Option Investor
Index Wrap

BELLWETHER BLUES

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THE BOTTOM LINE -
A least for the Nasdaq, the "bellwether" Semiconductor (SOX) Index is keeping a lid on tech and there has been little to no follow through to the upside. This contrasts with the S&P and Dow indices, which look like they could achieve some modest further upside gains.

FRIDAY'S TRADING ACTIVITY -

The NUMBERS -
The S&P 500 (SPX) was up 3 points to 1,135, but down 1.47 points, (0.1%) on the week. The Dow 30 Average (INDU) advanced 38.9 points to 10,416, and was up a scant 6 points on the week.

The Nasdaq Composite Index (COMP)was up 3 points to 1,986.7, still under the 2,000 level that I've been highlighting as an important and pivotal area of resistance. For the week, COMP was off 13 points - 0.6%.

THE REPORTS -
Before the opening the market got to digest our latest red ink in the U.S. Trade deficit showing that the U.S. current account was a minus $144.9 billion in the first quarter as we bought that much more than we sold. The consensus was for an account deficit of around $140 billion from an upwardly revised $127.5 billion in the prior quarter.

The current account deficit is as noted on OIN in the morning is the broadest measure of the nation's financial balance with the rest of the world and includes goods, services and capital. It shows how much more Americans consumed and invested than they earned and saved. Kind of like everything else it seems these days, as we (Americans as a whole) spend like there is no tomorrow.

The Market doesn't seem much focused on our whooping trade deficit as it has no discernable impact on the U.S. economy right now - not like JOBS for example.

The semiconductor book-to-bill ratio for May was released and showed a decline to 1.11, putting it below consensus estimates of 1.13. Goldman had estimated May's book-to-bill at 1.14 and noted that May's data was first time in 10 months that front end orders have not increased and the 2nd month in 10 when back end orders have declined from one month to the next.

If you want to know why the Nasdaq (Composite and Nas 100) is stalled and unable to establish a clear cut uptrend, you need look no farther than the Semiconductor Index (SOX). While broader measures of tech and small cap stocks like the Russell 2000 Index (RUT) seem be rebounding, the SOX is not. Their two charts, relative to their 50 & 200-day moving averages -

For the SOX index, the two key moving averages are acting as a kind of resistance or as deflection points, whereas the opposite is apparent in the RUT.

[For more about moving averages acting as support/resistance see my past Trader's Corner article]

THE TALK -
Dow and Nasdaq biggie Microsoft (MSFT) led the day's most actives as Triple Witch expiration came to a close. As noted by OIN's Jeff Bailey on Friday during one of his midday updates, the stock broke out of a bullish "wedge" pattern (pie shaped & pointing up). See chart below -

The MSFT bulls seem to be warming up to Microsoft (MSFT) - as Jeff noted it is a (very) cash-rich technology name. As you can see from the chart, MSFT is now approaching its prior highs, and possible resistance, at 28.8, then 30. The On Balance Volume (OBV) Indicator actually gave an early tip off the at the stock could be under "accumulation" (steady net buying) when this indicator turned up when the stock was more or less going sideways in May (see this indicator and time period circled on the bottom part of the chart above).

[This reminds me to write something both on wedge patterns and the OBV Indicator in a future Trader's Corner article this coming Tues.]

Microsoft is typically a bellwether stock, tending to lead the way for both the Dow/S&P and for Nasdaq. However, only the S&P and Dow are maintaining price levels above the down trendlines highlighted on their charts below - not so, the Nasdaq, which is still stalled in a downtrend. S&P bellwether GE also had a technical breakout a while ago - both bellwethers suggesting that a further advance is possible in the NYSE-related stock indices.

[ More on stocks/indices (e.g., SOX) that act as bellwethers]

Some of Friday's boost to MSFT might be at the expense of Red Hat (RHAT) as the stock was down substantially (-10%) on the day - RHAT's Linux software of course has been seen as a potential threat to the Microsoft operating system with IBM and other companies, as well as techies in general, being big proponents of Linux.

OTHER MARKETS -
July crude futures closed up 29 cents at $38.75 on the New York Mercantile Exchange (NY Merc). Continued violence in the Middle East and an oil workers strike in Norway outweighed some bearish U.S. supply data and the news that Iraqi exports would resume late next week.

The U.S. dollar fell after the Commerce Department said the U.S. current account deficit widened substantially in Q4.

The greenback was down 0.7% vs. the euro - the euro going out at just over $1.21. The dollar was down 0.7% against the Yen, closing in New York trade at 108.7.

Bond prices on the week were off slightly (yields up) as the bond market continues to trade on the certain anticipation of a Federal Reserve interest-rate hike for the first time in 4 years. The benchmark 10-year T-note was 6/32 higher on the day, at 100 10/32 to yield 4.71%.

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:

The chart pattern is bullish, especially if the S&P 500 (SPX) Index holds at or above 1120. The call to put readings continue to show some very bullish one-day readings, which was the case again at the beginning of this past trading week. A move up to highlighted resistance at 1147-1150 is a looming possibility.

There may be more of a sideways move next - Friday's apparent breakout type move could have more to do with the triple witching stocks, options and index futures expiration. Stay tuned on that!

Above 1150, my maximum upside SPX objective, at least for the near-term/next 1-2 weeks, is to 1160.

S&P 100 Index (OEX) - Daily chart:

OEX could be heading up to test the prior highs at 560-564. The trend looks higher as long as the S&P 100 (OEX) Index holds 550, especially on a closing basis. Below this near support and as noted on the OEX chart below, next lower support is at 546, then 540-541 in my estimation.

The Index is of course somewhat overbought, according to the 14- day stochastic model. This is not to say that OEX won't churn higher - but it does suggest that the trend may flatten out in a sideways type movement.

If OEX gets to the 560-564 area, the combination of the prior highs, the closeness to my upper trading envelope line and the overbought situation does at least suggest taking profits on Index calls held from lower levels - nice profits are nice to take!

Dow Industrials (INDU) Daily:

The trend is up as long as the Dow 30 (INDU) can hold above 10,3000 on a closing basis. Next lower support is 10,200, then more major support - implied by the 200-day moving average - around 10,125. Resistance, and possible selling pressure, has to be assumed to be the prior highs at 10,540, extending to 10,575.

By the end of this past week, the Dow was acting as though it wanted to break out of this little trading range and flag type pattern it was in. The ability to hold above 10,400 should be a tip off as to whether INDU will continue to chug higher. Notice how, what was resistance "became" support, as recent lows acted as support at the previously broken down trendline - see the green arrow at the dashed down trendline.

Nasdaq 100 (NDX) Index - Daily:

I expect support at 1450-1455, but this looks in danger of being penetrated, so is an area to watch closely as momentum is waning and the stochastic model has turned down. 1425 is next support.

Resistance is apparent at 1490-1500. An hourly, then daily close above 1500, with the subsequent ability for NDX to hold above that level, to suggest that 1525 is a next possible objective.

Nasdaq 100 tracking Stock (QQQ) Hourly:

The Q's are in a tight range and have formed a "rectangle" type pattern which is another way of saying that its in a trading range - here, between 37-37.25 on the upside and 36 on the downside. To gauge the bigger potential will be to watch for a breakout in either direction. If on the downside, next lower support looks like 35.50. Conversely, an upside target and next resistance, assuming an upside breakout, is 38.

I suggested last week using the 5 and 21-day hourly stochastic pairing (i.e., when both are at the bottom look for a buy, when both at high extremes look for a tradable top) as a way to trade the stock, especially on a very short-term basis. This rather than necessarily focusing on a specific price level - the recent high around 37 showed an overbought reading on both the very short term and the slightly longer term 2-3 day measure.

[My past week's Trader's Corner article for you technophiles, as in technical analysis, was on Bollinger Bands]

Good Trading Success!

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