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Index Wrap

Retailers ring up new highs, oil slips to monthly low

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Gains on Wall Street were modest, but a dip with just an hour left in today's trade was quickly scooped up by eager bulls as the major indices closed back near their highs of the session as the Dow Industrials (INDU) 10,432.52 +0.39% bulldozed its way above 10,400.

U.S. Market Watch - 06/08/04 Close

The NYSE Composite ($NYA.X) 6,603 -0.11% finished fractionally lower, where no doubt there were some real-estate related equities accounting for the 7-point decline. The Dow Jones Home Construction Index (DJUSHB) 592.62 -2.73% couldn't stand prosperity after moving back above its 50-day SMA (600.35) yesterday, as regional homebuilder Dominion Homes (NASDAQ:DHOM) $23.61 -24.83% warned that higher mortgage rates had negatively impacted home sales in Ohio and Kentucky. DJUSHB components KB Home (NYSE:KBH) $65.60 -3.92%, Centex (NYSE:CTX) $47.95 -3.42%, D.R. Horton (NYSE:DHI) $29.28 -3.27%, MDC Holdings (NYSE:MDC) $63.60 -3.03% traded down in sympathy.

The S&P Retail Index (RLX.X) 413.29 +0.56% rung up fractional gains but a second-consecutive all-time high, where business products retailer Office Depot (NYSE:ODP) $17.89 +1.53% reclaimed its 50-day SMA ($17.64) on an improving jobs outlook.

Among technology sectors, the CBOE Internet Index (INX.X) 196.76 +0.78% sees its right shoulder grow further to the ear of the recently failed reverse head/shoulder pattern, as investors anxiously await the Google IPO, where no date has yet been set.

July Crude Oil futures (cl04n) $37.02 have edged back above the $37 level as I type, but the decline in oil had the Airline Index (XAL.X) $55.81 +2.49% taxiing its way to the top of today's sector winner list, where a 6% gain over the past 5 days also represents a week-to-week winner, where oddly enough, percentage gains would just about mirror oil's declines.

As next week's Triple Witch expiration nears, trader might prepare for some volatility as the Market Volatility Index (VIX.X) 15.01 -2.46% falls to its lowest reading in more than a month.

Summertime volume levels that remain light may make it tempting, if not easier to push the major indices toward a more favorable quarterly close.

Current "Max Pain" quarterly expiration levels derive from June open interest are....

DIA = $102.00 (a possibility, but they'd better hurry) SPX = 1,100.00 (nope... 1,125 got unwound a couple of weeks ago) OEX = 545 (a possibility, watch for higher VIX.X on 2:1 call/put at 560/555). QQQ = $36.00 (tough based on SOX/SMH, but $36.25-$36.50 possible) SOX.X = 475 (INTC $28.99 +0.83% reversed losses, its Max Pain $27.50).

While all "Max Pain" theory values posted reside below current levels of trade, this does NOT necessarily mean gravitation lower. It could well be that excessive calls were written where into expiration inventories might have to be purchased to get things square.

I'll admit I thought DIA max upside this month would be $103.00, and with DIA $104.47, if a bear doesn't have DIA inventory here, then he/she is most likely pressed, with just 6 days (Friday closed) to get squared.

Market Snapshot / Internals -

Just after 03:00 PM it looked like bulls had pulled their bids despite a pop in the number of new highs into the 03:00 hour, and as suspicious as that looked at the time, the majors finished pretty much back at their highs of the session.

Pivot Matrix -

All be darned if bulls didn't get their MONTHLY R1 trade in the INDU by the close. An upbeat outlook from Hewlett Packard's (NYSE:HPQ) $22.00 +1.56% CEO "Fiesty" Carly Fiorina as she is affectionately called, not only helped the less-weighted HPQ give the INDU a lift, but also the more heavily price-weighted IBM (NYSE:IBM) $90.47 +1.57% move in percentage-gain stride.

Dow Industrials (INDU) - Daily Intervals

Tonight I'm looking at the INDU and wondering just what the heck I was thinking when I profiled 1/2 bearish position in the DIA July $100 puts. It certainly looks as if I got "tricked" below the 10,000 level into May's expiration. OK, but these options market makers can be just as tricky in the other direction.

Here's my thought, and what to at least be alert, or looking for.

Fact: Options volatility is low, premiums are low. This is usually NOT the time to be SELLING premium, right? Right.

So... how does an options market maker try and "trick" an options trader into doing something they might regret?

Hypothetical: I'm thinking a good way is to really get a breakout looking move going, maybe above 10,475 (bear things.... holy crud, its going to ramp higher) options market maker sells me (a call buyer) all the JULY DIA $105 or $106 calls I want (market maker sells out/near the money, get as much premium as possible with volatility low), then the market maker takes those proceeds and turns and BUYS the OUT the money DIA June $103, maybe $104 puts, and then unloads some long/bullish inventory in the DIA, or some individual stocks, to get the downside move going to the "max pain" DIA $102. If all works out well, the Market Volatility (VIX.X) moves higher, as should option premiums, for a little Triple Witch humor.

Keep an eye on the VIX.X. If we start seeing high CALL activity, with some offsetting but lighter PUT activity, but the VIX.X is rising, then we begin to interpret this VIX.X action as CALL SELLING and PUT BUYING.

I outline the HYPOTHETICAL as an EXAMPLE of what we might be alert to, that would be COUNTER to current trend.

S&P 100 Index (OEX.X) - Daily Intervals

Huh... See that little "doji" bar (looks like a cross) where the open 545.13 and close 545.11 were almost exactly the same on June 1, 2004? I'm not a "candlesticker," but I believe that's a bar/candle that depicts price equilibrium, and traders will trade the break above or below the days range. It is only tonight that I see this "doji" and only because I was eyeballing the June "Max Pain" of 545.

Not a thing bearish with the OEX chart at this point, but I begin to outline what I would currently have to view as the first area of weakness below tomorrow's DAILY S1 and WEEKLY R1.

Institutional sell programs should have been lined up at the 556 level in my opinion if they were going to whack the OEX today. The only reason I can think of that they didn't is that volumes are light enough that higher price padding is needed to really be able to sell strength and some volume build, if a "crush move" back to OEX 545 is ever going to be a possibility into next week's expiration.

At the top of the OEX chart I say that Thursday would be the "ideal" day to be looking for a reversal, only because that would be one less day an options market maker would have to worry about if he/she is going to sell calls and buy some puts.

NASDAQ-100 Tracking Stock (QQQ) - Daily Intervals

Get some perspective on where the QQQ is trading right now, and it certainly looks like QQQ $37.25-$37.36 is in the bag for the bulls.

Now, I want to quickly go back to VOLUME, which is very light, and can make it a little easier for institutions to "manipulate" trade into expiration if they're going to.

Here's an intra-day chart of Amazon.com (NASDAQ:AMZN) $51.94 +0.34%, where since I'm more bullish on the Internets right now, I profiled as a day trade today. Boy things were looking real good, VOLUME picked up as the stock traded an intra-day high, then "flush" and bid back to the close. It has the look that the stock is being pushed around, and might give traders in the QQQ an idea of what they might be alert to in the next couple of days.

Amazon.com (NASDAQ:AMZN) - Daily Intervals

Day trading for me has been tough of late, where I'm getting whipped around intra-day, and I can "blame" it on light volumes, where I get the feeling that stocks are being pushed around. The point of showing AMZN is to get a feel for volume, and you can probably do this with other stocks (even the QQQ/SPY/DIA), but volume spikes of late seem to be coming at inflection points, as if to get ANY volume for an institution to buy or sell into, the stock needs to be manipulated, or worked, in order to get traders to act.

A QQQ trader might begin to visualize the "zone" that AMZN is in right now, as being equivalent to QQQ $37.25-$37.36 (tomorrow, perhaps Thursday). AMZN did not fail today, but it did seem to get pushed around on light volume, and after volume, which did see immediate upside, volume faded, as did price.

The pattern seems to be higher price, then quick higher price on volume, then a fade in price, and volume. Then... higher price on light volume, quick price rise on heavier volume, then a fade.

The reversal in the QQQ might come on .... higher price on light volume, quick price rise on heavier volume, then fade on light to heavy volume, then... boom! Heavy volume follow through, which would be DIVERGENCE to recent trade and trend.

Jeff Bailey

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