The major indices shrugged off early morning weakness to finish mixed, but the downtrodden AMEX Gold Bugs Index ($HUI.X) 210.32 +5.42% surged as rosier European economic data lifted the euro to a two-month high against the greenback.
Eurozone data showed after a measure of the services economy showed expansion, edging up to 53.5 in July from 53.1 in June and had some economists in the region sensing a turn for the better as the euro-zone economy sputters along. Also fueling euro gains were rumors of Saudi Arabian and Kuwaiti buying of euros.
Now take note of this all you technicians (currency, commodity, stock, bond, any tradable security) out there. Some euro technicians say today's action in the euro also found a key break above technical resistance at the $1.2250 level, where several times this past week, the euro kept hammering away at this level, only to be knocked back. That is, before today's successful charge took the euro as high as $1.2343 intra-day.
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I'm using today's "commentary" of euro technicians to solidify a key technical measure that can sway one side of a trade to another. It is thought by many that the more times a HORIZONTAL level is tested as resistance, or support, once broken, that level can become a MASSIVE reaction point for a strong directional move in the direction of the break!
I'll touch on this in one of my "key sectors for the month," and traders that have been following my commentary over the years, will know this equity sectors as a pretty good indicator of BULLISH aggression, or lack thereof.
Economic data released here in the U.S. had the Institute of Supply Management nonmanufacturing index slipping to 60.5% in July from 62.2% in June. Economists were expecting some slippage, but to a reading of 61.4%. As a reminder, this is a diffusion index, where readings above 50% signal expansion, while levels below 50% signal contraction. This services index has been above 50% for 28 months. While the overall ISM reading slipped to 60.5%, July new orders rose to 61.9% from June's 59.5%. The employment component fell to 56.2% in July, after a 57.4 reading in June. The prices-paid component jumped to 70.3% from 59.8%, its highest level since December. Ralph Kaufman, chairman of the ISM's nonmanufacturing survey committee, said survey participants blamed the increase entirely on higher oil prices.
Speaking of oil, September Crude Oil futures (cl05u) settled down $1.03, or -1.66% at $60.86 after spiking to $62.50 in the first minutes of this morning's floor trade. The morning highs came just shy of the contract high of $62.90 set on July 8, 2005.
Weekly inventory data showed crude oil inventories rose by a very modest 196,000 barrels, the first build after four weeks of decline! Gasoline inventories fell by a sharp 4.02 million barrels, while distillate inventories rose by 1.49 million barrels.
September Heating Oil futures (ho05u), a distillate, settled down $0.0362, or -2.10% to $1.6889. Meanwhile, September Unleaded Gas futures (hu05u) settled down $0.0107, or -0.60% at $1.7709.
The longer-dated 30-year Treasury yield ($TYX.X) fell 3.5 basis points to 4.505% with the Treasury Department confirming it will reintroduce the 30-year bond with semiannual auctions beginning early next. Buying was evenly spread among the major maturities with the shorter-dated 5-year yield ($FVX.X) falling 3.6 bp to 4.127%, while the benchmark 10-year yield ($TNX.X) was down 3.6 bp to 4.300%
U.S. Market Watch - 08/03/05
What a difference a day makes with the AMEX Gold Bugs ($HUI.X) 210.32 +5.42% now up 6.81% since last Wednesday's close (see 5DyNet% column).
How about them HMOs!? Shares of Cigna (NYSE:CI) $115.57 +6.61% surged to an all-time high after the employee benefits provider joined recent other health insurers such as Aetna (NYSE:AET) $76.89 +0.01% and Wellpoint (NYSE:WLP) $73.96 +0.80% in posting forecast-beating results.
In last Wednesday's Market Wrap I noted that the "healthcare" sectors had been a drag on the broader S&P 500, and I do think the week-to-week gains helped broader-market bulls.
Tonight I'm going to focus in on the FINANCIALS, with some focus on the S&P Banks Index (BIX.X), which is at a near-term levels of rising support.
But first, let's talk a little about "bear season."
S&P Depository Receipts - Daily Intervals
In last Wednesday's Market Wrap, we did some "fine tuning" on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26%, which would have close juuuust above the 50% retracement of $12.66.
For several weeks I've been reading about "bullish complacency" as depicted by the various volatility measures (VIX.X, VXO.X, VXN.X). However, I could never find anyone that could show me, or prove to me, that it was BULLS doing all the call buying and put selling to have these various volatility measures falling to multi-year lows.
Last night I was snooping around for any confirmation to my thoughts that it might be BEARS (often times their own worst enemy) that might be doing the call buying and put selling. After all, options were "created" as an instrument to help hedge RISK. Recent short interest data on the S&P Depository Receipts (AMEX:SPY) $124.72 +0.26% shows that SHORT INTEREST on the SPY has built to a 12-month high! Meanwhile the SPY is at a 4-year high!
In orange, I've tried to benchmark the 06/16 and recent 07/15 dates with short interest readings.
In my opinion, "bear season" is in full swing and the Division of Wildlife hasn't published any definitive dates as to when it will close.
Now, I know what a bear that is short below $123.65 is probably saying. "Those bulls haven't shown me anything. Yeah... you got your healthcare boost last week, but I'm not sweating things at all. I'm as cool as a cucumber."
But whether YOU or I am bullish/bearish this broader market measure, don't forget that there's roughly 113.1 million shares on the wrong side of the trade at tonight's close.
On a hot summer's night, when the humidity is high, even a cucumber will sweat.
S&P Banks Index (BIX.X) - Daily Intervals
"Financial" represent roughly a 25% weighting in the SPY/SPX and while the more regional S&P Bank Index (BIX.X) is not a full representation of "financials," it is a sector/index I like to use (in addition to the BKX.X, XBD.X and IUX.X, which I group together in our U.S. Market Watch).
Do you see how the BIX.X on a technical basis has been of NO HELP to the SPY/SPX bulls in the last couple of weeks? But note some of the same SIMILARITIES of a reverse head/shoulder pattern, as well as a bullish resistance trend (thick red line).
Trading and technical analysis is so much of a "what if" type of question.
"What if" the BIX.X breaks down below its near-term bullish trend and breaks below what looks to be the formation of a "right shoulder." Aha! That is perhaps a BEAR'S case for still shorting/putting the SPY/SPX.
But.... "What if" the BIX.X rebounds sharply and tries to reclaim its bullish resistance (thick red trend)?
In essence, the BIX.X can perhaps become our "key" index/sector of the week/month. It could well be the indicator of just how long bear season is going to last.
Why do I show a BLUE retracement and a PINK retracement?
The BLUE retracement may be thought of as a LONGER-TERM bull's retracement. Say for example the "smartest bull" bought the May 2004 relative lows of 322.50 and that bull also sold the tippy-top high of 382.78. It's not uncommon for those bulls to come back for seconds on a 61.8% retracement of that range.
The PINK retracement may be thought of as an INTERMEDIATE-TERM bear's retracement. Say for example the "smartest bear" sold the December all-time highs. Hey... you've got to be very smart, or very lucky to have done that. But let's assume "smart money" sold that high and THEN bought the recent 04/21/05 low of 340.63.
Hmmm... maybe a little bit STRONGER than a bear would have wanted above this PINK 61.8% retracement, and maybe, just maybe, the BIX.X firms a bit at 50% of PINK retracement.
All I want traders and investors to do is get the feel/observation of how this index/sector could be pivotal in comings sessions.
Over the past 20 sessions, I see that the BIX.X is up just 0.81%, the BKX.X is up 2.15%, the XBD.X is up 5.94% and the IUX.X is up 3.5%.
What I'm doing here tonight is focusing on the BIX.X, which is the WEAKEST of the financial sectors/indices in our U.S. Market Watch.
I like to monitor any "weakness" for further weakness, or renewed STRENGTH.
Also remember... "healtchare" represents roughly a 25% weighting in the SPY/SPX.
OK... now let's revisit some talk among traders regarding the euro, and how it hammered against a key technical level of $1.225 and finally broke through.
I'm not a currency trader, and I'd be lying to you if I told you I could "feel the power" of today's break higher. However, maybe today's $HUI.X surge was triggered by such a break higher in the euro vs. dollar.
Hmmmm.... I could perhaps envision a bunch of angry villagers pounding and pounding and pounding at the castle gates with their battering ram. For the BIX.X it may well be the 360 level that seller are trying to break.
One of my "key sectors" for buyers showing some aggressiveness is the CBOE Internet Index (INX.X) 203.19 -0.31%. Where in recent Market Monitor notes, I've been focusing on INX.X 204.50, let's round up to 205.00 to keep a round number.
My thoughts of the INX.X being a sector/index to represent how aggressive buyers are getting probably lingers from the "Internet Bubble." Yes... "no earnings and a pipe dream." In March of 2000, this index topped out at 944.
CBOE Internet Index (INX.X) - Daily Intervals
Here's an index I like to associate with buyers being "aggressive" or "not aggressive." No, I don't have "reverse head/shoulder pattern on the brain," but these patterns continue to show up, and from what I've seen, necklines keep getting broken to the upside, and the "right shoulders" held when the pullbacks took place.
See how the BIX.X becomes a "test for strength, or weakness on the current pullback.
See how the INX.X can become a test for strength, or weakness on the current bounce?
When things (indices/sectors) get in unison (up/down) that's when the powerful moves can come for the major indices. To the upside, it is when all the buyers, including short-covering bears, and suddenly convinced bulls all start getting on the same side of the trade. To the downside is when all the sellers get in unison, which includes convinced bears and doubtful bulls.
Recent short interest data in the SPY would suggest to this analyst that bears should not be overly confident, and bulls might start getting aggressive.
Danaher - DHR - close: 56.67 chg: -0.01 stop: 53.99
Why We Like It:
BUY CALL SEP 55.00 DHR-IK OI=2639 current ask $2.65
Picked on August 03 at $ 56.67
CR Bard - BCR - close: 64.45 chg: -1.46 stop: 67.51
Why We Like It:
BUY PUT SEP 65.00 BCR-VM OI= 90 current ask $3.90
Picked on August 03 at $ 64.45
F5 Networks - FFIV - close: 38.76 chg: -2.24 stop: 42.51
Why We Like It:
BUY PUT SEP 40.00 FLK-UH OI=524 current ask $3.00
Picked on August 03 at $ 38.76
Alliance Res.Part. - ARLP - cls: 91.41 chg: +1.94 stop: 91.01
There is no change here in ARLP. The stock managed a small bounce from the $90.00 level this morning and then churned sideways. This is a very speculative, high-risk play where we are trying to scalp a few points if ARLP finally succumbs to profit taking. We are suggesting an entry point at $89.39 to open the play. Our initial target is the $85.00-84.00 range.
Picked on August xx at $ xx.xx <-- see TRIGGER
Fedex Corp - FDX - close: 85.50 chg: +0.74 stop: 86.01
The momentum in the Dow Transportation index is waning and the TRAN looks poised to breakdown under technical support at its rising 10-dma. That would be good news for our play in FDX, which continues to struggle under its own simple 50-dma. We are suggesting that traders use a trigger at $82.85 to buy puts.
Picked on July xx at $ xx.xx <-- see TRIGGER
Fannie Mae - FNM - close: 55.40 chg: -0.47 stop: 59.01
FNM continues to move the right direction for us. The relative weakness is a good sign for the bears. Our target is the $51.50-50.00 range. Traders can probably expect an oversold bounce from the $55.00 level but watch for it to fail under its 100-dma.
Picked on July 27 at $ 56.49
Google - GOOG - close: 297.23 chg: -1.96 stop: 300.01
Today's failure to breakout over the $300.00 level may be a clue to GOOG's direction. Very aggressive traders might want to consider bearish plays here. We're feeling aggressive enough with a trigger to buy puts at $284.50, under the recent low and its simple 50-dma.
Picked on July xx at $ xx.xx <-- see TRIGGER
Lehman Brothers - LEH - cls: 106.65 chg: +0.05 stop: 108.01
There is no change in our strategy with LEH. The stock continues to oscillate between $105.00 and $107.00. We would probably not suggest new bearish positions until LEH trades under $105.00. Our target is the $100.00 level before the August $100 puts expire.
Picked on July 21 at $105.13
3M Co. - MMM - close: 74.19 change: -0.69 stop: 76.77
This could be a new bearish entry point. We've been suggesting that traders wait for MMM to trade under the $74.00 level again before buying puts. Well, MMM hit $73.92 late this afternoon. Listening to CNBC today we heard one of their guests label MMM as a "sell" candidate since the company's earnings are flat.
Picked on July 19 at $ 74.29
Panera Bread - PNRA - close: 57.85 chg: +0.11 stop: 60.01
We are running out of time here with PNRA. We only have three more trading days. The plan is to exit on Monday afternoon at the close to avoid holding over PNRA's Tuesday morning earnings report. The six-week trend is bearish and if the markets could just give us a decent sell-off then PNRA might really pick up momentum. Our target is the $52.50-51.00 range.
Picked on August 1 at $ 57.49
AutoZone - AZO - close: 103.80 chg: +5.04 stop: 100.01
We can thank SmithBarney for today's rally in AZO. The analyst firm upgraded the stock to a "buy" and slapped a $115 price target on the stock. Investors responded positively and shares gapped open at $101.00 and then ran higher. This is a significant breakout over what was a potential double-top pattern with resistance at the $100.00 level. We were stopped out at the open at $101.00.
Picked on July 25 at $ 98.13
Infosys Tech. - INFY - cls: 74.52 chg: +2.24 stop: 74.05
We have been stopped out. INFY out performed the U.S. markets and the software sector with its 3% rally today. We suspect this is a reflection of the strength in the Indian stock market, which once again hit another new all-time high with a sharp spike this morning. The move over $74.00 in INFY, which put it back into the gap down, hit our stop loss at $74.05.
Picked on July 20 at $ 69.92
OIN SUBSCRIBER QUESTION
"1560 is next lower support in my estimation; a move to this level would 'fill in' the upside gap from earlier in the month (July) and is a natural support point technically and fundamentally."
[This question related to my weekend Index Trader wrap of 7/30 and which is viewable online by clicking here.]
In the example of an upside gap, there is a price point or zone left where would-be buyers would have liked to have purchased, but sellers were not willing to sell in this area and higher prices were required to induce them to sell.
On the way back down, when prices fall into the 'gap' area, there are often or usually willing buyers who would like to buy the index (or stock) at the low end of the gap - where they couldn't before. This is, so to speak, a 'fundamental' reason as opposed to the 'technical' reason simple that the gap is being 'filled in'.
I am stretching the meaning of 'fundamental' here. It's more about the underlying market dynamic related to the 'technical' concept that gaps tend to act as support (or resistance) areas.
OIN SUBSCRIBER QUESTION
How about discussing why the different indexes are diverging and what if anything we can make of this? The Russell is going up strongly but the OEX is lagging. The broad market is going up, but not the big-cap stocks so much. NDX is lagging the Nas Composite quite a bit.
A rising trend in oil prices may not spell trouble for stocks, as we've been seeing lately, as crude gets above $60. We know that rising interest rates do spell trouble. There is an 'inverse' relationship between interest rates and stocks; i.e., they tend to move in OPPOSITE directions. If bond yields are going up, over time there is a point reached where this spells trouble for equities.
It's not so easy to always figure relationships between market sectors. Dow had his theory that new highs in the Dow 30 (INDU) without the Dow Transportation average (TRAN) also following suit, spells trouble for INDU and the economy; e.g., this divergent pattern may show that goods are still being produced, but shipments may be lagging in an inventory buildup. Conversely, TRAN going to a new high, without INDU doing the same, is a Dow theory 'divergence' and could suggest that the economy is not as strong as we think.
By the way, the Transport (TRAN) average has had a tremendous move rally from its 2002 weekly closing low (2027). With its Mch weekly close around 3800, the transport average surpassed its 2000 weekly closing top at 3742.
The Dow (Industrials) would have to close above 11723 to make a similar new high. Right now INDU is seriously lagging what TRAN has done. Perhaps something to keep in mind for later to see how this unfolds.
As regards indexes and sector indexes that have options with some liquidity and widely traded, I find that it's best to trade each index independently.
For example, if BOTH the Oil Stock Index (OIX) and the S&P 500 (SPX) are going up strongly, trade each on the basis of what each chart pattern tells you. I don't assume that rising oil prices are going to necessarily spell trouble for the S&P. Of course, the major oil and oil service stocks are huge companies and well represented in the capitalization weighted SPX.
But there is a tendency, especially on days when a sharp rise in oil prices was said to be a 'reason' for a drop in the market, to think that the trends and the relationship between this sector (OIX) and the broader big-cap SPX index might be to go in opposite directions.
There can be a big lagging tendency, which was true in 2003, when OIX (and oil prices) ran up substantially, versus the minimal rise in SPX. On a percentage basis, the run up in OIX in recent months has been substantially greater than the broader market. Rising oil prices: much better for Exxon, not terrible for the market unless it's an energy price 'shock' that puts us in recession. Hey, maybe if oil prices moderate ahead, SPX will get to the top end of ITS uptrend channel.
I mentioned the Russell 2000 Index (RUT) as a sometimes 'bellwether' (predictor) for the broader big-capitalization indices like the S&P 500 (SPX) or the Nasdaq Composite (COMP). Very strong rallies in the RUT can be a harbinger of a rally in the many, versus the few. Where market participants and money mangers start looking (and finding) 'value' in the smaller companies in the Nasdaq Composite for example.
I didn't fully appreciate the strength of the COMP advance, because the more common situation of the big-cap Nasdaq stocks 'leading' the Composite was not the case on this most recent strong advance in tech move. Actually, as it went, strong moves in 1-2, or a few, big 'name' Nasdaq stocks (e.g., AMZN; or, this week, in MSFT) plus rallies in a LARGE number of smaller tech company stocks, has been enough to propel COMP substantially higher, while the narrower all big-cap Nasdaq 100 lags.
In terms of 'bellwether' sectors, you can't beat the leading role of the Semiconductor Index (SOX), as semiconductor chips are so vital in producing such a wide-range of technical products. As SOX goes, so goes tech so to speak.
I didn't make quite make enough of the fact that SOX last week consolidated in a 'bull flag' pattern, that suggested that another strong spurt higher was likely, which would also 'lead' both the Nasdaq Composite and the Nasdaq 100 (NDX) higher this week.
SOX and NDX were also kind of 'leap-froging' over each other. NDX had consolidated in a (bull) flag pattern the week before last and the index had seen upside follow-through last week. Then SOX formed a similar flag pattern last week, suggesting that NDX might have some more strength ahead also.
Looking ahead, both the chip sector (SOX index) and the Nasdaq 100 (NDX) have some upcoming 'tests'. SOX has nearly retraced 2/3rds or 66% of its last major decline (from Jan Sept of '04). If there is a close over 490 in SOX, not reversed the following day, or in subsequent days, it will suggest that this index could eventually challenge 560, its January high of last year. Conversely, if SOX cannot rise above 490, it may spell trouble in the related NDX, the options of which are more broadly traded.
Even more significantly I think, NDX is nearing its December January double top of last year at 1635 and highlighted by the dashed level on the chart above. A close over 1635, not reversed in subsequent days, will suggest upside potential to around 1660.
One index may reverse, or 'break out', first and act as a bellwether for the other; a reason why it's good to look at both. I tend to keep some charts where I see one under the other or have a 'page' of key index charts for daily/weekly comparison.
Good Trading Success!
Today's Newsletter Notes: Market Wrap by Keene H. Little, Trader's Corner by Leigh Stevens, and all other plays and content by the Option Investor staff.
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