Monday, May 21, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The index markets opened higher and stayed firm throughout Friday’s option expiration session. Mega-Cap issues continued to dominate the trade as the SPX came within a whisper of its All-Time closing high of 1527ish and the DJIA just kept on trucking into unknown territory. The session itself was pretty mundane, but the buy side pushed pretty aggressively over the final 30 minutes of trading to create new high prints. This morning we are called to open around UNCH as Shanghai was able to gain another +1% in spite of a rate hike…the rest of the global indices are trading – on balance – slightly higher as well. On the currency front, the dollar continues to catch a bid in here and one has to wonder, given the sharp correlation the last few months between a falling dollar and rising equity market, whether or not there will be any “give” in the equity trade this week.

It is on this front that I am examining the SPREADS…simply put, the movement between the SP and DJIA vs. the small cap Russell 2000 is astounding. Last week alone, a single unit (for my purposes) pushed into the stratosphere of expected returns. I have included a spread table with explanations in today’s chart section.

In my opinion, this spread action is about the only game in town. Is the shift into mega-caps the final leg of this 5 year old bull market? How much more is on the table in these spreads? Is it time to play a reversion-to-mean trade? One thing I do know from years of index trading…a shift out of one area/sector of the market typically requires a several week period of overall market disruption. The disruption is characterized with higher volatility and increased trading setups for those making a living in this game. So far, we have not seen any extended periods of this action. I would suggest that we may have a summer trade that surprises many with the above listed characteristics.

For today in the SPM contract, here is what I am looking for…on the upside, the index should find solid resistance between 1528 and 1531 as this zone should halt the market in the short run. If we get a 30 minute close above this zone, I will not chase ‘em up intentionally but one has to be prepared for a potentially buy stop rally above the cash closing highs in 2000 (call the trigger zone 1528 to be safe). Up here…it is pure guesswork. I would suspect stopping points to be 1535, 1538 and 1541. I must state that I put this rally scenario’s odds in the longshot category.

On the support side of the equation…1526 to 1524 is a key zone…any 30 minute close below this level should shift the trade to bounce selling. Accordingly, I would look to get short on any bounces into the aforementioned zone. Targets for this trade would be scale down from 1522.50 to 1519.50. Below this level we hit our old friend 1518.50 to 1515. This zone has now become a neutral/transition zone. Let this area play out and examine to see if it becomes support. An HOURLY close above 1520 (after testing this zone) would do the trick. Keep an eye on the SPREADS.
















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