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Daily Newsletter, Wednesday, 06/13/2007

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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

Market Wrap

Introduction

Trouble loomed during the pre-market session today. The yield on the ten-year treasury note hit a five-year high this morning, with experts casting around for a reason and not finding any particular trigger. Chinese inflation notched higher and some foreign central bank members sounded a bit hawkish, according to one article. Demand was weak at a treasury auction.

However, if you read Jim Brown's Wrap last night, you know that this selling of bonds and subsequent rise in yields may be part of a weeks-long process of diversification out of dollar-denominated securities by China and other governments. If you're a technical trader, you know the part that momentum can play in a trending move, too.

Even momentum-drive moves must eventually pause, and that's what happened after the ten-year yields hit that early high. Yields dropped.

The pullback in yields allowed equities a bit of a breather before the afternoon's important Beige Book release. Equities gained, pulled back slightly, and then moved sideways, waiting for that release. The release did not produce any bad news. Equities continued the bounce that they had begun this morning, and yields continued the pullback they'd begun from that early high.

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Something else was happening, too. Both the U.S. dollar and the euro were gaining against the yen, perhaps relieving some concerns about the yen carry trade. In fact, the chart of the USD/JPY pair broke above the year's high. As I've been pointing out in charts for several weeks now, some correlation in the action of this currency pair and U.S. equities has been noted lately, so this move could have been deemed supportive of equities, too.

Annotated Weekly Chart of the USD/JPY:

The euro also gained against the yen today. Both developments at least corroborated the gain in equities whether or not they had any causative function. That's a question that's being debated by many of the world's economists these last few months. I'm not going to weigh in with a completely unlearned opinion but instead will acknowledge that there's some quibbling about whether the chicken or the egg comes first in this inter-market relationship.

Charts

One headline this afternoon noted that the Dow had posted its best one-day gain this calendar year. Many bulls applauded the strong gains today and many bears lamented them, but I'm more skeptical than the bulls for now. That could change as soon as tomorrow. The one thing that keeps me from being too skeptical is that USD/JPY breakout to a new yearly high, and you can bet I'll be watching that inter-market relationship tomorrow. Here are the rest of the charts.

Annotated Daily Chart of the SPX:

Many proclaimed the bullishness of today's action, noting the bullish engulfing candle. I don't think that candle is proof of anything yet, any more than yesterday's reversal of almost two days of gains was proof that the SPX was going to head lower. We have to consider not only the candle formation but where it occurred. This one occurred in what may well be a building consolidation zone, and they just don't have as much significance there. Look back to last summer and you can find day after day of alternating up and down movements, for several weeks before next direction was found.

We may know next short-term direction as soon as tomorrow, but for now we have volatility within a chop zone that's being established without yesterday being a clear breakdown or today being a clear breakout. Be careful about your expectations here. I wouldn't be surprised to see prices rise to test or pierce resistance tomorrow, but I also wouldn't be surprised for that resistance to ultimately hold, producing another consolidation Thursday.

Annotated Daily Chart of the Dow:

Annotated Daily Chart of the Nasdaq:

Annotated Daily Chart of the SOX:

Annotated Daily Chart of the RUT:

Annotated Daily Chart of the TNX:

Today's Developments

Today was a busy day for releases, with the afternoon's Beige Book release probably the most important of the day and one of the most important of the week. However, before that release, the day's slate began at 7:00, when the Mortgage Bankers Association released its weekly mortgage application volume survey for the week ending June 8.

The Composite Index, the headline number, increased 6.6 percent week over week on a seasonally adjusted basis and even more on an unadjusted basis. It was higher than the year-ago level by a hefty 16.1 percent. All component indices--refinance, purchase and conventional--increased, too.

Four week moving averages remain mixed, however. Refinancing activity remained at 38 percent of all applications for mortgages. ARM applications increased, a puzzle to me in a rising rate environment, although the average contract interest rate for one-year ARMs did decrease to 5.48 percent from the previous 5.74 percent. The average contract interest rate for a 30-year fixed-rate mortgage increased to 6.61 percent from the previous 6.35 percent.

An hour and a half later, May's Import and Export Prices and Retail Sales were both released. The Labor Department reported that Import Prices rose 0.9 percent, much higher than the predicted 0.2 percent, but still smaller than the gain seen in recent months. It should be noted, however, that April's Import Prices were revised higher with this report. Over the past 12 months, import prices have risen 0.2 percent. Excluding petroleum prices, which rose 2.7 percent, import prices still rose 0.5 percent, their largest gain in six months.

Export Prices rose only 0.1 percent, however. Some categories saw strong gains, but export prices in nonagricultural foods and distilled beverages fell 3.6 percent, and that depressed the headline number for U.S. exports.

Industry analysts believed that Retail Sales would climb 0.7 percent, recovering from the prior 0.1-percent drop. Instead, they shot higher by 1.4 percent. The Commerce Department tagged that as the biggest seasonally adjusted gain in almost a year and a half.

Why did recent same-store sales by retail chain stores and reports by automakers show more weakness? The seasonal adjustments the Commerce Department makes are different than those made by automakers and chain stores.

Gains were made across all categories of sales. Some pundits interpreted these figures as showing that the consumer hasn't been hit as hard as anticipated by higher gasoline prices. However, inflation, particularly in energy-related measures, did play a role in the gains. Industry experts assure market participants that wasn't the only reason for the gains. Excluding gasoline sales, sales rose 1.2 percent.

The combination of an increase in retail sales--strength for the economy--and a sharper-than-expected rise in import prices--troublesome on the inflation watch--may have contributed to that early rise in yields today.

April's Business Inventories appeared next, at 10:00. Economists forecast a rise of 0.4 percent, up from the prior 0.1-percent decline. Inventories met that expectation, gaining only 0.4 percent while sales climbed 0.7 percent. That drove the inventory-to-sales ratio down to 1.27, the lowest it's been since last August. Businesses report that they have about 39 days of sales in inventory, down slightly from the previous 40 days of sales. The strength seen in other areas wasn't true of auto retailers, however.

If demand is robust in the next months, this sets up businesses for a round of increased production and a subsequent boost in the GDP. The business inventories number isn't typically seen as a market moving release.

The API and Energy Department differed in their assessments of crude inventories, as they almost always do. The API reported that crude inventories climbed 1.7 million barrels while the Energy Department said they increased only 100,000 barrels. The API thought gasoline supplies fell by 3.1 million barrels while the DOE thought they were unchanged. The API reported a fall of 2.7 million barrels in distillate supplies while the Energy Department thought they rose 300,000 barrels.

The differences seemed more pronounced than the typically are. Crude futures climbed, but stayed within the consolidation formation that's been forming for several months, visible on a weekly chart. Weekly closes beneath the 50-sma and above the 20-sma have been the norm since the week of March 19, and nothing can be presumed about next direction until that pattern is broken. My charts produce a weekly 50-sma of 67.55 and a weekly 20-sma at 65.59, so the noose is tightening. Remember that these are weekly averages, and it's possible to pierce a weekly average intraweek yet hold to its resistance or support at the close of the week.

Then came the Beige Book, released at 2:00. Headlines trumpeted news that was considered good, with moderate growth and nothing alarming on the inflation front. All twelve districts reported growing manufacturing activity and consumer spending. Housing remained weak, with the South and the Midwest also suffering from the slump. All districts reported flat or declining mortgage lending. Inflation pressures were observed, but not growing worse. Those pressures included hiring, with hiring increasing in several regions. Rising energy and food prices also contributed to the pressures.

All in all, investors decided they hadn't heard anything that they hadn't heard before and reacted with relief. Those who would like to read the details can find this report, prepared by the Federal Reserve Bank of Philadelphia at this link.

The U.S. Treasury also produced its semi-annual report on currency manipulation. Experts did not expect the Treasury to cite China. As expected, the report did not cite China as a manipulator of currencies. Beats me, but that's what the Treasury Department said. In fact, none of our major trading partners was termed a manipulator. The Treasury Department did censure China, however, saying the country needed to move more quickly toward a stronger and more flexible currency. It was only for technical reasons that China escaped that classification as a manipulator, some concluded.

Weakness in Apple (AAPL) continued today. Last Thursday, AAPL had left a long upper shadow on its daily candle, suggesting that there had been some sellers waiting at the day's high.

Other stocks in the news were Boeing (BA) and Illinois Tool Works (ITW). BA boosted its 20-year forecast for its aircraft deliveries around the globe and Merrill Lynch upgraded ITW.

Lots of deal making still figured in the news. The Dubai government may buy Barneys New York from Jones Apparel, according to The New York Post, as quoted in a Marketwatch.com article. Investors have offered $46 a share for Biomet (BMET). Ceridian Corp.'s (CEN) largest shareholder apparently isn't happy with the deal CEN accepted from its buyers and has hired Lazard Freres to look for other deals. Early news reports noted that Lehman (LEH) had taken a meaningful position in SkyPower Corp. Alcoa (AA) might receive a counteroffer from Alcan (AL), Bear Stearns noted today.

Tomorrow's Economic and Earnings Releases

Tomorrow includes an economic release as important as this afternoon's Beige Book, if not more so. At 8:30 tomorrow morning, May's Producer Price Index (PPI) will be released, with expectations for the rise to moderate from the prior 0.7 percent to 0.5 percent.

The first quarter's Quarterly Services number appears at 10:00. That's not a number that I regularly follow, so I have little insight to provide.

The typical Natural Gas Inventories follows at 10:30, with May's Semi Book-to-Bill the last to arrive, at 6:00. This number can and does impact markets, but market participants may be paying far more attention to positioning their portfolios ahead of Friday's CPI than they are to the book-to-bill number.

Companies reporting earnings tomorrow include ADBE, BSC, CATS, DLM, GLBC and GS. BSC and GS continue the reporting among financials that has been going on all week, of course.

What about Tomorrow?

Tomorrow ends trading for SPX and many other index options for the June option-expiration cycle. OEX options trade through Friday, of course.

Some pin-them-to-the-number action is often typical for an opex Thursday after markets have stopped reacting to the early morning economic releases. This would fit with what we're seeing on the daily charts, too, with many indices mired in consolidation zones, caught between nets of support and resistance, and perhaps even needing to consolidate today's gains.

The PPI and the currency inter-market relationships are the wildcards, however. Those index charts look as if it will take a strong push to break through either support or resistance, and the PPI could deliver it. If we get a renewed influx of cash from those assured that they don't need to unwind their yen carry trades, that could, too.

Here's what's showing up on short-term charts.

Annotated 8-Minute Chart of the SPX:

Annotated 8-Minute Chart of the Dow:

Annotated 8-Minute Chart of the RUT:

Many factors seem right for a consolidation Thursday tomorrow, including the propensity for Thursdays to produce consolidation, the special propensity for an opex Thursday to do so, and the need to consolidate today's huge gains that stopped just shy of potential resistance in many cases. Remember that consolidation does not preclude a push higher that is then rebuffed.

However, that USD/JPY breakout argues against that conclusion, suggesting a stronger rise in equities while the pullback in yields at least allows breathing room for that to happen.

I'll be keeping a close eye on those inter-market relationships and suggest that you do so, too, looking for as many of them to be supporting your trade as possible. You can watch these relationships prior to the cash-market open, after the PPI is released, to get some idea about the earliest market reactions, at least. I literally would not rule anything out at this point, so be especially careful with your trades, watching stops and maybe keeping positions a bit smaller than is typical for you.
 


New Plays

New Option Plays

Call Options Plays
Put Options Plays
Strangle Options Plays
None None None

New Calls

None today.
 

New Puts

None today.
 

New Strangles

None today.
 


Play Updates

In Play Updates and Reviews

Call Updates

Ashland - ASH - cls: 61.77 change: +1.03 stop: 59.95

The market's big bounce on Wednesday fueled a 1.69% rebound for ASH. The rally didn't quite recoup yesterday's losses but ASH is definitely looking better here. We are somewhat skeptical of the bounce so readers may want to wait for a new relative high over $62.31 before opening new positions. Our target is the 200-dma near $64.50.

Picked on June 10 at $ 61.49
Change since picked: + 0.28
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 657 thousand

---

Avery Dennison - AVY - cls: 66.17 chg: +0.86 stop: 64.19

The rebound in AVY looks pretty good. Shares rallied past the $66 mark again and on above average volume. We would use today's move as a new entry point to buy calls. More conservative traders might still want to tighten their stops toward $64.80-65.00. Our target is the $69.75-70.00 range.

Picked on June 11 at $ 66.05
Change since picked: + 0.12
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 728 thousand

---

Baker Hughes - BHI - cls: 84.00 change: +1.19 stop: 79.95

Oil stocks got an additional boost today thanks to a rally in crude futures. BHI rose 1.4% and did regain yesterday's losses. Volume came in above average, which is normally bullish. The close at $84.00 looks like a potential entry point but readers might be better off to wait for a rise past $84.50 before initiating new positions. Our target is the $89.00-90.00 range.

Picked on June 04 at $ 84.26
Change since picked: - 0.26
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 4.3 million

---

FTSE/Xinhau China Index - FXI - cls: 116.83 chg: +2.11 stop: 111.90

The Chinese FXI rallied back above key support/resistance at the $116 level. This looks like a new entry point to buy calls. Our target is the $124.00-125.00 range. We would expect some temporary resistance near $120. We would consider this a more aggressive, higher-risk play.

Picked on June 11 at $116.75
Change since picked: + 0.08
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 2.4 million

---

General Dynamics - GD - cls: 80.19 change: +0.95 stop: 78.35

Shares of GD turned in a decent bounce with traders buying the dip near $79.00. The big volume behind today's move is very encouraging. While we remain wary with GD under $81.00 more aggressive traders might want to jump in right here. We do not want to hold over the mid July earnings report. Currently we have two targets. Our first target is the $84.50-85.00 range. Our second target is the $87.50-90.00 range. FYI: GD will be presenting at an investor conference on June 14th.

Picked on June 10 at $ 80.58
Change since picked: - 0.39
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 1.3 million

---

Global SantaFe - GSF - cls: 69.33 chg: +2.21 stop: 65.90

Yesterday GSF look poised to breakdown. Shares performed a u-turn today with a 3.29% rebound. Readers might want to buy this bounce but consider using a tighter stop loss. Our target is the $74.50-75.00 range.

Picked on June 03 at $ 68.86
Change since picked: + 0.47
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 4.8 million

---

China Life - LFC - cls: 47.86 chg: +0.86 stop: 45.75

LFC produced a 1.8% bounce but remains under resistance near $48.00. Aggressive traders might want to jump in early right here. We're sticking to our plan with a suggested trigger to buy calls at $48.25. More conservative traders may want to set their trigger to buy calls at $48.51. If triggered our target is the $54.00-55.00 range. We do expect some temporary resistance near $51.00.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.00
Earnings Date 08/25/07 (unconfirmed)
Average Daily Volume = 1.0 million

---

Vangard Emerg.Mkts ETF -VWO- cls: 88.29 chg: +1.92 stop: 84.99

The emerging markets VWO rebound with a 2.2% gain. The ETF looks poised to rally towards the $90 zone. We're not suggesting new positions. Our target is the $89.85-90.00 range.

Picked on May 16 at $ 86.15
Change since picked: + 2.14
Earnings Date 00/00/00 (unconfirmed)
Average Daily Volume = 416 thousand

---

XTO Energy - XTO - cls: 61.23 chg: +0.91 stop: 56.74

XTO continues to look strong and shares rose 1.5% on Wednesday. If you're looking for a new entry point and plan to aim for the high end of our target range then consider this a new entry point. However, if you're buying calls now we'd suggest a tighter stop loss closer to $60.00. Our target is the $64.75-67.50 range.

Picked on May 27 at $ 57.63
Change since picked: + 3.60
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 3.2 million
 

Put Updates

Allegheny Tech - ATI - cls: 107.53 chg: +0.83 stop: 112.15

ATI did produced a bounce on Wednesday but the stock seemed to under perform the rest of the market. Shares only rose 0.7%. We suspect the bounce isn't over yet. Readers can watch for a failed rally under the $110 level as a new entry point. More conservative traders may want to wait for a new decline under $106. We have two targets for ATI. Our first target is the $100.50-100.00 range. Our second target is the $95.50-95.00 range. More aggressive traders may want to aim for the simple 200-dma (currently near $92).

Picked on June 12 at $106.70
Change since picked: + 0.83
Earnings Date 07/25/07 (unconfirmed)
Average Daily Volume = 2.1 million

---

Anixter Intl. - AXE - cls: 70.93 chg: +1.25 stop: 71.55

It's not looking good for the bears in AXE. Shares rallied back above the $70 mark and its 50-dma this time. Readers may want to exit early to limit their losses. We're not suggesting new positions.

Picked on June 07 at $ 68.99
Change since picked: + 1.94
Earnings Date 07/24/07 (unconfirmed)
Average Daily Volume = 520 thousand

---

Diamonds - DIA - close: 134.80 chg: +1.88 stop: 135.26

It was a very big day for the Dow Industrials - the biggest one-day move this year. The index (and the DIA) is now sitting just under resistance near $135. A failed rally under $135 could be used as a new entry point to buy puts. Our target is the $130.50-130.00 range. There is potential support at the rising 50-dma currently near $131.40.

Picked on June 11 at $134.24
Change since picked: + 0.56
Earnings Date 00/00/00
Average Daily Volume = 10.8 million

---

Gilead Sciences - GILD - cls: 80.34 chg: +1.42 stop: 82.55

The bounce in GILD is starting to look a lot stronger after today's 1.79% gain. The stock should still have some resistance near $81 and its 50-dma overhead. Wait for a new decline under $80 or $79 before considering new puts. Our target is the $75.25-72.50 range. FYI: The stock is set to split 2-for-1 on June 25th. The P&F chart shows a new quadruple bottom breakdown sell signal with a $71 target.

Picked on June 07 at $ 79.90
Change since picked: + 0.44
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 4.1 million

---

S&P 100 Index - OEX - cls: 696.06 chg: +9.90 stop: 700.25

The OEX followed the big bounce in the S&P 500 and rose more than 1.4%. This huge rebound negates the bearish reversal signal from the previous three days yet the OEX remains under resistance near $700. Watch for a failed rally under 700 as a new entry point for puts. More conservative traders may want to cut their losses here given the lack of follow through lower. We have two targets. Our first target is $685 just above the rising 50-dma. Our second target is the $681-680 range. Really aggressive traders may want to hang on and aim for a decline toward $675. Trading the OEX is not for everyone so we consider this a higher-risk, more aggressive play.

Picked on June 11 at $693.73
Change since picked: + 2.33
Earnings Date 00/00/00
Average Daily Volume = 1270

---

QUALCOMM - QCOM - cls: 42.60 change: +0.79 stop: 44.05

Today's move in QCOM is bullish. The stock rose 1.8% and broke through short-term technical resistance at the 10-dma. The next test will be the $42.00 level and then again near $44 and its 50-dma. Wait and watch for a new failed rally before considering new bearish positions. More conservative traders may want to wait for a decline under $41.00 before opening positions. We're aiming for the $37.00-36.00 range.

Picked on June 10 at $ 41.87
Change since picked: + 0.73
Earnings Date 07/18/07 (unconfirmed)
Average Daily Volume = 18.0 million

---

Regency Centers - REG - cls: 74.63 chg: +1.11 stop: 77.76

Many of the REIT stocks produced huge rebounds today as M&A rumors fluttered through the sector. REG merely kept pace with the bounce in the S&P 500. A failed rally under $75 or the $76 level could be used as a new entry point for puts. There is some support near $72.50 but our target is the $70.50-70.00 range.

Picked on June 11 at $ 74.68
Change since picked: - 0.05
Earnings Date 08/01/07 (unconfirmed)
Average Daily Volume = 374 thousand

---

Weyerhauser - WY - cls: 82.00 chg: +1.73 stop: 82.05

Given the market's recent weakness it looked like WY would break down from its neutral consolidation pattern. After today's big market bounce and a 2% gain in WY the stock might be ready to breakout higher instead. We're not fully convinced yet so we're sticking to the plan for now. The 100-dma has been support in the past so we are suggesting a trigger under the $100-dma at $79.34. More aggressive traders may want to jump in early with a trigger at 79.49 under last Friday's low. If we are triggered our target is the $75.00-74.00 range. The $75 level is likely to be psychological support and the $74 level was support back in March. The Point & Figure chart looks very bearish with a $61 target.

Picked on June xx at $ xx.xx <-- see TRIGGER
Change since picked: + 0.000
Earnings Date 08/03/07 (unconfirmed)
Average Daily Volume = 2.1 million
 

Strangle Updates

None
 

Dropped Calls

None
 

Dropped Puts

AvalonBay - AVB - cls: 128.96 chg: +8.07 stop: 125.55

Shares of AVB hit our stop loss at $125.55 early this morning. The stock soared from $121 to about $129 in 15 minutes on buyout/takeover rumors. This is another example of why stop losses are important. You never know when the rumor mill is going to move against you.

Picked on June 11 at $122.84
Change since picked: + 6.12
Earnings Date 07/26/07 (unconfirmed)
Average Daily Volume = 903 thousand

---

ESSEX Property - ESS - cls: 122.12 chg: +4.98 stop: 122.51

ESS got caught up in the REIT rebound today. Talk of buyouts and takeovers in the sector fueled a big bounce and ESS hit our stop loss at $122.51. Volume came in very big on the move.

Picked on June 11 at $119.47
Change since picked: + 2.65
Earnings Date 08/02/07 (unconfirmed)
Average Daily Volume = 344 thousand

---

Vital Images - VTAL - cls: 25.71 chg: +0.07 stop: 29.05

Target achieved. VTAL under performed the market and its peers all day. Shares hit an intraday low of $25.14, which was enough for our target in the $25.15-25.00 zone. Volume did pick up on today's session and the stock might try and bounce with the $25 level acting as round-number support.

Picked on May 16 at $ 27.99
Change since picked: - 2.28
Earnings Date 04/26/07 (confirmed)
Average Daily Volume = 191 thousand
 

Dropped Strangles

None
 


Trader's Corner

Reviewing Two Indicators

My last two Trader's Corner columns were on respectively, the construction and use of Bollinger Bands [5/23 and seen by clicking here] and on the use of the Arms Index or TRIN [5/30, web page reachable by clicking here]

Since the question at hand is what's happening to this roller coaster trend, I like to write on practical tools that might shed some light on the current market direction, I will review and revisit TRIN and Bollinger bands for clues. Plus I'll look at some (chart) pattern) analysis that also might provide some guidance on the current trend.

** E-MAIL QUESTIONS/COMMENTS **
Since I rarely have any good ideas that a Subscriber doesn't put in my head, PLEASE send any technical and Index-related questions for answer to Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the Subject line.

BOLLINGER BANDS

Bollinger Bands (BB's) combine a centered moving average, usually 20 days and not usually shown as part of the indicator. BB's basically combine the moving average envelope technique with a measurement of recent price volatility to determine the optimal placement of the upper and lower lines. The purpose of the Bollinger Band indicator is the same: are current price levels 'relatively' high OR low?

Unlike the moving average envelope lines I use a lot, Bollinger bands are plotted two 'standard deviations" above and below the moving average.
John Bollinger suggested the use of a 20-day moving average and TWO standard deviations was derived from his long-time studies of stocks using daily data. His main use of them was for pattern recognition and trend analysis.

A key thing that we are always looking to determine in terms of pattern recognition is where tops and bottoms may be located. The recent decline in the S&P 500 (SPX) to the area of the lower Bollinger Band (4 touches) as seen in my first chart below highlighted at the green up arrow, looks to be significant in suggesting that SPX has reached a bottom, at least for now; it remains to be seen if these same recent lows will hold over time.

Another aspect of a pattern we tend to see with the Bollinger Bands is the tendency for volatility 'spikes' as suggesting possible trend reversal points. 1-2 or more days where intraday highs or lows pierce the BB's are often associated with reversals as seen at the blue up and down arrows.


PATTERN RECOGNITION:

Standard pattern recognition using just price, not indicators, is suggesting that the S&P trend remains up. One definition of whether a trend remains intact is whether a reaction low holds above the prior deepest pullback low, which in the case of SPX is around 1490 as highlighted on my next chart. The envelope lines on THIS chart below are moving average envelopes where the lines are set at percentages above and below a centered 21-day moving average. The lower envelope line down in the 1465 area doesn't appear to be a help in determining close in support.

The 21-day moving average does act as a measure of near resistance. A close ABOVE this average tomorrow and the next day would further suggest that the up trend was back on track.

BOLLINGER BANDS ON THE NASDAQ CHART:

The recent decline in the Nasdaq Composite (COMP) didn't fall to the area of the lower Bollinger Band (BB) on the daily chart, so appears to be less helpful in determining if this Index hit at least an interim bottom over recent days. The spikes up above the UPPER BB seen at the recent highs were not seen at recent lows, unlike late-February. We turn to a conventional chart analysis to see how well the COMP trend has held up.


PATTERN RECOGNITION:

The use of the level line and (up) trendline better highlight how COMP is, to date, holding an uptrend pattern. First, and most important in terms of the definition of the trend technically, is that COMP has help above its prior reaction lows AND with those lows forming a most recently re-drawn up trendline as seen on my next chart.

Moreover, it's usually significant that AFTER a prior major top has been pierced (in COMP, its late-February peak at 2531), that subsequent pullback lows stay above this prior top; i.e., resistance, once exceeded, 'becomes' support later on. COMP closed today back above its 21-day moving average which is a bullish plus, assuming that TOMORROW'S close does the same thing in terms of our key trading average.

On the subject of patterns, we can't yet rule out the formation of a Head & Shoulder's (H&S) top pattern in the Composite: if 2600 is NOT exceeded again (on a further rally), the level equal to the peak of a possible 'left shoulder', a H&S top could be forming.

Just to note again that the moving average envelope lines shown on the COMP chart above are not the Bollinger Bands, and the lower line doesn't adjust for volatility, so is WELL UNDER current levels. If COMP fell below 2530 and kept going, then the lower envelope line might would be a different indicator we turn to, suggesting a possible 'maximum' downside target; i.e., to around 2470.

ARMS INDEX OR 'TRIN'

The Arms Index (aka 'TRading INdex' or "TRIN) is widely followed. The Arms Index (TRIN) compares the number of (traditionally, NYSE) stocks up to the number of stocks down in a given time and relates that to the advancing and declining volume at the same snapshot in time. TRIN serves to ascertain if the advancing stocks are receiving more or less of the volume, so as to assess the internal pressures of the market.

THE CALCULATION
The formula for the Arms Index or TRIN is (Advances/Declines) / (Advancing Volume/Declining Volume)
An example used in my aforementioned Trader's Corner article from a couple of weeks ago is:
NYSE Advances: 2,326; NYSE Declines: 1,014
Advancing Volume: 1,220,762,920; Declining NYSE Volume: 315,909,930

Dividing advances by declines equals 2.29. Dividing advancing volume by declining volume for the day above equals 3.86. Dividing the first result by the second equals an Arms Index/TRIN that day of .593, a very bullish TRIN. A reading of 1.00 is a 'standoff'. Numbers below 1.00 are bullish in general and an Arms Index or TRIN above 1.00 is bearish.

My last chart is that of the New York Composite Index (NYA), the index of all the NYSE stocks. The NYA is the perfect correlating Index to show with the Arms Index as this index uses the total NYSE stocks, advancing versus declining, in its calculation. In terms of the NYA chart pattern, I take the dominant trendline currently to be the upper one, suggesting a major resistance coming in around 10,000 in the NYA.

The 1-day Arms Index (TRIN) readings are back and forth above the line and don't tell us much except when TRIN changes intraday from a reading above 1 to below 1 and vice-versa. Floor and day traders will tend to follow the intraday TRIN readings.

A common use in TREND analysis is to utilize the 5 and 10-day TRIN averages. These two are mixed currently. Today's 5-day TRIN crossed into bullish territory. The 10-day TRIN is above the 1.00 line and remains bearish. The 10-day TRIN has been mostly in bullish territory since late-March. Used as a 'trigger' to get into stocks, TRIN can be ok. For timing index options entry, it's a lagging indicator. I pay attention to the 5 and 10-day TRIN as a means to keep near-term volatile price swings in some perspective.

And I'm most comfortable on the long or short side of the market when BOTH the 5 and 10-day averages are reading the same as to which side of the market I'm on such as whether I'm long calls or puts. However, I don't wait to get in based on one or both going into bullish or bearish territory. That would be too late for me to get on board a market trend when trading options.

GOOD TRADING SUCCESS!
 

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

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