Option Investor
Index Wrap

The uneasy feeling as the second leg begins

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I usually don't mention, or talk about what I "feel," as a trader's feeling's, when unverifiable, usually have little impact on what direction the markets usually take. While I feel a pullback is in order, there's no doubt in my mind that the second leg of the bull market took hold today.

The reason I have an uneasy feeling that a pullback is in order, is that things look way too bullish at today's close. But the fact that things look so bullish can't be a mistake. The market is never wrong, it's saying something.

"The second leg of the bull market began today.

U.S. Market Watch - 06/23/04 Close

The Dow Transports (TRAN), the CBOE Oil Index (OIX.X), the Natural Gas Index (XNG.X) and the Defense Index (DFX.X) all trade new 52-week highs in today's session.

The CBOE Internet Index (INX.X) is closing in on a 52-week high, the S&P Retail Index (RLX.X) is near its recently set all-time high, the Oil Service Index (OSX.X) is closing in on its 52-week high, and the Morgan Stanley Cyclical Index (CYC.X) is another day like today's trade away from a 52-week high.

Market Snapshot / Internals - 06/23/04 Close

Strong gains across the board for the major indices. Bulls lit the fuse late in the session where at 03:15 PM EDT a buy program premium alert came about 15-minutes after an upside alert I had set on NYSE Composite ($NYA.X) 6,602.34 +0.74% at 6,575.

New highs at both the NYSE and NASDAQ expanded to their highest numbers since the mid-May lows. I did leave the NYSE 10-day NH/NL ratio green. If carried to the second decimal it would still be 74.02%.

The NASDAQ's NH/NL indications would show the NH/NL 5-day average moving back above its 10-day NH/NL average, which is still falling at 57.50-day.

Traders and investors may have noted this morning's 09:00 AM EDT update, where the S&P 500 Bullish % ($BPSPX) reversed up to "bear correction" status after Tuesday's trade.

The MAIN thing I would want to be careful of as an OVERLY aggressive bull at this point, is to get the FEEL for what the NH/NL indications have been doing. Remember when they "bottomed out" at what I'm calling the "Biggs Bottom" (when Barton Biggs said "these markets are the most oversold I've seen in 20 years).

The NH/NL ratios are faster moving, now we start to see some more meaningful signs of strength from the bullish %. For it to continue, a bull wants to see the NH indications build further, and preferably find the new lows drying up. While the NH are building, the NL at both the NYSE and NASDAQ are steady, thus my sense that we're still seeing some "stretch" at both ends, where things could still snap.

After a pretty good move up from the mid-May lows, my uneasy feeling at this point is some type of giveback of gains.

VOLUME returned to the NASDAQ with over 1.8 billion shares changing hands. That's impressive and shows sudden renewed interest from market participants, most likely brought on by some bearish capitulation on breaks above downward trend(s).

Pivot Analysis Matrix -

Fresh trades at WEEKLY R1s and some MONTHLY R1s were found in today's trade. Of the major's its will be the S&P 100 Index (OEX.X) that closes right at/near its WEEKLY R1.

Wilshire 5000 Total Market Index ($WLSH) - Daily Intervals

Fact: The broadest of broad major indices has the Wilshire 5000 Index ($WLSH) braking firmly above trend, and with MACD oscillator kicking higher, the 10,500 lows are in, the $WLSH will likely trade 11,280 before it trades back below 10,900, and with hindsight being 20/20, every bull and bear that didn't get some buying done on that test of the longer-term 200-day SMA, which is as good a representation of upward trend as we should need, will be chomping at the bit to do so in the future. If ever given a chance.

Dow Transportation Average (TRAN) - Weekly Intervals

Oil prices have been at record highs in recent months. The Fed will be raising interest rates soon. Somebody needs to tell the transports this as they're breaking out despite these "negative" catalysts.

Prediction: The TRAN will trade 3,442 before it trades 2,800 again. Depending on how things go after the turnover of Iraq, TRAN might trade 3,800 before it trades 2,800 again.

S&P 100 Index Chart - Daily Intervals

Gulp! Bulls defended WEEKLY S1s on Tuesday, now its time to see how much conviction bears have, or lack of conviction bulls have, with the Transports (TRAN) breaking to new highs. I don't think bears will defend tomorrow, not here. The late session gains Tuesday and then again today gives me the feeling bulls went home long, and the distribution point is most likely at the 560 to 561 level, and that distribution may run well into next week.

One reason I made note of some indices that were within reach of 52-week highs was so I could set some alerts at those levels, and if triggered, will be able to get a sense for further bullish enthusiasm.

One thing I really need to do tonight is go back and read some of the Index Trader Wraps from April 2-13, make some notes, as I'm sure things were looking very bullish as the OEX was trading the current WEEKLY R2.

NASDAQ-100 Tracker (QQQ) Chart - Daily Intervals

I profiled some bullish stock plays today, but having gone home short the QQQ at last night's close, I couldn't get myself to close out a bearish trade TWO TIMES as the QQQ came down and kissed its WEEKLY Pivot. Mom used to beat me over the head with an iron skillet when I was a kid, and its starting to take its toll.

As I look at tonight's chart of the QQQ, I'm a bit surprised that QQQ didn't build on yesterday's volume, especially considering today's 1.8 billion at the NASDAQ. Are bears a little complacent? Surely that recent June 8 relative high of $37.19 is going to find sellers.

That's probably enough reason for the QQQ to find a bid at WEEKLY R1 tomorrow, then a finishing drive higher toward MONTHLY R1 and WEEKLY R2. That will find some volume for sure.

Jeff Bailey

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