Posted 07:45 CST
Equity Index Update
Monday November 28, 2005
The index markets continued their rapid ascent last week as players on the sidelines used the FOMC minutes, released on Tuesday afternoon, as a reason to get into the current rally. Wednesday and Friday's action was muted, at best, due to the holiday. Today, the indices are called to open higher as the SPZ is trading above its high from last week at 1272.50, up 2.50 overnight. Retailers are reporting sales gains that came in above estimates, Crude Oil is sharply lower, the dollar is mixed, fixed income is moderately lower and the metals are sharply higher.
The indices have been in a vertical move since mid-October's trading lows and are poised to challenge key psychological levels shortly. These levels are DJIA 11,000, SPX 1275, NDX (already there at 1700) and the Russell 2000 at 700. I suspect these levels will hold some value as a point of reflection and should lead to a breather. However, in a breakaway move like this, forecasting a breather should not be confused with getting short. A couple of weeks ago, I discussed at length the need for traders not to "lose" their long positions during sideways consolidation. That consolidation occurred between 1229 and 1215 in the SPX. I would argue that the market is due for a similar consolidation phase, not a correction. Having said that, with such strong historical tendencies for higher prices around the first few trading days of December, I wonder if the pause may not happen until next week? If this scenario turns out to be correct, there is a chance the SPZ could see 1300 by Friday's bell. The more likely scenario is a test and failure of the above levels today, followed by moderate losses in the market that get reversed in a big way on Thursday, the first day of trading in December.
One issue that has me concerned is the current ramping up of my Standard Deviation readings. Using a 22 day STD reading, the SPX is currently registering a +/- 1 STD of 21.54, the highest reading since last NOVEMBER'S reading of 30. The importance of this reading is more akin to a yellow light when driving. The odds for a consolidation or minor pullback have been historically their greatest when this reading breaks above 20. Another light flashing caution is the moving average extension. This reading measures the % difference between the simple moving averages (200, 135, 50 and 20) and the current index price. The Midcap 400 and NDX are trading at resistance levels of approximately +10% from their respective 200 day MA's. Since the bull move began in 2003, neither index has crossed above or below the 10% threshold for more than a couple of sessions. It is worth repeating that I use this reading as an âexit typeâ of reading from my positions. Currently, it is flashing yellow.
The NDX settled at 1700 on Friday. That level had been my trading target for long positions, accordingly I am selling out 65% of my NDZ long position on the open this morning. I will carry the other 35% into December option expiration, where I plan to exit that Friday. The Midcap 400 (EMDZ mini contract) continues to hold at all-time highs, but with my extension reading flashing yellow, I will cover 60% of my long position on the open. Technically, keep a close eye on the SPZ at 1275 as it should pose key resistance. Support remains between 1268 and 1266.
Globally, the Nikkei is closing fast on the key 15,000 level. For those of you that think our domestic market has momentum, take a look at Japan as it seems to have forgotten how to finish a session in the red. Europe is higher. Trend-wise, Soybeans, Wheat and Corn continue to lay down at lower levels -- still looking for 5.50 on the beans. Feeder and Live Cattle are just below key high levels.
Good Trading to All,
Brad
Equity Index Update
Monday November 28, 2005
The index markets continued their rapid ascent last week as players on the sidelines used the FOMC minutes, released on Tuesday afternoon, as a reason to get into the current rally. Wednesday and Friday's action was muted, at best, due to the holiday. Today, the indices are called to open higher as the SPZ is trading above its high from last week at 1272.50, up 2.50 overnight. Retailers are reporting sales gains that came in above estimates, Crude Oil is sharply lower, the dollar is mixed, fixed income is moderately lower and the metals are sharply higher.
The indices have been in a vertical move since mid-October's trading lows and are poised to challenge key psychological levels shortly. These levels are DJIA 11,000, SPX 1275, NDX (already there at 1700) and the Russell 2000 at 700. I suspect these levels will hold some value as a point of reflection and should lead to a breather. However, in a breakaway move like this, forecasting a breather should not be confused with getting short. A couple of weeks ago, I discussed at length the need for traders not to "lose" their long positions during sideways consolidation. That consolidation occurred between 1229 and 1215 in the SPX. I would argue that the market is due for a similar consolidation phase, not a correction. Having said that, with such strong historical tendencies for higher prices around the first few trading days of December, I wonder if the pause may not happen until next week? If this scenario turns out to be correct, there is a chance the SPZ could see 1300 by Friday's bell. The more likely scenario is a test and failure of the above levels today, followed by moderate losses in the market that get reversed in a big way on Thursday, the first day of trading in December.
One issue that has me concerned is the current ramping up of my Standard Deviation readings. Using a 22 day STD reading, the SPX is currently registering a +/- 1 STD of 21.54, the highest reading since last NOVEMBER'S reading of 30. The importance of this reading is more akin to a yellow light when driving. The odds for a consolidation or minor pullback have been historically their greatest when this reading breaks above 20. Another light flashing caution is the moving average extension. This reading measures the % difference between the simple moving averages (200, 135, 50 and 20) and the current index price. The Midcap 400 and NDX are trading at resistance levels of approximately +10% from their respective 200 day MA's. Since the bull move began in 2003, neither index has crossed above or below the 10% threshold for more than a couple of sessions. It is worth repeating that I use this reading as an âexit typeâ of reading from my positions. Currently, it is flashing yellow.
The NDX settled at 1700 on Friday. That level had been my trading target for long positions, accordingly I am selling out 65% of my NDZ long position on the open this morning. I will carry the other 35% into December option expiration, where I plan to exit that Friday. The Midcap 400 (EMDZ mini contract) continues to hold at all-time highs, but with my extension reading flashing yellow, I will cover 60% of my long position on the open. Technically, keep a close eye on the SPZ at 1275 as it should pose key resistance. Support remains between 1268 and 1266.
Globally, the Nikkei is closing fast on the key 15,000 level. For those of you that think our domestic market has momentum, take a look at Japan as it seems to have forgotten how to finish a session in the red. Europe is higher. Trend-wise, Soybeans, Wheat and Corn continue to lay down at lower levels -- still looking for 5.50 on the beans. Feeder and Live Cattle are just below key high levels.
Good Trading to All,
Brad