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Daily Newsletter, Wednesday, 06/01/2005

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Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews
  4. Trader's Corner

Market Wrap

Pressure cooker gonn'a go pop!

Pressure cooker gonn'a go pop!

It's barely summer and already its BEAR season!

A surge in oil prices ahead of tomorrow's weekly inventory data may have been the saving grace for broader equity market bears with July Crude Oil futures (cl05n) settling up $2.63, or 5.06% at $54.60 on the NYMEX. Energy inventory data, which is usually released Wednesday each Wednesday morning, will be reported tomorrow morning due to the Memorial Day Holiday.

Despite the surge in oil prices, stocks finished markedly higher with the S&P 500 Index (SPX.X) 1,202.22 +0.89% finishing off its best levels of 1,205.64, with traders booking some gains in the final hour of trade.

Today's time-line shows a flat-to-lower open, but buyers came to the table in force at the 10:00 AM EDT hour with a flurry of buy program premiums catapulting the major indices higher. At 10:00 AM, the Institute for Supply Management said its manufacturing sector continued to expand, albeit at a slower pace, with a May reading of 51.5 vs. April's 53.3 reading. Figures above 50.00 signal expansion, while readings below 50.00 are considered to show contraction.


I do think continued dollar strength, which had the euro falling to its lowest level against the dollar in eight months, combined with a strong bout of Treasury buying at this morning's open is in part reflecting a "flight to quality" as voters in the Netherlands joined France in rejecting the EU constitution, and putting economic reforms on hold. I also think there's some bears on the wrong side of this trade, fueled in part by April's Treasury budget surplus.

However, a further surge in buying among the major Treasury maturities was found when the May ISM figures were released as investors contemplated that the Fed may be nearing its final stage of rate hikes. The benchmark 10-year yield ($TNX.X) plunged 9.9 basis points to close at 3.907%, a staggering move below the psychological 4.0% level. Today's 10-year yield close was the lowest since April 1, 2004!

Further fueling the hunger for Treasuries was comments from Federal Reserve Bank of Dallas president Richard Fisher, who suggested the current rate tightening cycle is drawing to a close.

The FOMC will meet later this month and Fed Fund futures continue to suggest a 100% probability of another 25-basis point rate hike to 3.25%. After that, the FOMC doesn't meet until August 9. A quick look at September Fed Funds (ff05u) 96.54 +0.03%, which has been creeping higher since late March now suggests an 85% probability of Fed Funds rising 50 basis points, to 3.50%. In March, this contract was predicting an 85% probability that Fed Funds could read 3.75%.

If you bought a house, or refinanced a mortgage in the past year, let alone in late March, you should call your mortgage lender and look into a refinance. In late March of this year, the 10-year yield ($TNX.X) stood at 4.6%. This would equate to a decline of 70 basis points in just two months. Here too, some bears look to be caught on the wrong side of the trade, which I think could have the 10-year yield ($TNX.X) falling to 3.77%!

Speaking of houses. The Dow Jones Home Construction Index (DJUSHB) 935.67 +1.91% traded an all-time high intra day.

Market breadth was positive at both exchanges, where bullish leadership prevails. The 220 new highs at the big board was the largest number since March 7 of this year, when daily NH/NL readings were 427:16. The NASDAQ's NH/NL reading today compares favorably to a May 13 reading of 131:151 and here too getting close to a March 7 reading of 171:47.

U.S. Market Watch - 06/01/05 Close


Broad gains were found across the sectors. Even the AMEX Gold Bugs Index ($HUI.X) 190.65 +2.62% found gains despite dollar strength! Not just today, but over the past week (5-day Net %).

This action may begin to suggest that dollar softening could soon take place. Remember how gold stocks weakened several month ago despite dollar softness?

Still... in a raging bull trend like the equity markets are in, the rising tide will lift all boats as bears get sideways. When that happens, they can start buying back what profits remain in even the weakest of sectors, for fear gains could quickly become losses as bullishness feeds on itself.

So what happened to "dollar strength = broader equity weakness?" We haven't heard too much from those bearish bloggers of late have we?

Once again the lesson of an equity market, or say an economy, or participants view of the economy is much more complex that what the dollar is doing (up or down). One could say the same about oil's price movement and broader equity prices. I'll throw in Treasury yield as another KEY INGREDIENT, as YIELD will have major impact on consumer borrowing costs.

The REASON you don't hear about dollar strength being bad for equities from the bearish blogger is that it NO LONGER HOLDS TRUE! We've seen it before, we'll see it again.

The equation may look something like this ....

Treasury YIELD + Dollar + Oil = Equity prices/economy

The trader/investor that FOCUSES on just one part of the equation may find short-term success, but when the trade turns, like the dollar has, and equity prices have (they're now moving in unison), the pain can be great for the broader equity bear that focuses on just one dynamic (the dollar for instance).

What's changed? Oil is still high, however Treasury YIELDs have fallen sharply, thus the "reflation" for equities.

Now... I have learned through confidential sources, that a bearish pool of bloggers are forming with the thought that a sharp rise in Treasury YIELD will then become the doom and gloom for the broader equity markets!

This HAS TO BE IT! It isn't the dollar! It's the sharp decline in Treasury yield that has fueled this bull rally! When it reverses, so will equities!

Ooops! That wasn't true as recent history would prove out. In November, the 10-year yield ($TNX.X) backed up from 3.85% to 4.4%. Yet the S&P 500 Index (SPX.X), a good index for broader equity observation, rose from 1,100.00 to 1,180.00.

I want to quickly cover the SEPTEMBER Crude Oil Futures (cl05m) chart, as this is the contract from which we find resistance appearing out of nowhere in the JULY Crude Oil Futures (cl05n) today.

Oil trading is a game of now (July) and then (September).

Do NOT assume that oil's rise is being "ignored" as not having a negative impact on stocks, or the economy! It DOES! But also remember, oil's price is also benchmarked to the U.S. Dollar!!!!

What's the dollar been doing? A SIMPLISTIC look at the 5-day % Net would show the DX00Y up 2.42%. JULY Crude 5-day % Net would show it up 6.64%. Yes, crude oil's rise is TAXING, but not as bad perhaps if the dollar was DOWN 2.42%. Now throw in the DECLINE in Treasury YIELD. There's some "taxing" relief there. Especially at the CONSUMER level.

September Crude Oil Futures (cl05u) - Daily Intervals


Not all that dissimilar to Jim Brown's chart of July Crude in last night's wrap, we do see September Crude (cl05u) breaking boldly above trend. Today's gap above my previously defined near-term "zone of resistance" from $52.73-$52.95 is a SIGNAL that shorts are getting squeezed here too. And they'll be jittery as heck into tomorrow's energy reports.

I (Jeff Bailey) would now have to feel that the NEGATIVE psychology of oils rise is going to have broader equity bulls eager to pull the trigger on gains on a break above $56.75 as overhead supply becomes limited.

What are broader equity market BEARS thinking. I think they've got to be thinking.... "Oil had better press higher for my bearish broader-market scenario, as I'm not getting any help from the dollar and Treasury YIELD."

Oil is in play again as a possible capper to this broad equity rally.

You know where the Dow Transports ($TRAN) are trading. And we should all be up to speed on this index. They couldn't close the deal at 3,650 today and remain pinned pretty much between 3,600 and 3,650. You can feel the pressure continuing to build.

Dow Transports (TRAN) - Components


It certainly looked like the TRAN could make the run for 3,650 and become the "key sector" for confirming strength to this broader-market rally. Give some "market theory" support to the broader averages.

But unless we've had our head in the sand as it relates to fuel prices and the commercial airline sector. I showed a similar table of the TRAN components in today's Market Monitor just after the TRAN had traded its high of the session.

What drives home the thought that oil is still in play as a "rally killer" is the 5-day and 20-day Net% gains the TRAN has gotten from many of the commercial airlines. Today, as oil prices really started to get a move on, this group then "weighted" on any thought of TRAN above 3,650.

If there is EVERY and index at this point that shows a test for STRENGTH, its the TRAN.

I sense, observe GREAT PRESSURE BUILDING here.

Dow Transports (TRAN) - 10-point box


We last looked at this chart on 05/18/05 as the TRAN ramped back higher. I want to show you this chart in hopes you get the observation that PRESSURE is building. Bulls defend above 3,580 wish suspicious bar chart low closes at 3,600 even. Bears defend at previously identified 3,650 and "collision pending."

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


On Friday, the S&P 500 Bullish % ($BPSPX) reversed back up to "bull confirmed" status with a 58% reading. Today (Wednesday) we saw an additional 1.2% gain, or a net gain of 6 stocks to reversing higher point and figure buy signals. Since Wednesday of last week, we've witnessed a net gain of 3.8%, or 19 stocks to a reversing higher point and figure buy signal.

Tonight I show a bullish resistance trend (upward trend that was broken to downside, that can become resistance when tested from underneath). The anchor point is the January 24th relative low.

NASDAQ-100 Trust (QQQQ) - Daily Intervals


What's happening here? Last week we looked at this chart of the QQQQ. Sure looks as if some bears were doing some low risk shorting at that 61.8% retracement the last three sessions. Not bad with a tight stop just above. Meanwhile, buyers inflict some pain.

I also mark a similar "bullish resistance" trend from the QQQQs Jan. 24 relative low. With QQQQ back on that trend, sellers below $37.52 should be getting eager to cover any pullback, unless oil is at $60?

Last week I also showed a technique for using the point and figure chart, where we set the box size to a 1% box. As of tonight's close, a 3% pullback would equate to $37.89.

Today, the NASDAQ-100 Bullish % ($BPNDX) saw a net gain of 4 stocks to a reversing higher point and figure buy signal and remains in "bull confirmed" status at 51%. Bulls now have advanced the ball to "midfield." It was on May 18 that this narrower indicator (compared to S&P 500 Bull %) reversed up to "bull confirmed" at 40% bullish.
 

 
 




New Plays

New Option Plays

Call Options Plays
Put Options Plays
WYNN None

New Calls

Wynn Resorts - WYNN - close: 49.95 chg: +3.10 stop: 44.99

Company Description:
Wynn Resorts is traded on the Nasdaq stock exchange under the ticker symbol WYNN and, since December 2004, it has been part of the NASDAQ-100 Index. Wynn Las Vegas, a $2.7 billion luxury hotel and destination casino resort located on the Las Vegas Strip, opened to the public on April 28, 2005. Wynn Las Vegas features 2,716 luxurious guest rooms and suites; an 111,000 square foot casino; 22 food and beverage outlets; an on-site 18-hole golf course; approximately 223,000 square feet of meeting space; an on-site Ferrari and Maserati dealership; and approximately 76,000 square feet of retail space. (source: company press release)

Why We Like It:
The casino stocks got some positive press today and it looks like shares of WYNN have reversed into what could be the beginning of a new up trend. Analysts have been talking positively about rising room rates for the big resorts and how Americans plan to do a record amount of traveling this year with most of it in the U.S. You can imagine that Las Vegas is near the top of the list for domestic vacation spots. WYNN's daily chart is not only showing what looks like a "W" bottom but the rally today was fueled by volume more than double the norm. Strong volume on a bullish breakout normally suggests more strength ahead. In addition to WYNN breaking its two-month trend of lower highs its P&F chart has reversed as well. The Point & Figure chart shows a double-top breakout buy signal that now points to a $66.00 target. We normally hesitate to chase a big move like today in WYNN but if the market keeps climbing we may not have much alternative. If you are the patient type, we would much prefer to buy a dip back into the $47.50-48.50 range. Due to today's big move our stop loss looks pretty wide. You may want to consider a tighter stop. Our target is the $57-58 range although we do anticipate trouble near the simple 50-dma and exponential 200-dma currently near the $55.50 region.

Suggested Options:
We are suggesting the July calls

BUY CALL JUL 45.00 UWY-GI OI=1221 current ask $6.30
BUY CALL JUL 50.00 UWY-GJ OI=3417 current ask $3.10
BUY CALL JUL 55.00 UWY-GK OI= 239 current ask $1.25

Picked on June 01 at $ 49.96
Change since picked: + 0.00
Earnings Date 08/03/05 (unconfirmed)
Average Daily Volume = 2.2 million
 

New Puts

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Amer. Intl Group - AIG - close: 56.10 chg: +0.67 stop: 52.49

We are encouraged to see today's market rally help AIG turnaround. Yesterday's candle looked like a bearish reversal. Given the strength in the DJIA readers may want to consider new bullish positions here although we'd still prefer to buy a bounce after a dip toward the $54.50-55.00 region. Our target is the $59.00-60.00 range.

Picked on May 26 at $ 55.05
Change since picked: + 1.17
Earnings Date 02/09/05 (confirmed)
Average Daily Volume = 15.5 million

---

Caterpillar - CAT - close: 95.47 chg: +1.36 stop: 89.99 *new*

CAT turned in a strong performance today. The move was partially fueled by positive comments from a Merrill Lynch analyst. The analyst was quoted as saying positive construction spending trends in April suggest a bullish forecast for CAT. The analyst reiterated his $115 stock price on CAT. The move helped push CAT through resistance in the $95 region. This looks like another momentum entry point. Our target is the $99.25-100.00 range. We are raising the stop loss to $89.99.

Picked on May 18 at $ 92.35
Change since picked: + 3.12
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.8 million

---

Career Education - CECO - close: 35.29 chg: +0.62 stop: 32.45

The market rally is lending strength to shares of CECO. Now after five days of consolidating sideways it looks like CECO is poised to breakout over its 100-dma. We would consider new bullish positions here although more conservative traders might want to wait for CECO to trade above the $35.50 level first. Our target is the $38.50-39.00 range.

Picked on May 23 at $ 35.24
Change since picked: + 0.05
Earnings Date 05/02/05 (confirmed)
Average Daily Volume = 2.5 million

---

Rockwell Collins - COL - close: 49.53 chg: +0.14 stop: 44.95

This could become a real test of patience. We were expecting a deeper pull back in the markets but it may not occur. That might leave our suggested entry point near the rising 100-dma a little too distant. We're not changing our strategy just yet but we're going to keep an eye on the $47.50-48.00 region as a potential alternative entry point to buy calls. Currently our plan is to buy calls on a dip into the $46.25-45.50 range.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 800 thousand

---

Federated Dept Stores - FD - cls: 67.70 chg: +0.25 stop: 64.45

No change from our previous update on 05/29/05. Our target is the $69.50-70.00 range.

Picked on May 17 at $ 66.60
Change since picked: + 1.10
Earnings Date 05/11/05 (confirmed)
Average Daily Volume = 2.9 million

---

Reynolds American - RAI - cls: 82.61 chg: -0.30 stop: 77.95

No change from our previous update on 05/29/05. Today's late day bounce almost looks like a new bullish entry point but we would be careful here.

Picked on May 16 at $ 81.31
Change since picked: + 1.30
Earnings Date 04/27/05 (confirmed)
Average Daily Volume = 866 thousand

---

United Technologies - UTX - cls: 107.49 chg: +0.79 stop: 102.45

A strong rally for the DJIA helped push UTX back toward short-term resistance at the $108 level. While we'd prefer to buy a bounce from a dip toward the $105 region traders might want to consider a momentum-type entry point on a move over the $108.00 level. Our target is the $114.00-115.00 range.

Picked on May 23 at $106.25
Change since picked: + 1.24
Earnings Date 04/20/05 (confirmed)
Average Daily Volume = 2.0 million
 

Put Updates

MedcoHealth Sol. - MHS - close: 50.71 change: +0.71 stop: 52.21

This morning's dip under the $50.00 level was enough to trigger our play at $49.90. Unfortunately, shares of MHS rebounded very rapidly with the broader market in rally mode. Thus far the bounce has failed near the $51.00 level and its broken 50-dma but we would be hesitant to consider new bearish positions here. Instead we would wait to see MHS trade under today's low at $49.50 before considering bearish positions. If the market continues to rally we could easily be stopped out before the end of the week.

Picked on June 01 at $ 49.90
Change since picked: + 0.81
Earnings Date 07/26/05 (unconfirmed)
Average Daily Volume = 2.0 million

---

United Thera. - UTHR - close: 50.31 chg: +0.35 stop: 53.38

The market rally today also pushed shares of UTHR higher but it looks like the rally stalled near UTHR's gap down. More specifically the rally struggled near the bottom of UTHR's gap down three days ago. Given the strength in today's market we're still suggesting that more conservative traders may want to exit early (a.k.a. exit now). Our target remains the $48.25-47.50 range.

Picked on May 24 at $ 53.38
Change since picked: - 3.07
Earnings Date 05/03/05 (confirmed)
Average Daily Volume = 452 thousand
 

Dropped Calls

First Marblehead - FMD - close: 35.17 chg: -9.47 stop: 42.49

Whoa! Talk about a negative reaction. Shares of FMD lost more than 21 percent with massive volume driving the decline. The move was sparked by news from Collegiate Funding Services (CFSI). CFSI is the third largest client for FMD and CFSI's announcement today that it would keep and service more of its own loans was a big blow to FMD. Investors panicked that this could herald a new challenge for FMD with other clients pursuing this path (source:CBSMW). Thankfully we had a trigger to go long the stock at $45.01 and that trigger has not been hit. This allows us to close the play unopened.

Picked on May xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 04/28/05 (confirmed)
Average Daily Volume = 782 thousand
 

Dropped Puts

None
 


Trader's Corner

Use Of Weekly Charts; and, Key Reversals

OIN SUBSCRIBER QUESTION:
Congratulations. You pegged this most recent upswing almost perfectly. We'll see what happens up around 570.

My question is do you use longer term charts, like weeklies, to help you decide what the overall direction of the market is? If so, what indicators do you recommend and what settings?
I was looking at the daily chart for OEX and thought, summer doldrums, earnings over, top of the recent channel, here comes 530 at end of July.

Then I switched to weekly settings and I thought "Not so fast Bucko, this market is still in upswing mode. Reminded me of your recent comments about the market not being particularly friendly to bearish trades. Hmmmm... Thanks for your insights.

RESPONSE:
I think you got the key (resistance) level right to watch in the S&P 100 (OEX), as being 570. 570 is approximately where the OEX index gets back to its previously broken up OctoberMarch up trendline. This trendline was pierced on the sharp mid-April sell off. Just as support seen at prior lows, once penetrated, can become resistance later on, a prior "line" of support can act as a resistance trendline later on. As of today (Wed., 6/1) it looks to be true so far ...

Conversely, an ability for OEX to close, and then stay, above 570 is bullish; but I would give the Index a bit more leeway and take a bullish trading stance if the Index closes above 572, and then holds this area on balance after that.

572 represents the 2/3rds or 66% retracement of the March April decline. An advance of more than 2/3rds of the last down swing, suggest that the Index may go on to advance back to the area of the prior high (585) or beyond, to a new high. Stay tuned on that! Next is an OEX chart showing the retracements ....

I would also point out what I think is the significance of bellwether S&P (and Dow) stock General Electric (GE) holding at and above 36.50, the top end of a lengthily trading range or 'rectangle' formation, and a well-defined line of prior resistance. A close below 36.5 would be an ancillary sign of a possible pullback in OEX as well as in bellwether GE.

NOTE:
I wrote on the significance of various specific retracement levels in a prior Trader's Corner article, seen by clicking here.

And, on the concept of "bellwether" stocks, sectors and other related indices see an ONLINE prior explanation by clicking here.

But I DIGRESS from my answer on the question, a bad habit!

Regarding the use of WEEKLY charts:
I absolutely do look at weekly charts for analysis of Index and stock trends, a habit especially honed by a long history of looking at the Mansfield Stock charts that used to come weekly to us Analysts at PaineWebber (now UBS) back when.

On weekly charts, such as in the OEX (S&P 100), I tend to rely mostly on interpretations of the chart patterns and relevant trendlines. As far as INDICATORS, I do also look at the Relative Strength Index (length setting, 8) on an 8-week basis to gauge how overbought or oversold the market might be. I like using the Fibonacci number sequence and 'length' settings of 5,8,13 and 21. [For daily charts, I use 13 & 21 mostly; sometimes 5 for very short-term trading.] For weekly charts, I use an RSI measuring 8 (sometimes 13) weeks, as is seen in the chart below.

As far as the patterns, OEX has broken out above its very long-term down trendline, but has not yet achieved a decisive upside penetration back into its (weekly) uptrend channel. It's hugging the line so to speak, but is starting to trade just (back) into its prior uptrend channel; a mild bullish plus if this pattern continues and if OEX works higher from (you guessed it!) 570-572.

Now, there is a fair amount of use of the MACD indicator, a measure of price momentum, on weekly charts. In fact, this indicator was formulated especially for use on WEEKLY charts.

I don't use the MACD Indicator as much as some. Momentum can be seen on price charts and gauged well if not better by trendlines I think, but the MACD can be a confirming indicator. The MACD is about to achieve a bullish (upside) crossover if the trend doesn't falter around recent highs and the OEX continues to work higher on a weekly closing basis.

KEY REVERSALS

Someone asked me (and I was looking at it myself) about what would constitute a REVERSAL of the recent strong up trend. The concept of what constitutes a reversal pattern, and especially a so-called "key" reversal is a topic in and of itself and useful for trading in many instances.

Some reversal patterns are formed in only 1-2 sessions of whatever time duration (e.g., hourly, daily, weekly) being watched. You may hear the term "key" upside or downside reversals used for these situations. Sometimes a price 'spike', where the high or low for the bar is noticeably above or below the close, warns of a trend reversal.

Certain candlestick patterns that form in one session are anticipated to mark a trend reversal; e.g., the "hanging man" or "hammer". At the opposite extreme are patterns that form over an extended duration such as are described in technical analysis as "broadening" tops or bottoms.

The discussion here is of the type called key reversals on a bar (or candlestick) chart, measuring the High, Low and Close (HLC); or, commonly, containing the Open as well (OHLC charts).

A strong sign of a trend reversal and which is often the start of a intermediate or long-term trend change is the formation of 1 or 2-day key reversals. By the way, the definition of a key reversal is only loosely defined in technical analysis.

A common definition of what is usually called a reversal up day or reversal down day is as follows (sometimes also loosely called "'key' reversal up" or "'key' reversal down" days). I use as examples what are typically the most significant or at least talked about reversal time frame, those seen on a DAILY chart:

1. Reversal up day a day where there is a lower intraday low than the prior day, followed by a close above the prior days CLOSE. Such days are fairly common and I resist calling this set of conditions, a "key" reversal in fact, there is no agreed upon textbook definition of what exactly makes a reversal a key reversal. I learned it one way, others another way.

2. Reversal down day a day where there is higher high than the prior day, followed by close that is below the prior days close.

What I consider to be a more significant and what makes a reversal a KEY reversal, either up or down, is this definition:

1. Key Upside reversal a day (or hour, week, etc) where there is a lower low than the prior "bar" or prior two bars AND the close is above the high of the prior bar or the prior 2 trading periods.

Since I use examples on the daily charts, I'll start to substitute 'day' for 'bar'; just keep in mind that the SAME reversal patterns occur on intraday charts like 15, 30 or 60 minutes, AND on weekly and monthly charts.

2. Downside key reversal day: a day where there is a higher intraday high than the prior day (same as the above "reversal down" definition) OR prior 2-days AND the CLOSE is below the prior days LOW (a 1-day key reversal down) or, of the prior 2-days (a 2-day key reversal down).

The key reversal term does tend to be applied most often to a daily time frame or daily chart.

The pattern of a move to new low, followed by an upside reversal and a CLOSE that is above the prior day's HIGH happened recently in the S&P indices, and the S&P 500 (SPX) daily chart is shown below...

The fact the last LOW here was substantially below the prior day's low is reinforcing for the upside key reversal. Of course, as well, SPX made an approximate double bottom. The two pattern types together made it a very potent indication that the market had bottomed.

Significant tops and significant bottoms are emotional events and are often extreme. Selling accelerates as more and more traders and investors dump stock, UNTIL there it (the selling) gets 'exhausted'. Short-term traders sense this and start covering short positions and there is a rapid rebound.

The Nasdaq did not also have a "key" reversal, only the common reversal pattern: a lower low, in this case substantially, followed by a close above the prior day's close as seen in the Nasdaq 100 (NDX) chart below ...

The circled day was a more common variety 1-day (upside) "reversal". However, the fact that the intraday low as SUBSTANTIALLY lower than the day before and in fact was a new LOW for the move, is also highly significant.

Such a "spike" down to a new low (a 'spike' low) as seen above which was followed by an immediate upside rebound, also fits the pattern of a "bear trap" reversal; i.e., a new low for the move, followed by an immediate substantial upside reversal. [The reverse pattern is a "bull trap" reversal: a new high for the move, followed by an immediate fall.]

And, as always...

LOOK FOR MULTIPLE SIGNS OF A BOTTOM OR TOP

The above pattern seen in NDX had a low that was at the lower end of its downtrend price CHANNEL, which adds significance to what happened in the subsequent reversal also.

As well, it seemed that a bullish price/RSI DIVERGENCE occurred, as the daily Relative Strength Index (RSI) established a pattern of trending higher, unlike the lower intraday lows.

Of course it's also true that the RSI measures the CLOSING level of the Index versus what we're seeing in a chart above, that shows intraday price swings. In a way the RSI divergence seen in the above daily chart is just another way of viewing a price trend that reversed from down to up.

LOOK AT OTHER TIME FRAMES

So, in the case above of a possible bullish Price/RSI divergence, is a bullish Price/RSI divergence apparent on the hourly chart?

I use an Hourly CLOSE-ONLY or 'line' chart below of the same period when the Nas 100 (NDX) Index was bottoming as seen above in the daily chart.

Since the RSI does its indicator calculation based on the close of a bar (e.g., hourly, daily, weekly, etc.), the line chart is a key one to look at. The RSI indicator below has a longer 'length' setting than I usually look at (21), at 34. 34 being the next higher number in the Fibonacci number sequence of adding the two prior numbers to get the next higher one: 1,2,3,5,8,13,21,34, etc.

And, a clear-cut bullish HOURLY Price/RSI divergence is seen in this next chart ...

Looking at other patterns, indicators and time frames is simply part of the 'check list' so to speak, that can be run through for 'confirmation' of key, or simple, reversal patterns.

Reversals of trends are very important to an option trader as spotting reversals means that you have the most confidence possible, at least as supplied by technical analysis, that you are getting into a NEW trend and, EARLY in that trend.

Good Trading Success!

NOTE -
Please send any technical and Index-related questions for possible use in my next Trader's Corner article to support@optioninvestor.com with 'Leigh Stevens' in the Subject line.
 

Today's Newsletter Notes: Market Wrap by Jeff Bailey, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.

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