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Index Wrap

Oil, earnings and expiration make for lively trade

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Intel (NASDAQ:INTC) $20.28 -1.6% jumped to $21.00 in Tuesday evening's extended session after the chip giant said it saw stability in inventory levels and sees some upside potential into the end of the year.

Yahoo! Inc. (NASDAQ:YHOO) $34.23 +0.61% also saw gains in its extended session to $34.78 after reporting quarterly results that matched Wall Street's expectations.

Is this the news tech bulls have been looking for? Is the news out of INTC and YHOO as bad as bears had hoped for?

It is impossible to say if investors have been "too bearish" on tech, or "too optimistic," but I expect technology sector/index traders are going to be put to the test into this week's October expiration, and should institutions turn to try and save positions they may have written calls against earlier this month, then things should liven up into the weekend.

Throw in today's reversal back lower in oil prices with weekly inventory data due out tomorrow morning, and Thursday/Friday option expiration, and traders are going to probably think they grabbed hold of a tiger's tail by Friday's close.

Market Snapshot / Internals - 10/12/04 Close

It was looking like bulls were headed for the slaughterhouse earlier this morning as oil traded new highs for a sixth-straight session, which seemed to provide the straw to break a bull's conviction.

Oils rise has been "nothing new," but equity traders, as well as economists will contemplate just how high oil might rise before having a significantly negative impact on not only the U.S. economy, but the global economy as well.

But as the session wore on, November Crude Oil futures (cl04x) found selling near their DAILY R1 and settled at the lows of the session, where weekly inventory figures will be released tomorrow morning. I think I can show how we may have also seen some option expiration come into play today, and should we see a continuation of this afternoons action, equity bulls might be in for a pleasant surprise.

Let's quickly review a 10-minute interval chart of the November Crude Oil futures (cl04x), which trades down 17 cents at $52.34, as Wednesday's trade is already underway.

As I looked at this chart, it also looked very similar to the Market Volatility Index (VIX.X) 15.05 +2.31%, which also closed back at its session low, but still above its 200-pd SMA and WEEKLY Pivot.

The reason I mention oil and the VIX.X, is that options market makers, as well as institutions may have to make some quick decisions regarding any October expiration call/put hedges as we are just days away from October expiration.

November Crude Oil futures (cl04x) - 10-minute intervals

On Wednesday of last week, November Crude Oil futures (cl04z) were trading at their WEEKLY R2 of $51.59, yet the SPX was trading higher (than it is today 1,122) at 1,140 and the NASDAQ- 100 was trading higher (than it is today 1,1,435) at 1,470.

When we review the Pivot Matrix later tonight, understand where oil IS, and where it WAS.

Bottom line as I see it. An important near-term SUPPORT level for oil is probably $51.60-$52.00. Think of this as a PSYCHOLOGICAL level of BULLISH EQUITY PSYCHOLOGY RESISTANCE.

In essence ... should we see a break much BELOW oil $52, market psychology could get a boost. I'll try and explain how this might play into option expiration.

Imagine that you sold OUT-THE-MONEY calls (naked or covered) on October expiration last week, with the thought that rising oil above $52 would put a lid on equity gains. Heck, imagine that you sold IN-THE-MONEY calls at October "Max Pain" Theory levels. (bottom of 10/07/04 Index Trader Wrap).

For some, you DON'T have to imagine doing any of the above. But many an options market maker may have, and oil, along with the VIX.X may be a trader's best friend into Friday's close.

Now oil is acting a little "funny" into tomorrow's weekly inventory data, where the last two weeks we have seen modest builds, not draws in inventory. And while Intel's (INTC) quarterly earnings were nothing to write home about, the stock traded up in after-hours.

U.S. Market Watch - 10/12/04 Close

I've updated some of the longer-term 200-day SMAs (red) for the major indices, as well as some sectors we've reviewed in recent sessions.

BIG Tech as depicted by the Morgan Stanley High Tech 35 (MSH.X) 450.74 -0.78% closed just about right on its 21-day SMA (pink) at 450.78. For you Pivot Matrix followers, the MHS.X WEEKLY Pivot from QCharts is 458, where not too unlike the Semiconductor Index (SOX.X), the MSH.X did see trade at its WEEKLY S1 (447.59) today.

Pivot Matrix -

Main points I would want to take note of. The SOX.X traded correlative MONTHLY Pivot/WEEKLY S1 support of 380 and held that level PRIOR to the Intel (INTC) data. Was there a pre-determined "bullish semiconductors" trade, or was it simply October "Max Pain" theory of 380 that got the attention. One could say both.

Now.... NDX/QQQ session low (bold pink) came fractions from their respective WEEKLY S1s. OK, that makes some sense with the SOX.X trade. Session lows came close to their October "Max Pain" values of 1,400 and $35. Let's keep NDX 1,400 in mind with the thought of "where we've been" in just the past week of trade. Remember, the NDX was just recently trading ABOVE MONTHLY R1 (bold pink).

See where I've marked the VIX.X and WEEKLY Pivot? The VIX.X traded as high as 15.69 today, but NOT UNLIKE OIL, closed at its lows of the session. Now, here's where I make a tie to the November Crude Oil futures (cl04x) chart.

Here's the VIX.X using the same 10-minute intervals. I would make special note of the 200-pd SMA and its WEEKLY Pivot. Go back and take a quick refresher of the November Oil contract, just in case oil gets volatile tomorrow.

Market Volatility Index (VIX.X) Chart - 10-minute intervals

I'm showing the VIX.X chart with QCharts' DAILY Pivot levels overlaid. I have drawn the WEEKLY S1, WEEKLY Piv and WEEKLY R1 on the chart (solid pink). Note the rising 200-pd SMA near WEEKLY Pivot.

One thought tomorrow is that a DECLINE IN OIL below its WEEKLY Pivot (say $52.00), could influence option trade into expiration.

IF SO, then VIX.X could break back under WEEKLY Pivot, and depict put selling, and call buying.

Why do I bring this up now you might ask?

Late Thursday evening in the Market Monitor (October 8 MM archive at bottom of the archive) I made some notes of things in the NDX.X that I would monitor into this week's expiration. I showed the following chart of the e-mini NASDAQ-100 futures (nq04z), which an options market maker will use to hedge his/her option- related activity. In those notes, I discussed just "how" I came up with the following chart, but I want you to focus on the YELLOW zones.

I think traders should also be able to use the Pivot Matrix Levels in the Pivot Matrix to also see similar levels, and how the VIX.X can play into things.

Bottom line: As it stands tonight (08:17:41 PM EDT) it looks like NASDAQ could bid BIG tomorrow.

Dec. e-mini NASDAQ-100 futures - Daily Intervals

I think the NASDAQ-100 will rally from the opening tick to its WEEKLY R1, and then hang out there until the 10:30 AM EDT release of weekly crude oil inventories. From my prior market monitor notes mentioned earlier in the wrap, WKLY R1 is going to be a formidable challenge, where further clues to strength could come from the VIX.X, or the VXN.X.

However, since we track just the VIX.X in the Pivot Matrix, I think it should suffice.

Jeff Bailey

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