Option Investor
Index Wrap

Some seasonally bullish trends for sectors approaches

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The major indices traded mixed to lower where the NASDAQ showed some relative strength compared to the Dow Industrials and S&Ps.

The small caps of the Russell 2000 Index (RUT.X) close below their 200-day SMA for a second-straight session, where you needed a magnifying glass to pick up any movement on an intra-day basis from these smaller capitalized stocks, and candlestickers will most likely be trading the Russell iShares tomorrow after today's "doji" pattern.

Tonight I want to make some notes as to the Stock Trader's Almanac, where on Page 89, or this week's calendar, the Stock Trader's Almanac makes note of bullish sector seasonalities for airline, Internet, cyclical, high-tech, telecom, NASDAQ-100, banking, forest/paper products (I miss the FPP.X still), gold/silver, semiconductors and broker/dealers.

Hmmmmmm..... some of these sectors have been acting well of late haven't they? Are bulls front running the October cycle?

U.S. Market Watch - 09/23/04 Close

In BLUE I've marked those sectors the Stock Trader's Almanac notes have historically shown bullish tendencies. Good golly! Internets up 21.7% from October to January? I'm watching that 200-day SMA on the CBOE Internet Index (INX.X) at 178.52.

Overstock.com (NASDAQ:OSTK) $36.25 +7.34% is going to make my hair turn gray. Call options I had profiled expired worthless last month, now the stock makes a nice little move.

Google (NASDAQ:GOOG) $120.82 +2.6%. Yeah.... nobody wanted the stock at the first-talked $120 IPO price. All-time high today.

Market Snapshot / Internals -

Internals were rather steady today and much improved from yesterday.

I think you can see how "profit" taking is stepping up as the 5- day and 10-day NH/NL ratio get notably weaker. It would take a reading of 86% for the NYSE NH/NL ratio to reverse 6% on its point and figure chart, and a 66% reading for the NASDAQ's 10-day NH/NL ratio.

Oil didn't budge today, but that didn't stop Dow component Exxon Mobil (NYSE:XOM) $47.76 -2.25% from getting a "downgrade" from Deutche bank. Believe me, Deutche Banks clients took their profits before today's downgrade, and I'm pretty sure Deutche's downgrade was a "take profits after huge move" type of call.

That's GREAT if you were long XOM and taking profits, but it wasn't so good for the Dow Industrials (INDU) when XOM has been doing a lot of the legwork for INDU gains.

Pivot Analysis Matrix -

Tonight I want to touch on the what I've noted in the TRIN. Today's low was above the WEEKLY Pivot, today's high marked at WEEKLY R1 (think of a range). Boom! both levels marked for tomorrow's DAILY S1 and R1.

In today's market monitor, several analysts were feeling some pressure building. I think TRIN may show some of that pressure. Later in the Wrap, we'll look at the VIX.X and I'll make some notes as to a CBOE trader's comments from today.

Dow Industrials Chart - Daily Intervals

In Monday's Index Trader Wrap, I showed a chart of the S&P 500 Index (SPX.X) and made some notes on that chart as it relates to recent historical trade AFTER an FOMC meeting. Tonight is "day 2" the SPX broke below 1,115 and sits at 1,108.36. The INDU (above) has been WEAKER in its pivot and as of tonight's close, sits below its MONTHLY Pivot and well below its WEEKLY S2. With simple moving average support broken, I'm showing the INDU's chart with conventional use of retracement, where other than DAILY S1 (10,010) somewhat correlative with Dow 10,000 conventional 19.1% retracement an our old downward trend represent technical support levels on the bar chart.

Traders and investors can look at a FREE point and figure chart of the Dow Industrials ($INDU) from www.stockcharts.com with its conventional 50-point box and see the Dow Industrials did give a point and figure buy signal at 10,000, and does give some technical credence to the 10,000 level, where more than likely there may be some bears that have seen 10,300 and might offer support buying at or just above the conventional 19.1% retracement on the bar chart.

A couple of observations I made in today's Market Monitor I will want to discuss and review.

The Market Volatility Index (VIX.X) 14.80 +0.40% traded rather firm above its QCharts-derived WEEKLY R1 for the bulk of the session, until some of the gyrations noted from the bond market took place, where the VIX.X did edge below the 14.72 level.

Now, a floor trader at the CBOE commented today that volatility was still low enough that he was still a buyer and not a seller. Keep this in mind tomorrow.

Keep this in mind if you are also using TRIN in combination with your VIX.X analysis. For a second day in a row, TRIN stayed above 1.20.

Now review tomorrow TRIN correlations. Here's a quick look at a TRIN chart using 30-minute intervals. I can use with the SOX.X and QQQ charts we've looked at on 30-minute intervals.

Market Volatility Index (VIX.X) - 30-minute intervals

Looking at VIX.X on a 30-minute chart with its WEEKLY Pivot analysis levels gives us some spatial relation of where we've been, and in general, what call and put traders have been doing. Again, I have a very basis thought on VIX.X. when its rising, there are more call sellers and put buyers than there are call buyers and put sellers.

See where the VIX.X fell to 13.50 this week? That was AFTER the FOMC meeting to Tuesday's close. See the gap above 14.00 and WEEKLY Pivot? That's Wednesday's opening 30-minutes. This is ONE observation that has me thinking Wednesday's trade was pre- determined.

Now, if YOU think I am the only one that observed and noted what the MARKET's did after recent FOMC decisions, the you would be WRONG. Certainly not EVERYONE has made such observations. I would like to think that the bulk of "smart money" did.

Ok, so what would be DIVERGENCE to the post-June FOMC meeting? DIVERGENCE would be a RISING market on the third-day, not a declining on.

If markets are going to decline tomorrow, what should VIX.X do? What should TRIN do? I VIX.X had better stay somewhere close to where it is or HIGHER, while TRIN must remain above 0.90 or 1.00. Remember, TRIN should "reset" itself, as it should each day (like a fresh start as it is only measuring buy/sell volume) tomorrow and start at 1.00.

Now look at the above VIX.X chart, and remember your 200-pd SMA.

While I was stopped out of a profiled short in the QQQ from last Friday as I used a tight stop, those darned QQQ would be very close to by last-Friday derived target of $34.80.

Even when I get stopped out of a trade for a loss, when it does go pretty close to plan, but not EXACTLY as timed, I always think to myself that others might have had a wider stop and might be ready to lock in gains.

If I were still short the QQQ, I'd be managing that trade with TRIN and VIX.X (or VXN.X) tomorrow, while also keeping and eye on the INDU.

NASDAQ-100 Tracking Stock - 30-minute intervals

Remember that we have DAILY S1 correlation with WEEKLY S2 correlation tomorrow. If we were trading without pivot levels and were not aware of POTENTIAL institutional computer buying around $34.82, do you see how there might be a setup for a BEAR trap? Undercut yesterday and TODAY's lows, bring in some momentum shorts then give them the "see-ya later" move back higher? Use your TRIN and VIX.X tomorrow, but it does look like the QQQ and INDU have some potential to re-test that old downward trend.

If VIX.X goes up to its WEEKLY R2, I'd think QQQ trades $34.60.

See how that "old" trend, the solid red one as well as the WEEKLY Pivot levels worked so nicely? Q's exploded above $34.82 and there might be some shorts waiting to buy the pullback. You can't blame a short for having shorted that trend and WEEKLY R1 a couple of weeks ago after the Q's got "whacked" lower the week before.

S&P Banks Index (BIX.X) - Daily Intervals

Is INFLATION back in play as alerted to in May? MMmmmmmmm... I don't think so. Did the FOMC do something it shouldn't have? Mmmmmm...... I don't think so. We were expecting a 25 bp rate hike weren't we? Would the MARKET bid the banks up with full intention of being negatively surprised by a 25 bp rate hike?

Maybe Treasuries are ready to unwind and banks got a little overdone to the upside and with Fannie Mae (NYSE:FNM) having some "accounting issues," it is simply time for the banks to see some profit taking. This has been a heck of a round of profit taking the past two sessions, but the near-term uncertainty that FNM's problems do bring to the regional banks is enough to have some bulls pulling the plug.

The BIX.X sits at a strong level of technical support. However, with a seasonally bullish month rapidly approaching, I think a bull might be more anxious to get a bank as cheap as they can back near BIX.X 340 or so. That just gives more room for an upside move.

Jeff Bailey

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