or 4.812%.

Jeff Bailey

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