Monday, May 7, 2007

Equity Index Update

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Brad Sullivan

The index markets continued their winning ways with another close at or near the high marks for this 50 month bull move. Further firming things was a sharp rally into the futures close of trading that led to the SPM contract settling nearly +3.50 to fair value. This morning, the indices are holding around their respective unchanged levels. There is little activity in Europe as Great Britain is on holiday.

Clearly the focus of this week will be on the FOMC meeting adjournment which takes place Wednesday afternoon. Throughout this push higher in the marketplace, the tendency has been to rally into and through the meeting. Thus far, there seems little reason to fade the conventional trading wisdom. However, I will point out one differential and that is that this meeting will mark the first time the FOMC will meet with the market trading at all-time highs. Reversal potential is worth keeping in the back of one’s mind for Wednesday afternoon and Thursday.

On Friday, I focused on the first resistance zone between 1515 and 1518.50 in the SPM contract. The trade pushed into that zone early, but did very little trading in that zone. Today’s action, particularly in light of the bullish close on Friday, should lead to greater probing and duration in this area. Once again, I will find it difficult to chase the long side up here and would rather wait for a clean move above the 1520 level before playing the long side in the late portions of the session.

Support areas today in the SPM contract will be from 1513 to 1512; 1510.20 to 1509.50. If we get below this zone, look for a push lower – most likely in a sell stop driven mode during a light volume time of day (late morning/lunchtime) towards the key support zone of 1507 to 1504. Only a settlement on an hourly basis below this zone would put the recent upside swing in short term jeopardy.

One index to key on today is the ER2 contract, which had a large burst of buying into the futures bell on Friday afternoon. The contract has traded in a 0.8% RANGE since our rally ended on Wednesday morning. In addition, this contract has a strong history of “follow” from strong/weak closings. Looking to be a buyer around the opening few minutes of trading for a push towards 840 seems plausible.

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