Option Investor
Index Wrap

Looking for a near-term reversal\? Here's my test

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There's quite a few things running through my mind tonight, points I want to touch on, but I do think we should be looking for a near-term reversal, and evidently, I'm not the only one envisioning a "pop" then a "drop."

So let's get on with it.

A couple quick points of order as it relates to today's trade.

Let's tune out some of today's economic reports and the flurry of terrorist attacks in Iraq from last night and this morning. I say this ONLY in the scope of the stock market. I think about what's going on overseas a lot, but I'll refrain from expressing my opinions toward terrorism, as a couple of you have kids that actually read the Index Trader Wrap, and enjoy the stock market.

First.... quarterly rebalancing. In this morning's 09:00 Update, I notes some of the index changes that will be taking place at the close of trade on June 30. I think we saw some rebalancing, fine tuning today.

Heck... I think we saw some of it yesterday too. While HL Camp & Company doesn't list those stocks bought/sold the most during a program trade executions each, day, did you see the list in this morning's 09:00 Update? That was a pretty long list and to me, suggests a lot of institutional computer activity.

Who, or what better than a computer to figure out just what a portfolio manager trying to track the SPX, OEX, NDX, Russell, you name, to fine tune things so the portfolio tracks the index the fund is trying to manage.

For you or I to really try and figure out what, when, where and the how of rebalancing an index, its best to probably just try and figure out what computers are going to do, set up our own plan, then look to trade it.

Second is a comment I heard a hedge fund manager on CNBC talk about today, and it was an excellent comment at that! Discussion surrounded low volatility for stocks (VIX.X).

Remember all that juke and jive we saw last week when following some of the option related activity. Selling puts, selling calls, quick 100% gains in the matter of an overnight close to the next days close.

The hedge fund manager (I didn't get his name, and I should if I'm talking about him) said he's BUYING both put and calls on this lower volatility, and believes RISK is high right now, with a bearish bias based on upcoming, and current geopolitical events.

He then commented that most traders have been wildly SELLING puts and SELLING calls, putting on the PREMIUM trade with thought that the low volatility, which sees a profitable trade take place as stocks trade a range, and volatility stays low, is one of the more dangerous trades in the market right now. (I believe he said that in the context of selling naked.)

Now... his comments drove home a point that I think I've made before. Options Market makers usually BUY call/puts when premiums are low (hedge with futures), and will switch to SELLING calls/puts when premiums are HIGH.

Then Larry Kudlow and James Cramer chimed in with excellent comments.

While I sometimes think that Larry Kudlow sees most things through rose colored glasses, he did make a VERY IMPORTANT point from the bullish view as it relates to upside potential that most of us might not be able to imagine.

Mr. Kudlow's point was "what happens if all the naked call sellers suddenly find the stock or index they've been so happily selling calls on, moves above their strike?

Answer: Boom!

OK... a quick check of JULY open interest at that is close to current levels of trade in the SPX 1,140.65 is 23,956 at the JULY 1,150 call (SPTGJ), then LOWER at 1,125 (call and put about 34,000 OI each) then LOWER still at 1,100 puts (SPTST) of 42,552.

Point here is 1,150 as you read the rest of tonight's wrap.

U.S. Market Watch - 06/24/04 Close

OK, maybe the dollar got clobbered today because of the economic data, geopolitical events. While my calculations in the pivot matrix might not be accurate to the 100th decimal, today's low in the dollar came within 0.02 of its WEEKLY S1 (88.60).

Take note of this you stock traders in the gold/mining/base metal stocks when you saw a sudden "no bid" at about 02:00 PM EDT.

In bold PINK, I've highlighted some of today's highs/lows as it relates to the Pivot Matrix.

The Networking Index (NWX.X) 253.44 -0.84% session high is marked in RED. Last night I set an upside alert at this indices 200-day SMA (257.17) as somewhat similar to the posting of achievable new 52-week high in other indices, I wanted to get a feel, and be alert for the Networking Index (NWX.X) at a key simple moving average. Thought was/is .... "if it can make it above it, then strength" (away from pivot matrix) and a more "human" approach to trading, where humans will tend to make buy/sell decisions around simple moving averages. Check at the chart of sector bellwether Cisco Systems (NASDAQ:CSCO) $23.68 -1.2% and how this stock has been trading like a cat on a hot tin roof at its 200-day SMA ($22.97) since first tested as support on April 20th.

CSCO saying "higher," above its 200-day SMA, but Networking Index (NWX.X) isn't so certain. At least not today. Why did CSCO find a session high at $24.20 as it broke above $24.00 resistance? Me thinks NWX.X 200-day SMA had something to do with it.

Market Snapshot / Internals - 06/24/04 Close

Something weird took place just after 02:00 PM EDT. The TICK turned decidedly more bearish. I don't think that could be dollar related, but tend to think it more rebalancing related. Still, something happened to suddenly have the TICK, which had been positive all session, suddenly reflect a sell bias.

From a pivot matrix standpoint, its the OEX and the QQQ that BEST reflect what computer were doing today, and this will be a key point in my book for a trade setup tomorrow. A "what to look for."

Continue to monitor and understand the NH/NL indications. My general feel/observation is that the "bottom" (new lows) isn't softening, it isn't strengthening, it just sitting there as if poised to soften after an impressive expansion of new highs from the "Biggs Bottom" continues. While I don't show the DAILY ratios above, you can calculated those you your own, but the NYSE NH/NL daily ratio for today was 89.9%. Remember on May 12th when the daily ratio was 3.3% and the 5-day was 3.7%? That's when Barton Biggs proclaimed, "most oversold in 20-years!"

Pivot Analysis Matrix -

Good gravy!.... I'm running way behind on the wrap. OK... Key correlations of resistance show up at WEEKLY R2 and DAILY R2. Take note of this if you're going to go short tomorrow. Think of this as your RISK level.

We closed below the DAILY Pivots, so first test of strength for how I, and fellow analyst Keene Little both see tomorrow's trade (different tools, which makes it interesting) is for a pop higher, but then a reversal.

See the QQQ DAILY Pivot that I highlight in PINK as if it is flashing? I'm setting a "go long alert" or a sign of strength alert.

Actually, late this afternoon, I set up a swing trade to "go long" on trade at $37.10. However, the QQQ could do no better than $37.09. I think something's going on at this level. (read on).

Here's a quick recap of Keene Little's thoughts in tonight's Market Monitor. Sometimes Keene and I don't "agree" on things. He'll see something with his wave analysis, that I don't see in the point and figure or pivot matrix charts.

However, tonight we do see things rather similar.

Market Monitor - Keen Little's thoughts for tomorrow

The link to Mr. Little's chart

This wave stuff is "Greek to me," but I see what Keene is looking for. I can also test it, and my thoughts in the pivot matrix.

OK Keene.... you're pointing to 1,150.82. Then some type of failure back lower to...he's pointing to 1,125.

Now, here's my Pivot Matrix chart of the S&P 500 Index (SPX.X).

S&P 500 Index Chart - 60-minute intervals

Question number one is "why did the SPX stop where it did today?" No DAILY R1, no weekly level, no monthly level. OK... it may have been the BIX.X at WEEKLY R1 (351.52) that was the clue. Take notes, set an alert on BIX.X 351.52. Hmmmm.... BIX.X DAILY R1 for tomorrow now correlative at 351.38.

I tell you what... if the SPX trades 1,149 tomorrow, and the BIX.X is below DAILY R1/WEEKLY R1, then I'm thinking "reversal potential."

S&P 100 Index (OEX.X) - 60-minute Intervals

A fishing buddy of mine will always say, "aint she a beaut" (as in isn't she a beauty) every time he catches a fish and admires it. The OEX traded more like a beauty within its pivot levels. Not quite what I thought it might do, spending more time up in that wider zone of resistance. If Keene and I are correct, then that comes tomorrow, theeeeeen, the reversal lower.

See how the SPX may have found its intra-day high from the OEX, perhaps the BIX.X?

NASDAQ-100 Tracker (QQQ) - 60-minute intervals

Same type of "tight trade" for the QQQ as found in the OEX. Now, a buddy of mine that has really been doing some extensive work with "ranges" and then utilizing the pivot matrix said he's been finding, and getting some very good trade results for "confirmations" of breaks, by utilizing conventional retracement.

See that $36.72 level?

NASDAQ-100 Tracker (QQQ) - 60-minute intervals

Here's a 60-minute chart of the QQQ, but now I'm showing the recent mid-May to current rebound within CONVENTIONAL retracement. Are we at a top of a range, where a reversal is likely? If I had used my "fitted retracement," technique and anchored the low, then "fit" the 61.8% retracement close to where it is within conventional, then I would have project a QQQ rally to $37.35 (as shown), but I would have probably nudged the current 61.8% up at that clutter just below $35.50. Still, the "fitted" technique would suggest the top of a range.

What caught my eye is that the current 19.1% of $36.73, is very close to the WEEKLY Pivot retracement of $36.72.

My thought is that to build a slightly higher "trap" we should see the QQQ get close to DAILY R2, WEEKLY R2, then look for weakness.

Jeff Bailey

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