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Index Wrap

Word of terrorist plot flattens enthusiasm

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At the mid-point of today's session, it looked as if equity bulls might have pulled a rabbit out of their hat as the major indices had managed to trade unchanged, or hold fractional gains where a sharper than expected decline in weekly jobless claims helped offset a negative tone after quarterly earnings and forward guidance from Yahoo! Inc. (NASDAQ:YHOO) $30.08 -7.73% failed to meet loftier expectations.

The CBOE Internet Index (INX.X) 181.51 -3.61% and another earnings warning from a software maker, this time Seibel Systems (NASDAQ:SEBL) $7.94 -13.78%, had the GSTI Software Index (GSO.X) 137.24 -3.13% weighing on broader technology.

The Semiconductor Index (SOX.X) 442.94 -0.24% held gains for the bulk of the session, but faded at the close to finish down just more than a point. Japan's Tokyo Electron said orders for its equipment to make chips and liquid crystal displays surged 124% in April-June when compared to last year as global demand for its chips that are used in digital home electronics remained robust.

Homebuilders as depicted by the Dow Jones Home Construction Index (DJUSHB) 545.09 -5.08% were today's sector loser on renewed concerns that a recent rise in mortgage rates would have housing prices decelerating.

As the major indices battled back to unchanged at the mid-point of today's trade, investor sentiment turned negative with Homeland Security Secretary Tom Ridge said credible reports surfaced that al-Qaeda was set to launch a major terrorist attack on U.S. shores prior to this November's Presidential Election.

One reason for my analysis is that fears of terrorism halted the major indices mid-session gains is that an intra-day chart of August Crude Oil futures (cl04q) $40.30 as I type tonight, had pulled back from their morning high of $39.75 to trade a session low of $38.75, where a strong round of buying appeared just after 11:00 AM EDT, and by 12:00 PM when Mr. Ridge was speaking of heightened terrorism concerns, oil was trading session highs, and settled at their highs of the session.

While today's API and DOE crude oil inventory reports were mixed, traders said the initial decline to session lows was due to trader's reaction to the build in natural gas inventories.

I can't say that I fully understand this logic, but I could only think that the build in natural gas inventories would be viewed bearish for oil prices (lower oil prices) from the perspective that a cooling U.S. economy, at the industrial level, which is a large user of natural gas, would have been interpreted.

So... the intra-day action of oil rising on the Department of Homeland security reports, and the mid-session fade in the major indices has me interpreting today's action as being highly tied to fears of terrorism.

Market Snapshot / Internals - 07/08/04 Close

Price action for the major indices had been improving from the opening bell, but A/D lines at both the NYSE and NASDAQ never really threatened a more bullish underlying sign.

The lack of new highs and building of new lows at both the NYSE and NASDAQ has the 5-day NH/NL ratios accelerating to the downside, where today's action now has the NASDAQ's 10-day NH/NL ration turning back lower to "bear confirmed" at 60.6%. The NYSE's NH/NL 10-day average won't be far behind where a reading of 76% would mark a reversal.

Since these NH/NL indications had been softening into today's trade, I can't fully blame today's trade on fears of terrorism, but with bullish leadership lacking near-term, it is going to be tough for buyers to be stepping up to the plate when threats of terrorism surface.

U.S. Market Watch - 07/08/04 Close

I wasn't expecting a 5% gain from the Securities Broker/Dealer Index (XBD.X) 118.90 -1.07% in today's session, but the bullish side of me didn't see the brokers put up much of a fight from the open.

While the brokers moved lower, the S&P Banks Index (BIX.X) 345.72 -0.60% tried to show the financials what it means to hang tough with another test of its WEEKLY Pivot, but sellers showed up just after lunchtime, and drove the BIX.X to close at its session lows.

Pivot Analysis Matrix - 07/08/04 Close

The most resistive correlation that shows up is at 543-544 in the OEX, and boy I'd be cognizant of this being an important and probably formidable level of resistance. Strength above, but more bearish near-term below.

My thought here is that today's high, while probably coincidental was OEX 545 and while it may have, or may not have been The Homeland Securities talk of heightened reports to al-Qaeda attacks, today's low close on the OEX after lunchtime trade at 545 and that June 1 "doji" really eats at me.

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

In today's 03:15 PM EDT update, I showed a chart of the SPX with conventional retracement anchored from the May 12 low and its January relative highs, where that conventional retracement did show some tie with the SPX's historic trade in recent months, but where this week's WEEKLY S2 and that conventional 38.2% retracement of 1,109.51, gives near-term significance (in my opinion to the OEX at WEEKLY S1. If broken to the downside (keep you eye on the weaker XBD.X), then a capitulation type of move to monthly S2 could be in order.

In my notes at the bottom of the OEX chart (If I'm put....) I'm talking about current MONTHLY S2. My thought is that back on May 25, when the OEX shot higher from 533.72, that was the day I thought a "hedge" came off. Part of that analysis was the amount of puts traded at/near that level in the SPX.

Here's a quick look at the SPX with WEEKLY/MONTHLY retracement.

S&P 500 Index Chart - Daily Intervals

The SPX has shown a tendency to close at its session lows (at current levels) and then see a brief pop back to 1,125, then see an extension of declines. The first sign of strength for a repeat of this pattern would be a trade above tomorrow's DAILY Pivot 1,112.32 and MONTHLY 80.9% retracement.

I do think, based on observation, that bulls were set to defend and stage an advance in today's session, where early on, despite a negative reaction to YHOO $30.08 -7.7% guidance and SEBL $7.94 -13.78%, the Market Volatility Index (VIX.X) started slipping lower. I quickly posted the most active options for the SPX, which I interpreted as being put selling (see in chart).

Every technician will be eyeballing the SPX at its rising 200-day SMA. Please not in other charts that the SPX in the ONLY major index (INDU, SPX, OEX, NDX) in our pivot matrix that closes ABOVE this longer-term simple moving average.

Just as the Broker/Dealer Index (XBD.X) is a sector/index we're monitoring for weakness to the downside, today's closes have bearish look with closes below this longer-term SMA.

Things looked good for the bulls, and a strategy of selling at and out the money July put premiums. That is.... until The Department of Homeland Security said it had information that al- Qaida was moving forward with plans to carry out a large scale attack in the U.S in an attempt to disrupt this fall's elections.

Dow Industrials (INDU) Chart - Daily Intervals

Similar to the OEX, the INDU closes below its 200-day SMA. NOTHING new as it relates to the May lows, where I profiled 1/2 position in the DIA July $100 puts.

To be HONEST with you, after watching the DIA move up and now back lower, the $300 I'm about to lose in that 1/2 bearish position.... I'd have just as soon shorted 100 shares of DIA. I'm thinking the same thing on an INDU dip below 10,134, but instead of looking to buy calls, I'd rather look long the DIA underlying. Similar to observations made with the SPX chart, I don't think bulls need to be QUICK to pull the trigger for new entries.

NASDAQ-100 Tracker (AMEX:QQQ) - Daily Intervals

I've profiled the naked selling of 10 July $35 puts for $0.20 on Tuesday, and while today's close for those puts was $0.15 bid and $0.20 offer, I think I did what a lot of naked put sellers are doing when the QQQ traded a new session low and moved below its WEEKLY S2 and correlative/overlapping MONTHLY 80.9% support.

I profiled an UNDERLYING QQQ short, with a stop just above that $36.00 level. Now.... I have to ask myself... "why did the QQQ stop at $35.55, seemingly in the middle of nowhere in the Matrix?

NASDAQ-100 Tracker (QQQ) - Daily Intervals

A conventional retracement from a recent low to a recent high may well explain today's low. When I profiled the selling of naked QQQ July $35 puts for $0.20, I though at "worse" the QQQ might be vulnerable to $35.00.

Jeff Bailey

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