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Index Wrap

Bear Confirmed!

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Stocks retreated for a third-straight session as the new year baby's face was red again on Monday, where despite a strong ISM Services Index, and calm oil prices where build in distillates and unleaded gasoline inventories had February Crude Oil futures (cl05f) $43.39 -1.18% settling down 52 cents, the major equity averages all finished in the red.

February Crude Oil futures (cl05f) - Daily Intervals

After surging to record highs in October, oil prices have started to find a range between $46.00 and $40.50, where with each passing week, the "energy story" begins to cool. Declines in oil have not had the bullish impact on the major averages, as they did in November and December, but trader and investors will be wise to keep tabs on black gold, where yesterday's release of the FOMC minutes, and mentioning of energy prices giving a boost to inflation fears, still keeps crude oil on trader's radar screens.

While the major averages and sectors we follow in the U.S. Market Watch continued their new year retreat, it is Dorsey/Wright and Associates Oil Sector Bullish % (BPOIL) that is first among the sectors to reverse lower to "bear confirmed" status!

Could it be that OPEC, as well as some industry analysts were correct, when in October they said that oil was being artificially driven higher by speculators in the futures market? Is it a coincidence that since the NYMEX raised its margin requirements that oil prices have eased?

It has been confusing to this analysts (Jeff Bailey) that crude oil "peaked" in October, yet oil stocks, as depicted by the Oil Index (OIX.X) 385.80 -0.26% didn't reach its recent highs until late November.

Oil Index (OIX.X) Chart - Daily Intervals

It may well be the recent weakness among oil producers that has had a fewer number of new 52-week highs being registered at the NYSE. A nasty looking head and shoulder top pattern, which now tests a horizontal neckline at 385, combined with Drosey's sector bullish % for oil reversing to "bear confirmed" status at a high level of bullish risk, on the alert for weakness.

I show two upward trends on the OIX.X chart. Until I labeled where I had anchored these trend from, did I make a tie that both trend's anchor points came at relative lows found in the month of MARCH.

This had me remembering my conversation of heating oil's peak demand season now passing in December, and not until later this spring, would the peak driving season most likely build some greater demand for unleaded gasoline. Perhaps oil stocks are about to take a major rest to OIX.X 355 between now and this summer, with MARCH marking another inflection point low.

While February Heating Oil (ho05g) $1.2184 -2.28% settled down $0.028 and matches its a December low settlement price, I'd continue to shift some focus toward unleaded gasoline, which I think crude oil futures traders are doing, where February Unleaded Gas (hu05g) $1.171 -0.09% settled fractions of a penny lower.

In a somewhat related energy note, shares of seismic imaging equipment maker Input/Output (NYSE:IO) $6.88 -16.96% fell sharply after warning that two incomplete transactions for its oil/gas exploration equipment would have fourth-quarter earnings falling significantly below the low end of its previously issued guidance. The company said it would give further details in a conference call, which I did not listen to, but I do wonder why anyone wouldn't be eager to be looking for oil, even at these prices.

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

An intra-day chart of the SPX did have this very broad index looking to find some support at the MONTHLY S1 of 1,185. As I think back to Index Trader Wraps, and discussion in the Market Monitor regarding the POTENTIAL "right shoulder" at 1,185 of a small head and shoulder top during that time, some bears that didn't blow up their accounts, but have taken some heat to 1,218 should most likely be looking to square things up.

There were some very brief intra-day signs of bullish life, but my guess is that it was some one-month-old bears doing the bulk of the buying.

Market Snapshot / Internals -

The 30-year Treasury bond ($TYX.X) unwound exactly 1/2 of yesterday's 6.0 basis point rise, with the 30-year falling 3.0 basis points today, but the aggressive flattening of the yield curve pressured stock's a/d lines throughout the day.

I profiled a day trade short in the QQQQ today at $38.63 (12:26:18), and while the QQQQ did go on to trade a session low of $38.47, that trade was stopped out at $38.80 as the QQQQ never did trade my target of $38.31, which was a correlative DAILY S1/MONTHLY S2 in the pivot matrix.

I will make further note that the intra-day low for the QQQQ came as the S&P Depository Receipts (AMEX:SPY) $118.01 had just kissed their MONTHLY S1 of $118.51, and it wasn't until the last 30- minutes of trade that both the SPY/SPX closed below their MONTHLY S1 levels.

NASDAQ Composite (COMPX) Chart - Daily Interval

Last night we reviewed the very broad NYSE Composite ($NYA.X) and tonight we're taking a quick look at the NASDAQ Composite, where a test of the 50-day SMA is underway. In early September, the COMPX made an initial bullish move above this closely monitored intermediate-term simple moving average, and on a pullback in late September, it served as support for a nice pop higher. A close much below this moving average will raise a bearish eyebrow among technicians.

I make some notes as to recent high bullish % readings (covered in 09:00 AM intra-day updates) where today's action did have more than 1% of stocks listed at both the NYSE and NASDAQ generating point and figure sell signals.

I still like my PINK 38.2% fitted retracement, but I don't like the way the recent high was NOT explained, like we saw in the NYSE Composite Chart.

In a quest to try and answer the "why," here's what I've done. The net analysis in my opinion that I think by Friday's close, bulls will want to see a CLOSE back above 2,106, or 2,110, but the focus of support will be at the 2,076 level and upward trend.

NASDAQ Composite (COMPX) - Daily Intervals

It's only when a "top" is realized months later that a conventional fibonacci retracement seems to have explained everything that took place. The technique of "fitted 38.2%" is admittedly more of an art than a science.

Still, even when the resulting 100% is moved lower, due to the lower attachment point of the 38.2% retracement, the COMPX closes weak for a second-straight session, and puts greater emphasis on trend and the "old" BLUE conventional retracement level of 2,076.

As I think about my bearish target of $38.31 in the QQQQ for my bearish day trade today, I can perhaps see how that type of target would tie in with the COMPX at 2,076.

U.S. Market Watch - 01/05/05 Close

Broad selling among the major indices and sectors in our U.S. Market Watch. The INDU and DIA were the only equity-based indices in our DAILY Pivot matrix to trade their DAILY Pivots. Sellers were still lined up just below the DAILY Pivots for others.

Maybe a little relative strength from the Dow on less profit taking. But after a couple of sharp declines on Monday and Tuesday, that "profit taking" begins to wear on a bull looking for the bounce.

Homebuilders (DJUSHB) 750.77 -1.11% were up earlier this morning, then faltered despite a pullback in yield from the 10 and 30-year year. While the Mortgage Bankers Association weekly statistics were taken with a grain of salt (Market Composite Index fell 10.6% to 605.7) due to the holiday-shortened week ending December 31, the decline in overall mortgage-related activity is noted.

This flattening yield curve continues to concern the bullish side of me somewhat, and headed into Friday's nonfarm payroll data, the homebuilders trade, in relation to how Treasuries trade could be telling for the next couple of months.

Yes, if you're long/bullish a homebuilder, you probably want the 10-year and 30-year yields to stay relatively low. Did you know that a 30-year fixed-rate mortgage is slightly below where it was at this time last year? According to the MBA, a 30-year fixed- rate mortgage was 5.67%. Last year at this time, a 30-year fixed-rate was slightly higher at 5.74%.

So where does some re-steepening of the yield curve come from, or where would you want it to come from if you're not only long a homebuilder or two, as well as other equities? While I speak to the BULLS, BEARS will also take note, then think the opposite. BEARS should be hopeful when the YIELD CURVE is flattening.

I think it comes down to the nonfarm payroll numbers on Friday. We've seen recent reports show that hiring has slowed since the Thanksgiving holiday.

Economists are currently forecasting the economy to have added 175,000 jobs in December, which would be up from November's 112,000.

I've been keeping track of my "Economics 101" table of various economic reports and the past four months, nonfarm payrolls have averaged 183,000 per month.

Regardless of what the number reported is, I don't think an equity bull is going to stand for much more flattening of the curve. No, with oil prices "behaving," an equity bull wants to see BUYING in the shorter-dated, which would most likely signal some alleviation of "fear for inflation." But at the same time, I think and equity bull, and housing bull then wants to see the 10 and 30-year yield hold steady. If the 5-year yield will fall, 10 and 30-year yield hold steady, then some steepening of the curve can still take place.

It's what traders, investors and economists would call the "Goldie Locks and the Three Bears," economy. Not too cold, not too hot, but just right.

Pivot Matrix -

Hmmmm.... After having gotten stopped out of a bullish QQQQ trade with a target of $40.25, which the QQQQ eventually traded, now I see QQQQ $38.30-$38.35 begin to show itself for a second-straight session. I'm thinking that's going to be a "destiny" trade for the QQQQ headed into tomorrow's session.

See all those correlations at WEEKLY S2 and DAILY R2? To get there, the SPY DAILY Pivot and MONTHLY S1 need to be taken out to the upside.

For that to happen (SPY strength), keep an eye on those bond yields.

Jeff Bailey

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