Option Investor
Index Wrap

SUMMERTIME BLUES

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THE BOTTOM LINE -
The bulls didn't get the lift from getting the modest rate rise out of the way and especially did not get the expected big jump in jobs. It's enough to make a grown bull cry. So near yet so far - the indices got at or near prior highs but retreated from their April price peaks (the Feb. highs in the case of the Nasdaq 100 & QQQ). This action of last week sets up double tops and suggests that this market will continue to be in trading range. And, from last week's closing levels, lower from here.

The only major index powering to a new high was the Dow Jones Transportation average (TRAN) and its prior high was reflecting a stock group that was lagging the market significantly. Still, this new high in TRAN sets up a watch to see if the Dow 30 (INDU) can follow suit at some point - right now, INDU is lagging the other related indices. My last week's Trader's Corner article was about what Dow Theory might have to say on this subject. See - this link

FRIDAY'S TRADING ACTIVITY -

THE NUMBERS -
The S&P 500 Index (SPX) fell to 1,125.37 (-0.3%). The Dow Jones 30 Average (INDU) was off by 51 points (-0.5%) to 10,282.76, it's lowest close since June 3rd. For the week, the Dow lost 89 points.

The Nasdaq Composite Index (COMP) was off 9 points (-0.4%), to finish at 2,006.6 - for the week COMP fell 19 points. The Russell 2000 (RUT) bucked the trend slightly by closing fractionally higher on the day at 582.7

THE REPORTS -
The Labor Dept. reported that the June non-farm payroll increase was only 112,000 jobs, well under the consensus forecast for around a quarter of a million.

The unemployment rate held steady at 5.6%. Average hourly wages rose by 2 cents (+0.1%) to $15.65 which was less than the 0.3% gain expected by the market.

Payroll growth in April and May together was revised lower by 37,000. Over the past 3 months, payroll growth has averaged 224,000 a month putting it near a million on an annual basis.

President Bush bragged on the growth, while his Dem challenger John Kerry pointed out that new jobs are generally paying less than ones lost in prior years. The income squeeze perceived by the middle class relates to this issue.

Details of the June Labor Dept. report included that the average workweek fell by 2/10ths of an hour to 33.6 hours. Total hours worked in the economy dropped 0.6%. In manufacturing, the average workweek fell by 3/10ths of an hour to 40.8 hours, while overtime was steady at 4.6 hours a week.

May factory orders were also released on Friday and fell by 0.3%, which was not as weak as the -0.7% forecast and May's decline was not as much as April's 1.1% fall. Not a great time to be in the manufacturing business - there are some signs of life but the patient is not well.

THE TALK -
Deutsche Bank dropped its rating on Dow stock Intel (INTC) - also of course a key stock in the Nasdaq - to "hold", citing supply- chain uncertainties. The Deutsche Bank analyst noted concerns about Intel's recently launched "Grantsdale" PC chip and its motherboard shipments in Taiwan as expressed by lowering their firm's rating on the stock.

Some cautious analyst comments on chip-maker Texas Instruments (TXN) also created a negative impact on tech stocks in general, as did warnings on some smaller companies. Apple Computer (AAPL) was a drag on the hardware sector as the company said the launch of a flat-panel version of its popular iMac PC would be delayed.

Semiconductor stocks were among the hardest hit among tech shares as investors disregarded word from the Semiconductor Industry Association that worldwide sales rose to $17.32 billion in May, up 2.1 percent from April and 36.9 percent from a year earlier. The Philadelphia Semiconductor index (SOX) fell just over 2%.

OTHER MARKETS -
Bonds soared as the data lessened concerns about aggressive interest-rate moves by the Fed.

Treasury bond prices on Friday rallied to 6-month highs and yields fell to 2-month lows. The 10-year note ended almost a full point higher, +28/32nds to 102 9/32, yielding 4.46%.

August crude futures closed at $38.39 a barrel on the New York Merc, down 35 cents, but up 85 cents for the week. A surprise fall in last week's crude inventories provided support last week, but prices fell Friday after a 2-day climb of more than $3 a barrel.

MY INDEX OUTLOOKS -

If the bulls are looking for help from the tech stock sectors and anticipating that maybe the Nasdaq, which has been lagging the S&P indices in recent weeks, will take the lead - little comfort for that is provided by the very important semiconductor index (SOX) as it reversed right at it's 200-day moving average and retreated from there, falling back under its down trendline -

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

It is now more apparent that the S&P 100 (OEX) has made at least an interim top given the continued decline from its high in the 559 area, which equals its late-April peak at the dashed red level line on the daily chart below. If in puts, stay with them as the near-term trend has gone from sideways to down with the decline to under the low end of the recent trading range.

The close under 550 and its 21-day moving average is also near- term bearish. Support could develop around 544, at the previously broken up trendline. A rebound from this area would be encouraging for a shallow correction only. 540-541 may offer some support. 533 is at the lower trading envelope line and is a kind of benchmark to see where OEX might again be "oversold".

The best technical indication for a top was pre-warned by the falling 14-day RSI line which was divergent or contrary action relative to what prices were doing; i.e., making a new high. This type of bearish divergence is one of the best signs for an upcoming reversal that there is.

In case you want to know more about Price/Indicator divergences, you can look back at a prior Trader's Corner article I did, which includes a discussion of divergences of this type - link

Dow Industrials (INDU) Daily:

The fall last week in the Dow 30 average (INDU) to below near- support in the 10300 area gives more credence to the idea that this index reached a top when prices again got up near the cluster of the April highs in INDU.

Look for possible support in the 10260 area, then in the 10170 area of the 200-day moving average. I think that the 10100 area is the lowest that will be seen in the short-term. (If that is the lowest low for this correction it will be interesting to see is a head and shoulder's bottom sets up.)

Price momentum is clearly down now as can be measured by such Indicators as the 14-day slow stochastic.

Nasdaq 100 (NDX) Index - Daily:

I suspect that the Nasdaq 100 (NDX) is headed back to the 1450 area at a minimum. I would be surprised to see NDX climb back above 1500 in the coming week, which is a short week anyway.

A very good tip off for a top was seen mid-week with the clear cut higher high, but without a similar new high in the 14-day RSI. These type divergences don't set up all that often, but are very valuable to index option trading.

The bearish divergence that set up this past week suggested a high potential put buy as the index rallied - especially up to a prior high (the Feb. top) - and when OEX put prices were relatively cheap. When they break, you then have to pay "up" for the option.

Nasdaq 100 (NDX) Index - Hourly:

If you want to see an even better visual on the aforementioned bearish price/RSI divergence, the hourly chart is shown below -

The RSI "length" setting shown above is 14, but the divergent trend of a lower RSI peak was also apparent with a "21" setting in the Relative Strength Index indicator that is good for use on an hourly chart.

Use of the hourly chart also shows the prior lows coming in around 1450 - below this level, support comes in around 1425 based on what I see in the chart pattern.

Nasdaq 100 tracking Stock (QQQ) Daily:

I leave the down trendline in place - it was a line of resistance - will it now prove to be the opposite and act as support. If so, the Q's will need to maintain closes at or above Friday's closing level at 36.80. However best near support is apparent in the 36 area. If the Q's start breaking 36 it should go lower still and would set up a target to the 35 area.

The only good jump in volume seen in a while - above average daily volume - was when the stock broke sharply this past week. The lack of a corresponding jump in volume on the rally early in the past week was a case of volume not "confirming" the advance in prices - the rally.

Good Trading Success!

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