Tuesday, May 22, 2007

Equity Index Update

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Brad Sullivan

The index markets continued their ascent into higher ground yesterday for much of the session. However, a late reversal in large cap oil issues seemed to bring an overall sale to the large cap indices. When it was over the SPM had dropped from its new contract high area of 1534 to its session low of 1526.50 before rebounding a touch at settlement. In addition the DJIA fell for what feels like the first time in about one year. However, the big story continues to be the action in the spreading between the various indices.

Yesterday, the ER2 and NQ rallied sharply. The spreads which I discussed at length yesterday – DJIA vs. Russell 2k, SP vs. Russell 2k – gave back a substantial portion of last week’s gains. How volatile was the spread action? Consider this a 1 unit spread of long 11 DJI minis and short -9 Er2 minis lost a WHOPPING -$10,540 ON THE DAY. The Spread trade of Long 10 SP minis and short -9 ER2 minis lost -$9,250. I CANNOT EMPHASIZE ENOUGH…THESE MOVES ARE OUTSIDE THE “NORMALIZED” PARAMETERS. To use option jargon…the tails are pretty fat in these spreads right now. I would associate this with someone, or a group of somebody’s being take to the shed and forced to cover this spread. Typically, when such a move happens, the size player on the wrong side of the bet is forced to pay up in order to get out. Whether or not this has been the reason for the dramatic move in these spreads is a bit of conjecture and rumor mongering. And, most importantly, it does not begin to tell the whole story about what is actually happening in the mega-cap arena. The bullish move in the mega-caps continues to play out on a liquidity driven theme…as traders our job is stay in touch with that theme. Final hour moves like yesterday afternoon tend to make one think that the “to is in.” Yet, for all these final hour sales…the market continues to find its way to higher ground. Keep this thought in mind when hitting bids.

I had a resistance zone yesterday that encompassed the 1528 to 1531 levels…the SPM gradually carved through that zone in the late morning and continued to hold above it as the CASH index made it above the 1527ish AT closing high…however, the market could not sustain the buying interest at the highs. Around 1:45 cst the SPM made another push to get above 1534 and failed…this time day trade longs ran for the exits creating a pretty good selling vacuum. That move pushed the SPM towards the morning and session low of 1526.50, before a slight bounce into the bell. The CASH index missed closing at AT high levels by a couple of points. The question today is this…will there be more selling?

Here are my levels for today’s trading in the SPM…on the Upside : Resistance should be found between 1530.50 and 1531, above this 1532.75 to 1534.50 is CRITICAL. If the contract can get a 30 minute close above this zone, it should produce a “walk em up” type of trade towards 1538.50. If long…I would look to exit between 1538 and 1541 as this zone will be difficult to push through for the contract.

On the downside…I have a neutral zone between 1530 and 1528. A 30 minute close below this neutral zone should provide a push lower. 1526 to 1524 remains a support zone and will be difficult to close below on a 30 minute basis. However, I would look for some “spike” oriented selling that would push the index towards 1522 before bouncing. Support is found at 1523.50, then 1522.25 to 1520. Any 30 minute close below 1520 and things will get interesting…however, much of that interest will most likely be tomorrow and Thursday. I suspect that below 1520 and we will have pushed as far as possible for today’s session.

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