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Big Week, What's Next?

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Big Week, What's Next?

FRIDAY'S TRADING ACTIVITY  
The market had its biggest gain in months last week, with the
bellwether S&P 500 (SPX) up 3.1% (35 points) and the narrower blue chip Dow 30 (INDU) gaining 3.3% (332 points) for the week. This was the biggest point gain since November. Both indices were down slightly on Friday after equaling, or slightly exceeding Thursday's peak. 

The Nasdaq Composite Index (COMP) however saw its sixth up day in a row, gaining 3.8 points to 2,046.4. COMP was up 70 points on th week (+3.5%), its biggest point gain since last August.

Decliners led advancers by an 18-to-15 margin on the NYSE with COMP having 15 stocks down to every 14 up. NYSE volume was a moderate 1.28 billion shares on Friday; 1.52 billion shares changed hands on Nasdaq.

You couldn't point to any single earth-shaking news on the week. [There was some Merger activity as a focus on Friday.] Crude oil continued its slide below 50 bucks, with the nearby and the new front month JULY crude futures closing at 48.65 (June futures went off the board at 47.25). 


There was some ok inflation news (core inflation rate). The market shrugged off cautionary words from Fed Chairman Greenspan about unhealthy debt levels all around (including mortgage lending) and a decline in Leading Economic Indicators, which is now of four months duration. Greenspan also noted in another speech that oil inventories are building as expected for this time of year.

With earnings reporting season behind us, the bulls kind of woke up, realizing that earnings were good pretty much, an outlook for an upward revision in overall economic growth with GDP being reported in the coming week. 

Well, inflation could tack up a bit and the Fed will keep raising rates some, but then again they may pause, what with oil prices coming back down... and the dollar rose to a 7-month high (to $1.256) against the Euro and to a 5-week peak against the Yen (to 108.1) ... not a bad overall picture. 

So, some buried cash got put to work. After all, what else are you going to do with cash? Bond yields aren't great (4% on the 10-year), real estate is viewed by many as being over-inflated and under the matress is not doing much for you! 

Of course the bears are suspicious, as always. Volume levels werent all that great (I'll more to say about one key volume measure); if the Fed DOESN'T have to raise rates more than they've done already and oil prices are starting to drop back, doesn't that point to a SLOWING economy?!

CHEAP STOCKS ... TIME TO BUY OR MERGE
America West Airlines Inc (AWA) announced late-Thursday that they had agreed to merge with bankrupt U.S. Airways (UAIRQ). The 
The new airline will operate under the US Airways name but will be run by the America West CEO.

Investors led by Ripplewood Holdings agreed to buy Maytag Corp. (MYG) for $14 a share, plus assumed debt, making a cost to them of a little over two billion. MYG rallied 26% on Friday.

Occidental Petroleum Corp. (OXY) announced that it would buy an interest in oil and gas production from Exxon Mobil Corp. (XOM) in West Texas for $972 million. Oxy Pete expects their acquisition, as well another potential deal in the works, to raise OXY proven reserves by at least 130 million barrels of oil and to add 26,000 barrels of oil equivalent per day for its 2005 rate. The deal is expected to immediately boost earnings. The stock was off 8 cents on day, as its been falling of late along with oil stocks in general after a multimonth rally. 

EARNINGS NEWS 
The market was not devoid of earnings news. 
Gap (GPX) reported a fiscal Q1 profit that was a penny ahead of Street lowered expectations. Total sales fell 1.1% to $3.63 billion as sales at all three of the company's retail concepts fell. The stock lost 1.3%. 

Sharper Image (SHRP), said it was hit by "sluggish" consumer spending in Q1 and reported both a drop in sales and a loss on its profits. The company also warned that Q2 results, as well as for the year, would be well under current expectations. The stock dropped 10%. 

Did I mention concerns about a slowing economy?

THE CHART LINE UP  
Leading this rebound are some of the key tech stocks and sectors. Leading tech has been the semiconductors sector, which of course have been under the gun until last month. The Philly Semiconductor Index (SOX) bears watching after making a double bottom low. When it's rally falters, it's likely that the Nasdaq advance will also.



Hey, those "doubles" are potent. You see what happened after SOX made a double top back in Feb-Mch. 

And, leading the SOX index is Intel Corp (INTC). INTC's chart pattern below suggests that it could get back up the $29 area. While average daily volume has not jumped, On Balance Volume (OBV) has, suggesting that the stock is under some accumulation. 



The bellwether stock in the S&P tends to be one of the 'generals' (NOT General Motors, although its rebounded some also)... General Electric (GE). GE has broken out of a lengthily sideways pattern otherwise known (in technical analysis terms) as a 'rectangle'; this pattern suggest that GE could go to a new high; although the S&P indexes dont look like they would join it there; perhaps the Dow 30 (INDU) would.



The DOW 30 (INDU) Daily chart
The Dow has substantial resistance in the 10,550 to maybe 10,600 area, as it tends to go to these even 100 levels sometimes. The consolidation (bull flag) after the Tues-Wed run up suggests an objective to maybe even 10,700. Stay tuned on that! 10,400 ought to be rock-bottom support, at the prior top and 200-day moving average. A close under 10,400, with no rebound the following day (to back above this key level), would suggest a rally failure. 



Making me cautious on INDU (above chart) is that the 21-day stochastic is just entering its overbought zone. While this indicator has a good record of being associated with tops or bottoms, there is also a tendency for multiple readings at the extremes before the index reverses. 

I'm cautious about taking any NEW Dow Index (DJX) call positions; the "easy" buy was in the 10,100 area. If holding calls from lower levels, exit on a break of 10,400; or, if INDU falters at 10,550; or, reaches the 10,700 area. 

OVERALL INDICATORS S&P market segment
My tendency in assessing the market trend is to run down my 'big 4', so to speak:
1. Pattern
2. Overbought/Oversold
3. Volume trends
4. Sentiment
I remember these by the "POVS" acronym and I look for where they mostly are pointing to a trend stopping/reversal point and where my key Indicators are at extremes.

S&P 500 (SPX) daily chart + key indicators ...
The chart pattern remains bullish. The second phase of the rally off the April low, occurred after completion of a 2/3rds retracement. Further basing or lows made at or above the absolute low warranted the first yellow circle and bullish buy area as it relates to 'Pattern'. This was also at the low end of its downtrend channel. 

It also should be noted that the SPX advance is approaching resistance implied by the prior (early-April) highs and is equal to a 62% Fibonacci retracement; of the March-April, 7-week decline. A bit more of an advance and SPX will have retraced 66%, which pegs key resistance at just under 1200. Only a close above 1200 would suggest to me that the Index could challenge the prior yearly peak. 

SPX is approaching an overbought reading, but it's not in the extreme zone, unlike the situation at the bottom made in the 1140 area, which kicked off this recent strong rally.



I look at the 10-day moving average of NYSE up volume (see chart above) as the key to volume activity on rallies. It should be rising, but this has not been the case lately, as can be seen on the Up Volume (10-day) moving average above. This latest price spurt up has been accompanied by a falling or faltering 10-day Up Volume average; not a good sign for strong continued upside follow through from here. 

The most bearish of my key indicators is the extreme in sentiment hit on Friday as call activity got quite high, relative to puts. You can see in the lowest portion of the chart above, what happened not long after my Call-Put Sentiment indicator hit the lower extreme. It set the stage for the rally to follow as traders got 'too' bearish. However, this indicator is a 'leading' indicator, as reversals might not occur for anywhere from one to a few days (e.g., up to 5) days after such an extreme. 

S&P 100 (OEX) Index 
I won't repeat the bearish warnings to the health of this current advance as relates to the same indicators as above, but only on the pattern. 

The key element to the pattern, besides the 'overbought' implication of the approach of the OEX to my upper trading band, (currently intersecting around 570), is the fact that OEX has rebounded to resistance implied by the prior top at 567; this level, as noted by the red down arrow, also represents a return to the previously broken October-March up trendline. As support levels AND support trendlines, once pierced or 'broken', tend to then 'become' resistance later on, 567-568 is doubly worth watching for signs of a (downside) reversal from this area; or, from the Friday high already reached. Stay tuned on that. 

However, as you'll read further on also in 'Strategy', I suggest taking profits on OEX calls, held from the 545-550 area, at 565. For those wishing to stay with calls, I suggest an exit if OEX starts to fall under 563. 



I don't have put recommendations, as the OEX chart pattern itself remains bullish and pattern is the first among 'equals' of the four factors I mention above. But, I do put a lot of stock in an approach back to the trendline noted above at the red down arrow; sometimes calling it the "kiss-of-death" trendline. 

NASDAQ 100 (NDX) Index --
Of the Nasdaq indices, I'll examine the Nasdaq 100 (NDX), where the strongest buying has come in. I will note that the 2090-2100 zone in the Composite (COMP) is where I see strong resistance. 

Resistance in the NDX Index, as suggested by the Nas 100 daily chart below, is around 1545-1550, as suggested by the up trendline drawn through the late-March/early-April tops. 

This trendline, coupled with the rising support trendline below it, gives an initial appearance of a bearish rising wedge pattern. I am cautious about over-staying in NDX calls. In fact, I suggested in my last Index Trader commentary to exit at and above 1500. This represented a 60 point gain from call purchases made in the 1440 area, on the pullback to the 21-day moving average, before NDX took off on one of its sky-shoots. 

Key support looks like 1450-1455 on the chart. As said, I'm cautious about staying in calls but not ready to suggest that its, willy nilly, time to buck this strong up trend by a put play; except, that I would suggest buying NDX puts in the 1550 area, where stop protection was 5-7 points above; e.g., at 1455-1457. At that point I would be looking for a pullback to at least the 1500 area. 



QQQQ The Nasdaq 100 tracking stock
The stock is bullish in its pattern; it cut through its 200-day moving average like a knife through butter. Short-covering had something to do with that, rather than a huge amount of new buying, judging by the lack of a big daily volume surge. However, the OBV (On Balance Volume) indicator is trending up strongly along with prices, which is a confirming bullish indicator. 

The best near-term upside I see for the Q's is to the 38.25-38.50. 36.75 is key support. 



I would rather be long than short of course ... always respect the trend! ... but will also consider shorting the stock at and above 38.00, on up to 38.50 max, with a protective (buy) stop at 38.70. My downside objective at that point would be for a pullback to the aforementioned 36.75 support. Such a trade would then just meet the kind of risk to reward parameters I look for. 

TRADING STRATEGY -- 
There are basically two types of traders: those that chase trends and those that anticipate them. If you had anticipated this recent surge, buying index and bellwether individual equities calls after the completion of a classic 2/3rds retracement of the October to early-March advance, you would be sitting pretty; and, well, if you follow my (Leigh Stevens) Index Trader column on the web site [for last week's, click here] you would have exited S&P 100 (OEX) calls at 565, after purchase in the 550 area, and exited Nasdaq 100 (NDX) calls in the 1495-1500 zone, after purchase around 1438. Now there was a further surge of course in NDX of another 28 points to 1528 at Friday's close. 

I discussed in my Wednesday Trader's Corner, the modified take-ALL-profits at set objectives, to taking profits on half at the objective and setting "trailing" stops or exit points at just above/below relevant trendlines. [for this rant, click here]

On this (trailing stop) basis, the exit points are up to 563 in OEX and 1501 in NDX. A compromise strategy, but potentially effective; both to protect against a downside reversal (and the opportunity to buy calls on pullbacks, as I favor bullish plays awhile longer) and to protect a portion of the remaining index option profits. 

My stance on trading options, especially of the index variety, when prices EXCEED my objectives and I'm out? Do I remorse about it? I don't much care and I expect to often leave money on the table so to speak. 

What I care about is controlling risk and having a profit expectation that is substantially greater than what I would lose on my initial exiting and protective stop. If we have fewer, but more high-potential, trades, with less losers, those closing year-end account statements will show a healthy increase from year ago equity. That's all I care about. 

Let the other trader-types, you remember, the ones that CHASE trends, fight it out during the period when its obvious to all that the trend is in gear. These are the trend chasers and bless em too, as it takes all kinds of individual participants to make the market what it is! 

When I mention the "classic" strategy above of buying certain retracement levels, it's an old trading principle, going back over a hundred years to Charles Dow and his Wall Street Journal editorials, to buy (or short) the one-half (50%) retracements that go opposite or against the MAJOR (or intermediate) trend; or, if this retracement percentage is exceeded, exit quickly and wait to see if the market retraces 62-66% of the last big move. 2/3rds retracements were also favored by Dow and some other famous trader types; e.g., WD Gann. Again, exit if the market goes much beyond the 2/3rds mark; it may have the "ultimate" retracement of 100%, back to prior major low or high! 

You would think that the recent lows in the major indexes, being so exactly at or close to the 2/3rds retracements, might have attracted a LOT of buying. No, only some; mostly professional. Many, if not most, tend to wait and see and buy or sell the re-newed trend; i.e., 'momentum' traders. However, options, those fascinating trading instruments, favor almost the same strategy as the Warren Buffets of the world: buy em when nobody else wants em. Fascinating. 

Unlike buying and shorting stocks and futures, we got premium expansion to contend with. Faster than a speeding bullet is the way index options premiums get inflated when the market breaks out. I learned the hard way when I went from trading S&P index futures to trading S&P index options and couldn't understand how I didn't make any or much money by buying puts or calls very close to when the indexes had technical breakouts. Well, that's another story. 

Good Trading Success! 

 
 



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