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Python squeezes bear by the head and shoulder

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Merger and acquisition activity as well as some better than expected retail sales and economic data regarding business inventories had the major indices moving higher in Monday's session, with the S&P 500 Index (SPX.X) 1,198.68 +0.89% closing at a new 52-week, and multi-year high.

Those head and shoulder tops in the SPX, OEX and even the QQQQ now have bears getting squeezed at the head and shoulder, where just prior to Monday's settlement, S&P futures traders looked like they were scrambling to "get long," or in a bear's case "get flat," to the close.

U.S. Market Watch - 12/13/04 Close

The SPX/SPY as well as the GSO.X, XBD.X and HMO.X closed at new 52-week highs in Monday's session, where a rather unexpected agreement from PeopleSoft (NASDAQ:PSFT) $26.42 +10.30% to be acquired by Oracle (NASDAQ:ORCL) $14.63 +10.16% without a long drawn out court battle, provided a catalyst for gains in the GSTI Software Index (GSO.X), as arbitragers unwound positions based on a lower PSFT price of $24.00 and extended court battle.

Brokers pressed higher in hopes that merger activity would continue to fuel revenues and earnings for the larger investment banks with merger talks regarding the pending $35 billion deal between wireless carriers Nextel (NASDAQ:NXTL) $29.99 +0.77% and Sprint (NYSE:FON) $24.40 +1.24% could be finalized this week.

Perplexing to me (Jeff Bailey) was today's broader market gains despite a notably flat yield curve. One can never tell, but after sensing a building short squeeze for the major indices, perhaps it was bears that were shorting equities last week on the dollar's rise, that now find out their quick demise?

Market Snapshot / Internals - 12/13/04 Close

NASDAQ bulls looked to have headed for the corral at 12:00 when the a/d line showed even breadth of 14:14, but as new highs begin to build versus few new lows, the thought/observation that bullish leadership is renewed after a brief 5-day respite has Wall Street once again with an ear to the ground and listening for the rumbling of bullish hooves.

How could stocks gain while today's yield curve flattened as it did?

I've been thinking that a steeper yield curve (bullish for stocks) would come from greater selling in the longer-dated 10 and 30-year maturities than would be found in the shorter-dated 5-year.

But if I pay any attention to recent thoughts out of Merrill Lynch at their "one and done" scenario that the Fed will raise rates tomorrow by 25-basis points, and be "done" raising rates for a couple of meetings, then I would have to think that any yield curve steepening comes as Treasury bond traders show greater hunger for shorter-dated Treasuries, which brings a LOWER yield to the 5-year.

There was perhaps some sign of this logic from the junk bond market today, where the Pacholder High Yield (AMEX:PHF) $9.94 +0.7% rose above 7-day resistance.

On 11/24/04, I thought PHF bulls should SELL a portion of their bullish holdings that may have been bought back in May at much lower levels and HIGHER dividend YIELD as I began to think that we would see a steepening of the Treasury yield curve, where the steepening of the curve would come from selling in longer-dated Treasuries.

I did NOT consider a steepening of the yield curve, which could come from a greater amount of selling in the shorter-dated 5-year maturity.

For an EQUITY BEAR, I can think of NO WORSE position to be short equities, than a STEEPENING yield curve, where both shorter-term and longer-term rates for the consumer remain relatively low, as EQUITIES press to multi-year highs, with overhead supply nonexistent.

Pivot Matrix -

Monday's close finds the INDU/DIA, SPX/SPY, OEX and BIX.X trading and closing just above their WEEKLY R1s. The SOX.X lags, just barely able to muster strength above its MONTLY Pivot, with correlative resistance higher at DAILY R2/WEEKLY Pivot.

In Thursday evening's Market Monitor (Friday's MM archive near bottom (12/9/2004 11:13:56 PM EST), I made some comments regarding the QQQQ might be using performance enhancing steroids. It was the Biotechnology Index (BTK.X) chart, and 9.96% weighting that biotechs had in the QQQQ that got my attention.

While bulls are constantly alerted to weakness and POTENTIAL "head and shoulder tops," where the necklines don't seem to be getting broken, the POTENTIAL "reverse head and shoulder bottoms" that have seen necklines broken to the upside have been positive for bulls!

Biotechnology Index (BTK.X) - Daily Intervals

While software (ORCL/PSFT) provided a lift for the QQQQ today, as the SOX.X advanced just 0.55%, the BTK.X looks to be breaking above its reverse head/shoulder neckline. It has been noted that there is "bearish divergence" in the BTK.X's MACD, where a recent lower high in MACD comes after equal tests of 540. However, I will note BULLISH CONFIRMATION from a matching higher low in MACD from the BTK.X's "head" and "right shoulder" as MACD now threatens to break above the bearish divergence trend.

Sometimes I (Jeff Bailey) will get swept up in QQQQ "bearishness" based on what the chip stocks are, or are not doing. Let's not forget the biotechs and their implications for the QQQQ.

S&P 500 Index Chart (SPX.X) - Daily Intervals

A bear's "right shoulder" of a POTENTIAL head/shoulder top at 1,190 was quickly taken out of play this morning, and buyers seemed to find something favorable for equities today, despite the flattening yield curve.

In Sunday evening's Market Monitor (see tonight's Market Monitor archive, I wanted to get a futures trader's perspective on the March e-mini S&P futures (es05h) with expiration just days away.

I made the chart look as bearish as I could based on Friday's settlement. Buying toward today's (Monday's) settlement has the look that traders wanted to be long.

March e-mini S&P futures (es05h) - Daily Intervals

With December e-mini futures (es04z) about to expire, I wanted to "roll" a conventional (blue) and fitted 38.2% (pink) retracement to the March contract. Just after the 04:00 PM EST cash (SPX.X) close, there were several buy program premiums (futures above cash) being generated. These buy program premiums come as futures traders were continuing to buy futures into the 04:15 PM EST settlement.

For the first time in seven sessions, the es05h has managed to settle at a new high and its conventional 1,200.75 retracement.

The one thing I "liked" about my "fitted 38.2%) retracement was the way its resulting 19.1% (1,144.50) might have marked an important settlement and contract high, where buyers seemed to be firm above that level.

A trader using THAT (1,144.50) as a test for strength, may have gotten it, and been on the right side of the trade. At tonight's settlement, I would have to think the right side of the trade was to be bullish above 1,200.75. I will note that the SPX.X DAILY S1 for tomorrow is 1,192.86, and pretty close to the 38.2% fitted (pink) retracement. For me, it would take a trade BELOW that level to have me getting more cautious, or thinking potential weakness.

Jeff Bailey

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