Option Investor
Index Wrap

A geopolitical/historical update

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Stocks reverted back to a more familiar tight range of trade where despite a weaker than forecasted April new home sales report, a decline in April durable goods orders, and the government informing us to be on the lookout for 7 individuals that may pose a real and present danger to U.S. interest around the world, them major indices showed relatively little change, with technology sectors providing a slight lift for the NASDAQ.

Market Snapshot / Internals - 05/26/04 Close

Advance/decline, which stumbled in the early going, where weaker than expected economic readings give investors reason to pause, finished the session positive, where NH/NL indications at both the NYSE and NASDAQ were almost identical. While the number of new 52-week highs are well off those levels found in January, the number of new lows are starting to diminish as the more intermediate-term 10-day NH/NL average ratios continue to improve.

NASDAQ Composite 52-week NH/NL 10-day Avg. - 2% box size

Yesterday (Tuesday) my NASDAQ Composite 52-week NH/NL 10-day ratio reversed up to "bull alert" status and today's trade saw this ratio gain an additional 5.3%. It's time to be making some longer-term observations from these "oversold" levels where bullish leadership looks to be returning. Today's number of new 52-week lows (28) is the fewest since April 26.

The NYSE Composite 52-week High/Low (10-day Avg.) chart would look similar to the chart above, but still be in a column of O at 12%, where we're monitoring for a 3-box reversal up to "bull alert" status at 18%.

NASDAQ Composite (COMPX) Chart - Weekly Intervals

Aside from the 10-week (50-day) and 40-week (200-day) SMA's, there are some rather obvious technical resistance levels present today as there was back in March and April of 2003 leading up to coalition forces invading Iraq. Now the world watches as the turnover deadline of June 30 approaches.

Yesterday's option-related, or what I feel was an unwinding of a hedge still intrigues me. Looking at a longer-term chart of the NASDAQ Composite (COMPX) almost looks like the COMPX is going to pad in some gains ahead of the June 30 deadline, perhaps give a cushion to any type of road bumps that most investors might expect, then should all work out as many hope, could then be set up for a rally into the election.

Market historians would be interested in studying the period of October 1990, when 200,000 U.S. troops amassed in the Persian Gulf for Desert Shield, then on January 17, 1991 launched Operation Desert Storm, and on February 28, 1991, Iraq accepted UN resolutions liberating Kuwait. Unfortunately for then President George Bush, Saddam Hussein remained in power, and Bush lost his run for a second-term in 1992.

Later this year, George W. Bush hopes to hold the presidency for a second term.

NASDAQ Composite (COMPX) - WEEKLY Intervals (1990-1993)

Back in March of 2003 I showed a similar historical observation of events in the Middle East, but used the SPX as an index, where market history suggested that even during times of uncertainty and war, equity markets tended to perform well. Certainly, Operation Desert Storm can't be compared to recent history and times are perhaps "different." In DASHED PINK, I've highlighted a period I think may now be VERY SIMILAR, not only technically (note 10-week, 40-week SMA and MACD) as this year's election becomes the next geopolitical event that market participants might be preparing for.

Well, with the government warning us to be on the lookout for 6 men and 1 woman that might be a threat to U.S. interests here and abroad, lets keep in mind that the markets will be closed on Monday in observance of Memorial Day. It won't be until July 5, the Monday following the Independence Day holiday that traders will find another 3-day weekend.

Pivot Analysis Matrix -

Good gravy! The S&P Banks Index (BIX.X) 347.50 +1.05% traded both its WEEKLY R2 and MONTHLY R1 today. That's worth noting and taking a look at the BIX.X.

S&P Banks Index (BIX.X) Chart - Daily Intervals

While a trade at a MONTHLY R1 and WEEKLY R2 doesn't mean the banks are set to surge further, it might actually have the BIX.X ready to rest after what I would consider to be a "Fed you're on track" type of move. I went back through my weekly Pivot Matrix archives and the last time the BIX.X traded its WEEKLY R2 was for the week of 03/29-04/02 where the BIX.X would have come just shy of our current MONTHLY 19.1% retracement of 350.44.

With the banks obviously being one of the bigger bullish catalyst groups for the SPX/OEX the past couple of weeks, a pivot matrix trader might envision a little further pop tomorrow near the 350 level, but sign of softening back below MONTHLY R1 of 346.03.

S&P 500 Index Chart - Daily Intervals

For the most part, percentage gains have been broadly positive the past 5-sessions, but the SPX lags a 3.75% gain from the BIX.X, or it doesn't show up was much as Telecom (+0.26% in 5 days), Drugs (+0.26% in 5 days) and Healthcare sectors (+1.75%) have been a lag. My thinking is that the banks might be due for a rest, and for SPX/OEX strength above the MONTHLY Pivots, either technology or these lagging telecom/drug/healthcare had better get a move on. If the banks rest and the telecom/healthcare/ drugs lead to the downside, it could be tough sledding for the SPX/OEX.

Two rather consecutive buy program premium alerts were found this morning just above the 1,109 level and session lows. Almost as if computers were saying.... "no, no, no... you're not going anywhere right now. Keep it here."

Dow Industrials (INDU) Chart - Daily Intervals

The INDU looks to me like it wants to bid to 10,250, but each day it seems to be one or two components that just can't get their act together, where losses dampen gains found elsewhere.

Dow Components - Sorted by price

Drugs and telecom are represented in the INDU, as is some banking flavor at the larger money center banks like JPM and C. Yesterday, Dorsey/Wright and Associates' Metals Non Ferrous (BPMETA) reversed up to "bear correction" status (current reading 59.26% after falling to 50%), which indicates some demand beginning to outstrip supply. Alcoa (NYSE:AA) $31.00 -1.17% traded a triple-bottom sell signal at $32, has fallen to $29, and while I don't think AA will trade its current bearish vertical count of $21, it may take a trade near $27, which should be a major level of support before it really begins providing some meaningful strength to the INDU again.

The only other sector bullish % to reverse up has been the Protection Safety Equipment (BPPROT) to "bear correction" status on 05/24/04, where it reversed up from a low reading of 42%, to currently read 51.72%. Recent news of terrorist plots here in the U.S. has given the sector renewed interest.

Jeff Bailey

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