Option Investor
Index Wrap

Cyclical bear suffers another blow

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Bulls stampeded again today in what could best be described as a celebratory salute to American veterans of all wars.

While Veteran's Day, originally known as "Armistice Day" was dedicated to the cause of world peace, bulls raged war against bears, where an all-time high for the Russell 2000 Index (RUT.X) 616.30 +1.09%, which follows an all-time high for the NYSE Composite ($NYA.X) 6,950.97 +0.86% set last week, has the "cyclical bear" starting to wonder what the market knows, that he or she doesn't.

While the term "cyclical bear market" has been a wonderful catch phrase that market and economic bears will continue to use to scare away bulls, cyclical bear markets shouldn't be setting all- time highs.

I will admit that in technical terms, the "cyclical bear" market for the S&P 500 Index (SPX.X) 1,173.48 +0.9% is still in play unless the SPX.X were to trade 1,553.00 and an all-time high.

Russell 2000 Index (RUT.X) Chart - Daily Interval

Bulls look to be embracing the small caps of the Russell 2000 Index ($RUT.X), where its price action continues to suggest seasonal bullishness is building some conviction among investors.

Bears might want to embrace the RUT.X and step up their short covering after seeing this.

NYSE Composite ($NYA.X) Chart - Daily Intervals

The NYSE shows a nice move higher from my "stacked" retracement 19.1% of 6,910. Some viewed 6,900 as a round number of psychological resistance too. That looks to have been bulldozed into the ground. Yep.... 7,000 will hold as this "cyclical bear" is sure to resume any day now.

If you or I begin to question that 6,900 would, or 7,000 will hold any resistance, then that might explain what I saw and mentioned in today's 01:00 PM EDT update and QQQ call activity.

Market Snapshot / Internals - 11/11/04 Close

Things were rather quiet for the first half of today's session, and when that's the case I tend to have a little more time to snoop around. I can say this though. November expiration can't come soon enough for the Semiconductor HOLDRs (SMH) $32.46 +1.85% and the covered calls at the Nov. $32.50 strike. That action in the QQQ calls today suggests expiration can't come soon enough for a lot of call sellers. See that expansion of new highs at 03:00 PM EST. After lunchtime, the 01:00 and 02:00 NH numbers were flattening out. That's not all that unusual. Within an hour, the NYSE posts 52 more highs? That is somewhat unusual and makes me think bulls may be trying to save some positions that they don't want to sell, at levels they didn't think would be traded.

NASDAQ-100 Index (NDX.X) - 25-point box

In the November 1 Index Trader Wrap we looked at the NDX.X point and figure chart. A bear had better be thinking "something's wrong," while a bulls is thinking "something's right!"

One trader asked about a possible "bull trap" pattern, where in the point and figure world is depicted by a triple top buy signal, where we see only one box get traded higher (like we see in the NDX.X) and then a quick reversal back lower. This is a great question and observation to be alert to, but "bull traps" are usually found in a bear phase (bear correction, bear confirmed), not a bull confirmed market.

Today's action may hint how quick bears are now calling it quits. At least the smart ones. Bulls will use it to their advantage.

NASDAQ-100 Index (NDX.X) Chart - Daily Intervals

In Tuesday evening's Futures Wrap, fellow analyst Jonathan Levinson couldn't have outlined the bull/bear case as depicted by the "Doji star" he observed. Look what begins to happen as "3 days' worth of well-applied shorts decide to hit the exits.

I didn't read Jonathan's wrap until tonight, as I was looking to see if anyone discussed the "Doji star" and it implications. However, I did trade the QQQ based on option action I was seeing as well as the action in the daily pivots.

NASDAQ-100 Index (NDX.X) - 10-minute interval

Other than oil's decline, I'm not aware of any news that had the NDX launching itself today. I overlaid the "bear stop" of 1,530, thinking there might have been some shorts that shorted yesterday. Do you sense the eagerness by bears to cover, or the aggressiveness building among bulls?

I had day trade QQQ bulls exit for a profit way to soon, just below the DAILY R2, but once the QQQ stuck its head back above DAILY R1, and the NDX 1,530 equivalent, you could really see some volume come into the Q's and they sprinted to DAILY R2 in rapid fashion.

The above observation isn't just of day traders. I'm trying to show how buyers are getting more aggressive. Bullish and bearish buyers.

I'll also note that I profiled a late session bullish trade in the Semiconductor HOLDRs (AMEX:SMH) $32.46 +1.85%, but buyers didn't seem as aggressive above today's DAILY R1 of $32.37 as they were in the QQQ.

Pivot Matrix -

The BIX.X is first to trade its WEEKLY R1, and that has been a bullish signal in recent weeks. Note today's high in the SOX.X comes just under its WEEKLY Pivot.

If the SMH and even the SOX.X is being "artificially pinned" near a "Max Pain" level, then we should also be alert to the possibility that further gains among the major indices could un- lodge the semis to the upside.

Can the INDU or OEX trade as high as DAILY R1 and MONTHLY R2 correlations? Price heavyweight (for the Dow) 3M (NYSE:MMM) $81.88 +1.27% traded $82.02 and kisses its 200-day SMA. As noted in today's Market Monitor, that also gets MMM's point and figure chart back on a buy signal, where after a "low pole" warning, we get a bullish vertical count of $99.00.

On November 5th, kept touching on MMM in the intra-day updates and profiled a LEAPs call option play on this deep cyclical. Its a "key stock" for bullishness in my opinion, as there are some very good tests for near-term strength, which I think the stock will surpass.

Jeff Bailey

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