Tuesday, May 8, 2007

Equity Index Update

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Brad Sullivan

24 wins and 3 losses over the last 27 sessions for the DJIA as it moved ahead of 13,300…should one dare look to fade this beast? I have enclosed a chart that shows the differential from the current price and the 200 day simple MA in the DJIA. The chart begins on the first day of trading in 2006. As you will see there has been a move to higher ground or “extension” away from the MA. Historically, an extension this large in the DJIA has led to one of two scenarios. A sideways trade that allows the MA to catch the current pricing levels or a fast bout of selling that ends around the -4 to -5% levels.

I have also enclosed a chart on the MIDCAP 400 and its 200 day MA differential. This index is showing similar action to the DJIA, however, it has not extended to new recent highs. Still, it is worth paying close attention to as this index was the first major one to hit all-time highs during the current rally.

This morning, the indices are called lower on global index selling. After the close of trading, CSCO will report its quarterly earnings. This morning, HPQ announced stronger growth forecasts for the next year and the stock is called moderately higher. More importantly is the currency situation which has seen a bid placed in the Yen/Dollar and Yen/Euro. Keep in mind the strong correlation between these pairs and the global index markets…indeed we are inextricably linked.

Given our called to open area of around 1511 in the SPM contract, few zones of support and resistance have changed from the past two updates. 1515 to 1518.50 remains as the first resistance zone and with yesterday’s moderate probe it is becoming even more formidable in the near term. Support is seen from 1511.25 to 1509.50…below this zone we should move towards the key support zone from 1507 to 1504. This zone should be choppy and liquid, leaving plenty of opportunity for short covering. A 30 minute settlement below this zone could lead to increased selling around the close of trading. IF THIS SCENARIO PLAYS OUT it will be due to buyers going hand-in-pocket ahead of the FOMC tomorrow. As I pointed out yesterday, the indices have not been at their highs moving into one of these meetings and a reversal trade is potentially upon us. In the meantime, don’t chase ‘em at areas that are too low as bottom fishers and short covering could provide a lift at any juncture…and keep an eye on the currency pairs.

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