Friday, May 25, 2007

Equity Index Update

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Brad Sullivan

The index markets took a spill yesterday on heavy volume. The SPM opened in my support zone between 1524 and 1526, quickly finding a bid just before the release of New Home Sales which rose by a staggering +16% and well outside the highest end of expectations. Accordingly, players bid the indices in the wake of this number…however; the key resistance area in the low 1530’s put a ceiling on the session. Once the day trade longs were forced to liquidate the downside picked up some serious momentum and pushed through a variety of support zones established in the last two weeks of trading. Program trades were the flavor of the session as -1000 readings on the NYSE TICK were plentiful. When the session ended, with a minor bounce off the session lows, the SPM lost -13.50 for the session. However, measured from high to low on the session, the contract fell nearly -25.00.

This morning the indices are called to open higher as Europe remains moderately higher for its session. The SPM is trading at 1515.50, up 4.00 on the session and +5.20 above fair value readings. Keep a close eye on the 1515-1518.50 zone as the trade unwinds this morning. Early closing in the US debt markets should leave many traders heading out for the weekend after the first hour of trading. Accordingly, keep a close eye on some volatile trading during this period. In addition…if I hear one more pundit on CNBC talk about the bond market and the 10yr. yield approaching 5% being the reason for equities reversing course yesterday I may have to turn it off for good. During the past four years, yields have generally moved higher while equities have taken off to the upside. Now…if we were to push the 10yr to 5.25% in a velocity driven/inflation fighting trade – THEN I would say the yields are impacting equities. Until then, too many people looking for a reason that the indices broke -2% from All-Time highs.

Here are my levels for today’s session in the SPM contract: On the upside we are scheduled to open in the 1515 to 1518.50 zone…this zone is acting as resistance once again and only a 30 minute close ABOVE 1520 will change that picture. If we were to push above 1520 on a 30 minute basis I would not chase em up. Rather, the picture would become mixed for the rest of the session. Given the anti-upside momentum that I outlined yesterday, we could very well hit the 1524 to 1526 zone and fail there. In other words, rally selling remains the key in the short term.

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