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Market Wrap

How Do You Spell Relief?

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        06-20-2001        High      Low     Volume Advance/Decline
DJIA    10647.33 + 50.66 10702.07 10563.86 1.34 bln   1828/1269	
NASDAQ   2031.24 + 38.58  2032.67  1973.70 1.53 bln   1927/1816
S&P 100   634.05 +  7.39   635.74   625.48   totals   3755/3085
S&P 500  1223.14 + 10.56  1225.61  1210.07           54.9%/45.1%
RUS 2000  495.86 +  7.13   495.87   487.25
DJ TRANS 2665.30 +  4.72  2670.41  2634.39
VIX        23.86 -  1.06    25.28    23.70
Put/Call Ratio      0.56

How Do You Spell Relief?

A rare catalyst surfaced Wednesday morning that inspired the broader market averages. The culprit: positive economic data. The Conference Board, which is a business and economic research organization, released its leading economic indicator index Wednesday morning. The Conference Board reported that its leading index increased by 0.5 percent, while economists had expected a rise of only 0.2 percent during the month of May.

In all, there are ten components to the Conference Board's index of leading indicators, and six of those ten components rose during May. Without going into too much detail, the summation of the Conference Board's findings suggest that economic weakness may persist in the U.S. over the next few months, but the "U.S. economy may be poised for some recovery" in the second-half of 2001.

The Conference Board's report adds a bit of credence to the thesis we set forth in Monday's Market Wrap. A hint of positive economic data is exactly what this market needs because a recovery in the economy will coincide with a recovery in corporate profits, which stocks should begin discounting if, in fact, the economy does begin to improve. I'll elaborate on this idea at the bottom of the column. But, in the meantime, let's focus on Wednesday's price action.

The Nasdaq Composite (COMPX) bounced off our 1975 support for the second time in as many days Wednesday. Depending upon risk tolerance and trading style, this bounce may have offered entry points into relatively strong tech stocks. Although our 1975 support level held and the COMPX closed back above the psychologically significant 2000 level, there's some serious resistance just above current levels that we need to address.

Tuesday's opening placed the COMPX right at our 2060 resistance level, from which it precipitously fell throughout the session. So, we'll want to keep a skeptical eye on 2060 if the COMPX advances up to that level during Thursday's session. Keep in mind that the COMPX's intraday highs for the past three sessions - prior to Wednesday's trading - were 2048, 2046 and 2057. In short, there's some significant resistance just above the COMPX's current level. Of course, if the COMPX can break above its short-term resistance at 2060, it should advance back up to the 2100 level.

Insofar as support concerns the COMPX, we'll want to keep a close watch on our same levels: 2000 (psychological) and 1975 (technical). If the COMPX does break below 1975, traders will want to look to get short weak technology stocks (Read: Tech/Telecom Complex). If the COMPX does break below 1975, for whatever reason(s), I think there's a good chance it will work down to the 1900 area.

Nasdaq traders might also want to keep an eye on the Nasdaq-100 (NDX.X). It, too, has some resistance just above its current level around the 1750 area, which was Tuesday's high. But, if the NDX advances above 1750, coinciding with the COMPX breaking above 2060, it would add validity to the latter advancing up to 2100.

For the third time in four days, the Dow Jones Industrial Average (INDU) rebounded from the 10,565 area. This development is most encouraging, in that buyers are defending the Dow before it can test its significant technical and psychological support at 10,500. But more discouraging is the fact that the Dow can't get above the 10,700 level. In fact, the Dow has tested but failed to close above the 10,700 level in the last four trading sessions. A strong advance and subsequent settlement above the 10,700 level would offer traders the opportunity to get long relatively strong blue chip stocks.

Not by coincidence, the S&P 500 (SPX.X) topped out at our 1225 resistance level Wednesday afternoon. The S&P is right on the verge of breaking out above 1225 and that development would certainly be a big positive for the broader market. Watch this index closely Thursday morning to decipher whether or not the Dow and Nasdaq have a chance to break above their respective resistance levels. And like the Dow and Nasdaq, the bears could NOT push the S&P 500 down below its significant support level at 1200 during the recent sessions. What this may lead to is a capitulation on the part of the shorts, who may throw in the towel and buyback their bearish bets over the coming sessions.

The broader market averages, despite Wednesday's respite, are still oversold. Across the big three (COMPX, INDU and SPX) stochastics are just starting to turn higher, out of oversold readings. In addition, the Arms Index (TRIN) 10-day moving average is sticking around the 1.50 level, which is considered oversold and is generally indicative of a market rebound.

As I opined in Monday's Market Wrap, however, the magnitude and duration of any rally from current levels are the variables that are rather difficult to quantify. Our support and resistance levels that we've been monitoring, especially in the Nasdaq, have proven VERY reliable so far this week. So I would continue to urge my readers to monitor the levels that I've set forth in this column as a general guide for measuring risk/reward.

While the short-term favors an advance in the broader markets especially in light of the healthy volume that accompanied Wednesday's rally, the intermediate-term price action is becoming increasingly difficult to gauge, at least from where I sit. On one hand, the corporate profit front continues to show signs of deterioration. But on the other hand, according to the Conference Board's report Wednesday morning, there's still a chance that the U.S. economy rebounds in the second half of 2001. That leaves us stuck in between the walls of risk and reward, trying to balance the current corporate profit landscape with the potential for an economic rebound later this year.

Speaking of balancing risk versus reward, some of you may have noticed that we introduced Jeff Bailey's Market Monitor to the Option Investor Web site. This is an invaluable service provided by one of the sharpest minds in this game we call trading. Jeff's observations in his Market Monitor will introduce timely, actionable ideas that will be a great benefit to OI readers. I highly suggest checking out the Web site throughout the day to get into the mind of Jeff Bailey.

Questions and comments are welcome: eutley@OptionInvestor.com

Eric Utley

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