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Market Wrap

Ba..ZOOOM!

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There's an old saying that "a picture is worth a thousand words." For those that have heard those words, then last Monday's Market Wrap and this Monday's updated point and figure chart of the very narrow Dow Industrials (INDU) 13,950.98 +0.31% recaps much of that wrap.

The recent pattern of "Bam, bam, ugh..." just went "Ba.. Zoom!" as buyers aggressively bought last Tuesday's pullback.

With a nice little short-squeeze having taken hold on the break higher at 13,700, buyers (especially shorts below 13,700) should have support rising from 13,250 to 13,500.

Dow Diamonds (DIA) - Daily Intervals

I should note that on Thursday and Friday, I suggested OptionInvestor.com Market Monitor traders leg out of their bullish Dow Diamond Aug $135 Calls at DIA respective benchmarks of DIA $137.61 and $139.23 as the DIA $139.46 +0.39% neared my $140.00 target.

Recent action strongly suggests that institutional computers are exhausted of supply at MONTHLY R1 ($136.56) and I'd have to think (based on observation), that they will be set for further buying on any re-test of that level.

While some long liquidation (selling long) took place on the powerful move up as bulls took profits, the rapid move through July's MONTHLY pivot retracement levels, and perhaps today's low at MONTHLY R2, suggests this market (INDU/DIA/DJX and YM futures) is overly short.


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Right? If YOU were making a market in the DIA, or CBOT's mini Dow $5 September futures (ym07u), where 1-point/contract is worth $5, and your inventory was exhausted, what would you have done?

Lighten up your offer/ask, and assess risk to MONTHLY R2. If you're going to stay in business and generate a commission, you might have to SHORT to the market as BUYERS scramble to buy.

Now you want to BUY on weakness and get SQUARED up!

Yes! Even those still short from the 6/11/07 doji close.

U.S. Market Watch - 7/16/07 Close

Having traded as high as 13,989 intra-day, only the very narrow Dow Industrials (INDU) managed to close at an all-time high on positive breadth of 18:12.

Boeing (NYSE:BA) $102.07 +0.18% gets the trade at $102 (see Monday's Market Wrap), while Johnson & Johnson (NYSE:JNJ) $63.80 +0.58% inches its way higher.

Alcoa (NYSE:AA) $46.77 -1.22% traded as high as $48.77, but takes a breather having surged from the $42.00 level on Thursday.

United Technologies (NYSE:UTX) $76.67 +2.22%, which is the 6th-highest-priced Dow component, put in a strong showing today, as did 22nd-weighted Verizon (NYSE:VZ) $42.76 +2.39% on rumor that Vodafone (NYSE:VOD) $33.15 -1.10% may be set to buy the telecom service provider. A rumor that Vodafone denied.

McDonalds (NYSE:MCD) $52.10 +0.36% edged higher after the fast-food giant said same store sales rose 8.4% in June and 7.4% in the second-quarter. However, the company warned that it expects to post its first quarterly loss in more than 50 years in the recently completed second-quarter when it takes a -$1.31/share charge for the sale of some Latin American operations. Excluding the one-time charge, McDonald's said it would likely exceed Wall Street forecasts and earn $0.71/share from continuing operations. Consensus is for $0.68/share.

Ahead of key earnings for financials this week and mixed retail sales trends, 11th-weighted American Express (NYSE:AXP) $61.88 -1.51% was a percentage loser among the Dow 30 components.

The largest U.S. banks are facing a tough operating environment, but their second-quarter results are likely to be decent as they benefit from their diverse business mixes. Still, investors will be scrutinizing the results to detect any fallout from the meltdown in the subprime mortgage market.

I've made a few notes regarding the "delay" of a few bond offerings, especially in the corporate high yield segments in the OptionInvestor.com Market Monitor the past couple of weeks. The bond market dwarfs the equity markets and is difficult to track closely. But the general impression is that there are still some liquidity issues, or lack of buyer interest for "junk bonds."

Starting tomorrow, super regional Wells Fargo (NYSE:WFC) $35.45 -0.25% and Wachovia (NYSE:WB) $52.36 -0.53% are slated to report their quarterly earnings.

Dow component JP Morgan (NYSE:JPM) $49.83 -0.43% will report Wednesday and Bank of America Corp. (NYSE:BAC) $49.62 +0.24% will report on Thursday.

Citigroup Inc. (NYSE:C) $52.19 -0.62%, which is the 14th heaviest price-weighted Dow component reports Friday.

Merrill Lynch & Co. (NYSE:MER) $87.39 +0.98% ends a volatile second-quarter earnings season for the big brokerage firms tomorrow amid continuing concerns over subprime mortgages and the credit markets. Merrill bought a big subprime lender in January, but observers say it has been savvy in shedding many of the riskiest loans.

The narrower S&P 100 (OEX.X) 717.01 -0.02% traded relatively unchanged, but the supply/demand relationship looks very similar to that of the Dow 30.

S&P 100 Index (OEX.X)

As you review the VERY NARROW Dow Industrials, and build out to the narrow S&P 100 Index ($OEX) you can see some similarities. Not a coincidence as the Dow 30 are also found in the OEX. The OEX is a MARKET CAP WEIGHTED index though, so it is constructed slightly different. FINANCIALS are the BIGGEST weighted group in the OEX.

With BUYERS (not just bulls, "old bears") seemingly more focused on the narrower indexes, I would think an "S&P" bull finds 695 as a "best buy" on a pullback. As of tonight's close, it would take a trade at 700 in the OEX to see a 3-box reversal back lower.

Let's stick with the "S&P" for a minute, and look at the BROADER S&P 500 ($SPX).

S&P 500 Index ($SPX) - 10-point box

Slightly different supply (O) and demand (X) picture. Are you seeing the VERY SUBTLE differences as we "broaden out" from 30 stocks in the Dow, to 100 in the OEX, to 500 now with the SPX?

I've shown the S&P Depository Receipts (SPY) $154.83 -0.01% bar charts before and noted the WEEKLY 5/11/07 "doji close." I've superimposed the SPX's 5/11/07 close on the point and figure chart above.

VOLATILITY! In 2005, we would count 7 alternating columns of X and O.

In 2006, we would count 8 alternating columns of X and O.

Were just more than half-way through the year of 2007 and I'm already counting 8 alternating columns of X and O.

EXPECT VOLATILITY!

Now I want to build, or continue to follow up on "breadth."

Just looking at INDU, then OEX, then SPX we see SIMILARITY (INDU/OEX) and some very subtle difference (SPX) in the supply/demand charts.

Today, breadth was negative at the NASDAQ and NYSE with decliners outnumbering advancers by a 2:1 margin.

Let's quickly review the NASDAQ Summation Index ($NASI), which simply measures a/d on a continuous basis.

NASDAQ Summation ($NASI) - 20-point box

At last Monday's close, the $NASI from www.stockcharts.com measured -86.70. We have seen a REVERSAL higher to -80 on the chart, so some slight broadening out of advancing issues.

Now keep that in mind.

Let's jump to the big board and the NYSE's summation ratio.

NYSE Summation Index ($NYSI) - 20-point box

Zero (0.00) is what would envision as a "water line." That is, stuff that floats on water, floats above the water line, or zero.

OK?

VERY BROAD, each measuring over 3,000 stocks per exchange, so a continuous process of measuring the advance/decline line of over 6,000 stocks!

Question! What were the MAJOR US Equity % Gainers since last Monday?

Global Equity Benchmarks / Currencies

That's right!

The INDU and the NDX were the notable #1 and #2.

The OEX was #3.

The broader SPX #4.

And the much broad Russell 2000 ($RUT) is actually down 0.56% since last Monday.

Now look at your currencies!

The Dollar Index (DXY) was down 1.06%, as STRENGTH in the euro/$ and the pound/$ as well as strength in the yen against the $, or weakness in the $/yen unfolded.

What companies might tend to BENEFIT from a weak dollar?

How about the BIG companies that EXPORT products/services to countries that have a STRONGER currency against the dollar?

Now build out a bit and look at the US equity benchmarks against other FOREIGN equity benchmarks.

I wouldn't just "key" on the dollar, thinking "weak dollar BULLISH INDU/NDX/OEX/SPX," but as time progresses, and I compare US equity benchmarks, perhaps consider that "small companies" may not BENEFIT AS MUCH near-term with a WEAK dollar as larger companies, then add the observation that OVERSEAS markets haven't faired nearly as well as the BIG Cap indexes here in the U.S., I do get a feeling that the NARROW buying we're seeing, may well be part of the WEAK DOLLAR story.

In last Monday's wrap I mentioned that the narrow NASDAQ-100 Bullish % (BPNDX) from Dorsey/Wright had reversed up to "bear correction" status. On Thursday, this narrow bullish % did achieve "bull confirmed" status with a 76% measure (76 of the 100 point and figure charts) now have a point and figure "buy signal" associated with the chart.

On Friday, 3 additional stocks saw reversing higher point and figure buy signals (XMSR, PAYX and AMZN) unfold.

Today's action saw no net change, so still "bull confirmed" at 79% bullish.

Another observation that buyers are focused in the NARROW BIG cap names.
 

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