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Index Wrap

Is this market ripe for a short squeeze\?

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Sharp losses at this morning's open came on the heels of downside quarterly earnings from analog chipmakers Altera (NASDAQ:ALTR) $20.47 -7.79% and Xilinx (NASDAQ:XLNX) $29.72 -3.28%, which sent the Semiconductor Index (SOX.X) 425.46 -1.49% plunging as low as 414 to test its rising 50-day SMA (414) and correlative WEEKLY S2 (412).

But a steepening of the yield curve and some "not so negative" quarterly earnings from National Semiconductor (NYSE:NSM) $16.80, which had been halted just prior to 12:00 at the $15.30 level, may have once again had investors still contemplating if the semiconductors are beginning a cyclical downturn, or just working off some overproduction from earlier this year.

Fellow analyst Linda Piazza alerted traders to the news of NSM's trading halt and earnings. I missed it as I was trying to keep traders apprised of the steepening yield curve action which may have bode well for the broader equity markets.

Is this market ripe for a short squeeze? It could be, with option expiration just one week away.

U.S. Market Watch - 12/09/04 Close

Good Gravy! The homebuilders rocketed to a 5.5% gain and another all-time high as the "housing bubble" that pundits have been calling for the past two-years continues to inflate.

Sniff... wipe away a tear... "I want my Toll Brothers (NYSE:TOL) $60.99 +12.71% back" after I sold every single share in my retirement account just more than a week ago.

Market Snapshot / Internals - 12/09/04 Close

I do think Linda Piazza makes a good point that National Semiconductor's (NYSE:NSM) halted trade and quarterly earnings had chip-traders thinking twice about the group. Not the SOX.X cutting its losses in half from 12:00 to 01:00, as NSM was released for trade again at 12:30. If anything, the steepening of today's yield curve helped keep damage to a "minimum" in the first 90-minutes of trade, where buyers (bulls and covering bears) were tentatively buying the morning's weakness.

There may have been some BIG buyers too as I will discuss later in the wrap.

As the 5-to-30-year yield spread started to widen, with the yield curve steepening (11:00), that's about the time TRIN peaked on an hourly benchmark and began to roll slowly lower. Again, once NSM had been released for trade, things started to improve for the bulls.

Pivot Analysis Matrix -

I was a busy beaver this morning as the weakness in the SOX.X and Semiconductor HOLDRs (AMEX:SMH) $32.58 -1.36% had me wanting to get a SOX.X chart posted in the 11:00 AM EST update, and thanks to either the steepening yield curve action, or National Semiconductor (NSM), we'll never know for sure, the SOX.X managed to hold above its rising 50-day SMA and WEEKLY S2. Maybe its that old head and shoulder top downside price objective that still keeps some chip-bears uncertain if the new bearish cycle is beginning, or a bullish cycle has just taken a rest, and is soon to resume.

Good Gravy! A quick check of Dorsey/Wright and Associates Semiconductor Bullish % (BPSEMI) shows today's action saw a net gain of 0.63%, is still in "bull confirmed" status at a still rather low level of bullish risk. It would currently take a reversing lower reading of 34% for the sector to turn back to "bull correction" status.

Formidable resistance at correlative MONTHLY R1 and WEEKLY R1 and now DAILY R2 are found tomorrow.

Trader are going to want to keep a very close eye on the yield curve action tomorrow, as well as the VIX.X, and if you're a QQQQ trader, you'll want to check in on the VXN.X as well.

Here's some reasons why!

S&P 500 Option Chain - Most Active - 12/09/04

The VIX.X 12.88 -2.35% fell today, and it was the March 05 PUTS, that's right PUTS, at the 1,175 strike which were the most active by the close. It could be that the bulk of them were BOUGHT earlier in the morning. Now look at those Dec. 1,200 calls.

Now look at your pivot matrix.

Now look at this. Remember my alert in the November 1st Index Trader Wrap regarding the "squeeze" potential if the "head and shoulder top" were to break that right shoulder?

S&P 500 Index Chart - Daily Intervals (5)

Several analysts have been pointing out the possibility of another head/shoulder top formation in the SPX.X. Today, that "right shoulder" begins to grow into the ear. Hunchback patterns have been very unkind to bears.

Tonight, another "suspicious" large block of QQQQ printed in the after-hours. On December 2nd, it was 2,000,000 shares at $40.11. Tonight it was 5,000,000 shares at $40.05. I don't know if this is a BIG seller during a day's session, or a BIG buyer during a day's session, where the accumulated trade is then "blocked out" or marked to the market at the close. But be alert, as this action has my attention.

NASDAQ-100 Tracker Option Chain - 12/09/04

The NASDAQ-100 Volatility Index (VXN.X) 19.84 -0.84% was marginally lower today, and it is difficult to draw much of a bias from its action. With the QQQQ well above its "Max Pain" theory value for December, and some of these "suspicious" LARGE block trades being printed in after-hours, I've got to think it is some type of quarterly expiration.

But I've got a little test ready for tomorrow, based on the December 2nd observation, what took place the following day on December 3rd. Now we look for SIMILARITY, or DIVERGENCE to the December 3rd trade. If we see DIVERGENCE, the watch out for a short squeeze, as overhead supply is LIMITED!

NASDAQ-100 Tracker (NASDAQ:QQQQ) - 30-minute intervals

What I've done in show the QQQQ on 30-minute intervals, with both the QCharts' DAILY Pivot levels for each day, as well as the WEEKLY Pivot levels for this week.

I tried to get in touch with our QQQQ Market Monitor observer, Jonathan Levinson, so I could overlay his Keltner channels, but he is probably hard at work setting up a trade plan for tomorrow and didn't respond.

But! What I have done is simply observe what the QQQQ did the day after I saw that late-night print of 2,000,000 shares. The QQQQ jolted higher, above its DAILY R1 in the first 30-minutes of trade. It popped a little higher still, to $40.60, but see how it got crushed back lower to the DAILY Pivot? OK, that the PATTERN that begins the test for SIMILARITY or DIVERGENCE tomorrow.

The SQUEEZE to the upside could be found under the scenario of a steepening yield curve, where the QQQQ is able to hold a close above DAILY R1 for an HOUR or more (that's DIVERGENCE from the PAST). A trader that is monitoring the VIX.X or the VXN.X, should he/she see these volatility measures falling, I would immediately look to see what OPTIONS are seeing the most action.

If its the QQQQ Dec. $40 PUTS, the PUTS, the PUTS, and volatility is falling, then that is further alert to a squeeze.

Jeff Bailey

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