Wednesday, May 23, 2007

Equity Index Update

Equity Index UpdateSocialTwist Tell-a-Friend
Brad Sullivan

The indices continued their divergent path in yesterday’s session and for those that use one index as a lead indicator to trade another index, it has been nothing but a painful existence over the past couple of weeks. Indeed, the only game in town right now is the spread trade between the mega-caps (DJ and SP) versus the small caps (ER2) and to some extent the NDX. As I outlined earlier this week, the volatility has been nothing short of amazing in these spreads, and the highest levels I have seen since the run higher in 1999 and subsequent collapse in the NDX. Rumors continue to abound about the trade over the last two weeks in these spreads, but, the only thing that really seems to matter is what we examined the other day with a couple of spread charts. Simply put, it was “mean-reversion” time. The last 2 sessions have been a painful reminder of how these spreads can operate – at least for those that stayed too long at the party. I have included an updated table that I first put into Monday’s update and a chart to show the extremes.


This morning, the SPM is trading higher on the heels of another +1% rally in China (why I’m not long the great wall I’ll never know) and more all-time highs in the DAX. Currently the SPM is trading at 1531.50, up 6.50 on the session – just shy of yesterday’s high and contract highs. Without any hint of economic today, save the DOE weekly inventories, one has to wonder -- is today finally the day the SPX takes out its All-time closing high?

The SPM was a pretty interesting trade yesterday as the market attempted to consolidate below my key 1528 level, but could not muster any sustained selling and gradually firmed up between 1527 and 1529. Lunchtime provided a bid and pushed the market a bit higher…however, by the time the final hour was underway the index could not hold onto the gains. In the final 30 minutes of trading the contract was sold into the bell, producing a new session low at 1524.75. Much of this seemed to be spread related and day trade long selling. This theory has gained traction in my mind with today’s solid open higher. Now the question becomes…where do we go from here?

Here are my levels for the SPM today: On the upside…resistance should be found between 1531.50 and 1534.50…if we can get a 30 minute close above this zone it is bullish. However, I do not think one need’s to chase ‘em up. Instead wait for a move back into this zone (31.50 and 34.50) to build up a long position that pushes towards the 1538 level. Stopping points along the way should be 1535.50-1536, then strong resistance between 1538 and 1541. IF THE SPM TRADES ABOVE THE RESISTANCE ZONE (31.50-34.50) AND DOES NOT COME BACK IN…CANCEL THE IDEA OF BIDDING IN THAT ZONE. In other words…if we trade up to 1538, I don’t want ‘em back at 1532.

On the support side…1530-1527 is a transition zone. It should provide support, but, not support that one utilizes to get long. 1526 to 1524 remains key support and should be used to establish buying points…below this 1522.50 to 1520 is CRITICAL. Only a 30 minute close below 1520 turns the switch to “sell” and even then it most likely will be tomorrow or Friday that the trade comes to fruition. In other words…don’t chase lows below 1520 to establish a position.

All told, volatility is already on its holiday and one needs to be cautious in this trading environment.







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