Friday, May 11, 2007

Equity Index Update

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Brad Sullivan

The index markets suffered through a day of consistent selling to settle sharply lower on the session. Key short term support levels were violated in most of the indices, particularly the SPM7 which fell below the key 1507 to 1504 support zone and could not muster any sustained buying when retesting that area. Today’s action will be influenced, on the open at least, by the PPI and Retail Sales reports. PPI came in better than anticipated on the core rate (I wish I could exclude food and energy costs each month as well) and Retail Sales was on the disappointing end of the spectrum. That being said, the Retail Sales figure is likely to be discounted as the market will give the consumer the benefit of the doubt for a couple of more months…however, on a longer term basis, this reading is worth putting in your files as a potential turn in the consumer. The PPI reading continues to show elevated levels in food pricing and I know that it cost me $80 to fill up my car the other day, yet the marketplace continues to downplay any meaningful impact on the economy from these pricing pressures. It reminds me of the quote I used the other day…FOCUS ON WHAT THE MARKET IS PAYING ATTENTION TO, NOT WHAT YOU WANT IT TO PAY ATTENTION TO. Right now, in my opinion, the marketplace is focusing on the supply shrinkage in the equity market due to private equity takeovers and global liquidity. Until these underpinnings slow or stop, this market will continue to be firm…with hiccups along the way.

The question today is this…was yesterday’s hiccup on the downside the beginning of something more? As I have written this past week, nearly all of my readings are at extended levels and it provided a good entry to flatten longs or establish a moderate short line. One of two scenarios play out from these readings…a sharp drop of nearly -4 to -5% or a moderate drop of around -2% that turns into a trading range just underneath recent highs. Right now I am leaning to the trading range scenario, but that could change with a shift in any key inputs – particularly Euro/Yen and Dollar/Yen. I will continue to use these pairs as key barometers for index trading.

Here are the levels I am looking at for today’s session in the SPM contract. Resistance will be found between 1502.50 and 1504 in a moderate and choppy zone type of trade…above this is the key 1504 to 1507 zone. Only a 30 minute close above this zone will begin the reversal process from yesterday’s downside damage. If we do get a close above this zone, I would shift to playing from the long side – HOWEVER, be prepared for probing BACK into the 04-07 zone. In other words, the 30 minute close gives the signal but the odds are you can get better pricing by being in 04-07 zone than outside it with a little patience. On the downside…Support will range from 1499 to 1497.50. Below this level, look for some spike moves lower towards 1495 and 1494.50. Only a 30 minute close below this zone will produce more selling…in the interim I would look for program type spikes lower that would generate trading into the 1491 area.


Finally, keep in mind one fact and that is that Friday trading has been extremely quiet the past several weeks…is it time for a change? I have included a chart showing the 30 minute closes in SPM7 since May 1st. Notice the failure to get back above 1504…interesting.

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