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Index Wrap

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The Dow Industrials (INDU) 9,814.59 -1.24% fell 124 points, erasing all of this weeks gains, and despite some relative strength from banks and retailers, the S&P 500 (SPX.X) 1,063.23 -1.16% also erased weekly gains in today's session.

A negative quarterly earnings surprise from Dow component Hewlett Packard (NYSE:HPQ) $16.95 -13.16%, without so much as a pre- quarter earnings warning, cast the continued stench on technology stocks, like that of a stockyard on a warm summer day.

Not helping an equity bull's cause was the continued rise in black gold, where September Crude Oil futures (cl04u) settled 98 cents higher at $45.50 and another new contract high.

U.S. Market Watch - 08/12/04 Close

The non-weighted Amex Gold Bugs Index ($HUI.X) 185.13 +1.95% and weighted Gold/Silver Index ($HUI.X) 85.64 +0.87% recouped earlier week losses.

HUI component Harmony Gold (NYSE:HMY) $11.60 +10.16% jumped $1.07 per share on speculation that it might be a potential takeover target, while Bema Gold (AMEX:BGO) $2.00 -4.76% threatened to trade a 52-week low ahead of tonight's quarterly earnings report.

Market Snapshot / Internals - 08/12/04 Close

The major indices saw a notable decline just after today's 10:00 AM EDT release of June business inventories was released. I think the troubling part of the report was that sales rose a tepid 0.1%, which wasn't much of a follow through to May's robust 0.8% rise. At 10:00 AM EDT, and intra-day study of September Crude Oil Futures (cl04u) had the contract trading $45.18 and at 11:00 AM EDT had started inching higher still at $45.30.

Traders should be prepared for some August option expiration. Several traders noted "sudden" volume spikes in NASDAQ-100 components Whole Foods Market (NASDAQ:WFMI) $74.42 -2.13% and Paychex (NASDAQ:PAYX) $29.93 -0.82%, where combined with "suspicious" pegging of their DAILY pivot levels with those found in the QQQ, hints computers and traders are hard at work ahead of next Friday's expiration.

The ONLY positive thing I saw today was that the Semiconductor Index (SOX.X) 365.27 -1.98% found a buyer or two at its WEEKLY S2 later in the afternoon.

Pivot Analysis Matrix -

With the Dow Industrials (INDU) 9,814.59 -1.29% showing some "strength" within the pivot matrix, I'm marking DAILY R1 and MONTHLY S1 correlations as near-term and tentative resistance, where a move 10-points above would be an alert to further strength to the WEEKLY Pivot and DAILY R2.

The S&P Banks Index (BIX.X) 347.04 -0.58% while pulled lower on broader-market weakness provides traders with the "critical" support correlation at WEEKLY Pivot and DAILY S2. Note today's tight range in the BIX.X, so I'm correlating lower at DAILY S2.

I mark tomorrow's DAILY S1 in the QQQ for those that may be short the QQQ by itself (without the offsetting selling of out-the- money August $32 puts as profiled in the Market Monitor). My original swing trade bearish target for the QQQ was $32.25.

For traders that are short the QQQ at previously profiled $33.18, stop $33.55, target $32.25 and did sell the out-the-money August $32 puts (QAVTF) for $0.25 premium, we're not planning on doing ANYTHING with the QQQ trade at this point, but if stopped out on the QQQ underlying short, I will be closing out the August $30 puts at the same time.

Now... on the downside, here's what we would look to do. EVEN IF YOU don't hold this trade (short the QQQ, sold the August $30 puts) understand it, and be alert to this.

By being short the August $30 puts, I'm OBLIGATED to BUY QQQ at $30.00 between now and next Friday's expiration.

QQQ short while having sold the August $32 puts

The QQQ trades higher at $32.62 (see bid) in tonight's extended session after Dell Computer (NASDAQ:DELL) $33.12 -1.34%, which trades higher at $34.00 reported upbeat quarterly earnings.

Now... you can probably pick out where my current $33.55 stop is, in relation to the QQQ's WEEKLY Pivot of $33.47, where on Tuesday (08/10/2004) I profiled the underlying QQQ short just ahead of the FOMC announcement on interest rates, when the QQQ was trading $33.18. Later that afternoon, the QQQ pegged its weekly pivot with a session high of $33.47, but has traded lower since.

Now, the following day, oil saw a rather sudden intra-day price move lower on reports that Saudi Arabia was able to boost production to keep oil prices from continuing to rise, and with the Market Volatility Index (VIX.X), which I (Jeff Bailey) follow more than the VXO.X and VIX.X slipping below the 18.00 level at that point, I decided to profile the selling of the August $32 puts for $0.25 per contract, when the QQQ was starting to move off its then lows of the session at $32.80.

Market Volatility Index (VIX.X) - Daily Intervals

I apologize for the rather "compressed" daily interval bar chart of the VIX.X, but I wanted to give some historical perspective, where over the years, I've shown this exact chart of the VIX.X, where the BLUE retracement is one I've used to simply define levels that for years, the VIX.X tends to find options market makers implementing various strategies of buying/selling puts and calls.

The main point it to understand that we may be nearing a level where so far this year, we've seen the major indices find some inflection point lows when the VIX.X has traded from 20 to 21.22 as marked by the 80.9% retracement level.

With oil at record highs, it is nearly IMPOSSIBLE for anyone to see a top in oil prices. That's the scary thing about supply and demand, when demand is obviously strong and price of oil is achieving new highs.

Options market makers that are selling puts to market participants, where here too demand must be growing (higher VIX.X) we simply want to be alert to a potential inflection point, from the options market.

Let's face it. There has been an uncanny correlation between higher oil price and lower stock prices, yet the VIX.X is an instrument/tool that provides somewhat of an offsetting observation, where trend is not as apparent, but has tended to see inflection points, where levels above 20 have tended to be some near-term inflection points for the major indices.

Jeff Bailey

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