Option Investor
Index Wrap

Pressure cooker goes "pop"

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In last night's Index Trader Wrap, I mentioned that Tuesday's equity trade "felt heavy." Today, the pressure cooker went "pop" as all heck broke loose in the energy futures markets, as gains in crude, distillate and unleaded gas inventories sent January Crude Oil futures (cl05f) $45.49 -7.4% plunging lower by $3.64.

In Thursday's electronic trade, January Crude did rise to $45.65 after China said it would begin developing its own strategic oil reserve, and slowly establish a 90-day supply of oil beginning next September. China hopes to establish the reserve by 2010.

The Chinese government has been building 52 tanks near the East China Sea, south of Shanghai, to stockpile a month's worth of oil. Each tank will hold more than 25 million gallons (a petroleum barrel is 42 gallons).

Chinese officials did not say how they were going to pay for the stockpile, but it was speculated that the Chinese government may issue bonds, raise taxes, and introduce other fiscal measures to pay for the reserves program.

Hey... I might be able to broker a deal between the U.S. and China. How about selling some of the US's recent stockpiles to China? Help out a friend. Narrow the trade deficit?

I also hear the Russian government has an oil producer (Yukos) on the auction block. China's already shown an interest in buying Canada's Husky.

Before we get started with tonight's wrap, NASDAQ-100 Tracker (NASDAQ:QQQQ) $39.92 investors/trader that do hold short/long positions in this security, may want to quickly check any STOP Loss/Profit orders with their brokers. Make sure your orders are still standing and that the new symbol change doesn't leave you hanging in the wind, with no stop in place!

U.S. Market Watch - 12/01/04 Close

PINK arrows point to indices/sector that hit new 52-week highs in today's session. Financial (blue arrows) got close to some of their very recent 52-week highs, and really helped the SPX/OEX offset some of their exposure to energy and utilities.

The Computer Technology Index (XCI.X) 720.19 +2.37% is right back at the 720 level where it triggered the triple top buy signal on November 17.

The Semiconductor Index (SOX.X) 440.09 +3.82% closed above its trending lower 200-day SMA (438.25) and is back to within shouting distance of its recent relative high of 445.94 set on November 19. An upbeat outlook from Fairchild Semi (NYSE:FCS) $16.70 +9.15% helped fuel today's sector advance.

The Disk Drive Index (DDX.X) 114.59 +5.08% erupted for a hefty 5.5-point advance and closes in on its recent relative highs of 116 found in early October.

Having gotten stopped out of a 1/2 bullish call position in Apache Corp. (NYSE:APA) $51.85 -4.08% today (got scalped on the energy decline I sensed yesterday), some of the retailing reports had consumer clambering for digital cameras this holiday season.

Camera clickers might need a flash memory chip to go with that new digital camera. Disk Drive Index (DDX.X) and Semiconductor HOLDRs (AMEX:SMH) $33.73 +3.81% component SanDisk (NASDAQ:SNDK) $23.26 +3.01% might see some strong demand for its products into early next year. I liked a 1/2 bullish position in the SNDK April $22.50 calls (SWQ-DX) at $3.30.

While not a component of the DDX.X, disk drive maker Western Digital (NYSE:WDC) $10.38 +6.24% launched above its neckline ($9.75) of a massive reverse head and shoulder pattern after guiding its December quarter higher.

Soon-to-be added to the SOX.X (Friday morning) shares of Marvell Technology (NASDAQ:MRVL) $33.13 +3.33% surged to another 52-week high, with WDC a large customer.

Market Snapshot / Internals - 12/01/04 Close

NASDAQ traders will view today's volume as very bullish, and help alleviate fears that a "volume top" was made on November 17, when the NASDAQ turned a heavy 2.23 billion shares.

Take note "big tech" bulls. November 17. Tech bulls will want to see the Computer Technology Index (XCI.X) 720.19 +2.37% follow through above its recent November 17 relative high.

Kind'a like this....

NASDAQ Composite Index (COMPX) - Daily Intervals

I was cognizant of a possible "high volume top" from November 17, and tonight I'm checking the NH/NL indications closely. No sign of any BEARISH DIVERGENCE from the daily NH/NL readings. I would be questioning today's break higher if the number of new highs came in BELOW those found on November 17.

As we approach the January highs of 2,154 in the COMPX, I went back and checked some of the NH/NL daily readings back at that time. The highest reading came at 571 new highs and 6 new lows on January 20. It wasn't until January 26th that the NASDAQ Comp. traded its eventual 52-week price high and my 5-day NH/NL ratio had slipped to 98.4%, with the 10-day NH/NL ratio also at 98.4%. From their, the 5-day NH/NL ratio did fall below its 10- day NH/NL ratio.

When our IT department archives today's Market Monitor, look way down at the bottom to some of my late Tuesday evening posts (12:30:11 AM EST) as I posted updated through Tuesday's trade of both the NYSE and NASDAQ NH/NL point and figure charts.

My notes of last night were for traders to understand the possibility that we could see similar NH/NL charts as that found last fall.

Computer Technology Index (XCI.X) - Daily Intervals

We looked at the above chart in the November 16 Index Trader Wrap, and after the HPQ earnings report, and eventual test of 720, the XCI.X suffered a brief setback. One can imagine it was going to be tough to get a push above 720 today with the Intel (INTC) mid-quarter update tomorrow evening.

Now, I would have to think that with current stock settlement rules, we've probably seen some of Microsoft's (NASDAQ:MSFT) $27.25 +1.64% soon-to-be distributed $3 per share dividend having been invested the past couple of days. The Vanguard 500 Index Fund, which is designed to track the S&P 500, and owns roughly 100 million shares of MSFT, will most likely have to distribute all of its MSFT dividend on a weighted basis to the stocks in its fund. However, the other top 4 mutual fund holders will pick and choose what stocks get some of the MSFT distribution.

While the Vanguard 500 Index is the top mutual fund holder, its 100 million share holding is pocket change to some of the top institutional holders, of which many hold MSFT shares in various mutual funds.

FMR Corporation (Fidelity Management & Research) reportedly holds just over 452.5 million shares among its various funds. Barclay Bank holds just over 379.6 million shares, while State Street Corp. holds 323.8 million shares.

Most of the top mutual fund, and institutional holders tend to hold less than 5% of their holdings in cash. Recent statistics show 64% of the public float (9.38 billion shares) is owned by institutional and mutual fund owners.

Did you notice today's close on the Russell 2000 Growth iShares (AMEX:IWO) $66.26 +1.64% today! Here's something I thought an options trader might want to think about doing today, which might well be what some institutional bulls are doing.

While I've stuck with our previously outlined "seasonal bullish" strategy of establishing a full position (based on a full position being equivalent to $10,000 in an underlying equity), and have just two (2) call option in my Market Monitor profile, there are some of you subscribers managing larger accounts that might want to consider writing a covered call on a portion of your holdings.

Russell 2000 Growth iShares (IWO) - Daily Intervals

It was really neat to watch the IWO trade today. Last night's close above $65.00 was encouraging to a bull, and boy-oh-boy, the IWO gravitated toward the $66.26 level early in today's session. Almost like a shy little kid clinging to its mom's pant leg on the first day of school.

"Do I sell here? The IWO had performed so well so fast, I can't believe it!" Is some of the e-mail I've received.

I can't tell a trader "yes, or no" but with supply limited, one thing an options trader/investor can do as the IWO nears a historical average gain of 12.9% (from $60.00) is to sell some covered calls. I ran a calculation whereby selling some Dec. $67 calls for $0.75, is similar to actually saying "I'm willing and able to sell at $67.75. This doesn't ASSURE total profitability, but does generate some cash for the account, and give some benefit to the bullish trader that risked some of his/her capital.

I should note that Dorsey/Wright and Associates plots the IWO on a $0.50 box chart, so that it gives closer representation to the Russell 2000 Growth Index ($RUO.X). With the IWO plotted on a $0.50 box size, its bullish vertical count is to $72.50, so there may be more upside that the historical seasonal average from November-May.

Pivot Matrix -

There go those regional banks again! The BIX.X is first to trade its WEEKLY R2, and SPX/OEX bulls as well as broader-market bulls would sure like to see the BIX.X confirm further with another 52- weeker and lead in the MONTHLY at R1. If so, stocks should run into the end of the month.

Jeff Bailey

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