Equity Index Update

Tweet Equity Index Update

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.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets spent most of the session in range trading conditions before a spirited push to new contract highs in the mega-cap SP and DJ contracts. However, the buying power was offset by long liquidation (whether or not this was day trade long selling remains to be seen) in the final 30 minutes of trading. When the session was finished, the SP finished nearly -3.00 on the session and -6.00 from the daily high reached during the afternoon. HOWEVER, this morning finds the market bid sharply higher with the SPM contract trading +5.25 at 1520.50 – only -1.25 to the contract high made yesterday at 1521.75. The news is limited; however, retailers JCP, KSS and JWN reported solid earnings last night and GE agreed to sell its plastics division for a smooth $11bln and INTC was upgraded to a buy at MLynch. In addition, European indices are rallying nearly +1% across the board.

While all was quiet on the domestic index front during yesterday’s action, the commodity markets went wild. Copper was down nearly -5% on the session, while the energy complex shot higher on a couple of production disruptions. As far as the indices are concerned, the Copper story, in my opinion, is where the potential issues lie. Why, simple one word CHINA. Copper inventories in Shanghai have risen to over 14,000 tons, suggesting that we may have economic growth slowing in the belly of the beast. Obviously this China slowdown has been discussed widely…but it has not shown its face the past few years. Is this the time for a Chinese recession? It’s doubtful…but for the short term trader it is worth focusing on what Shanghai does each and every session. So far…not much, but keep your eyes open the next few weeks for some disruption in the Asian rally.

Option expiration today and EVERY NOW AND THEN a potential trade comes into the zone around the opening bell. Today may be such a day. With the market trading around yesterday’s high zone watch FOR A POTENTIAL PRE-MARKET PUSH TO NEW CONTRACT HIGHS AROUND 1525. THE OPENING SHOULD BE VIOLENT AND CHOPPY IN A ZONE BETWEEN 1524 AND 1526 BEFORE REVERSING COURSE BELOW 1521.50 TOWARDS 1518.50. THIS TRADE SHOULD NOT TAKE MUCH LONGER THAN 30 MINUTES TO COMPLETE. Keep in mind that the SPM needs to trade well above yesterday’s highs for this SCENARIO to be worth betting on. In addition, it must happen before are immediately after the opening bell of trading.

As for today’s levels in the SP contract…pretty much the same as we have had the past several sessions. On the upside…1520.50 to 1522 is a Mild resistance zone, above this comes the 1524 to 1526 level which should provide a tougher test to get through. On the extreme upside today, 1528-1531 is an excellent target area to liquidate trading longs. Keep in mind that expiration sessions typically get very stagnant after the first 90 minutes of trading is completed.

On the downside…1518.50 to 1515 is now a Neutral/Transition Zone. The first key support zone lies between 1512.50 and 1510.50. Only a 30 minute close below this zone is a negative…and that brings us to the ballgame support area of 1507 to 1504.

When all is said and done…expiration Friday’s are normally sessions to keep it close to the vest. If the opening trade I outlined plays out, it typically creates the entire session’s range within its boundaries…so be wary of playing any “follow” trades after the morning is complete.

I have included 3 charts today…one is a 1 minute SPmini chart with volume from yesterday’s high print. Also the weekly OIH chart, as the oils continue to explode and finally the monthly gasoline futures.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets chopped back and forth in a rather uneventful morning session before turning on the headlights and pushing to high contract closes in the SP and DJIA. Mr. Buffet and Buffet Jr. (Eddie Lampert) both made splashes with investment stakes in JNJ and C respectively. That news gave investors another reason to be buy stocks as the general assumption is that if two value oriented players are raising stakes in equity holdings, why not me? Amidst the buying in mega-caps came a sharp move lower in metal based commodities. It is worth noting that over the last three months there has been a “linked” move with these commodities and domestic indices. If the metals roll over…will equities follow? I hardly think it will be that smooth, however, this divergence is worth keeping close tabs on over the next few weeks.

Overall, the SPM market remains contained within a tight trading range…essentially 1518 to 1505 with some outside push attempts. From a trading perspective this has been an excellent pattern as the market continues to bounce off the 1507-04 zone and fail in the 1518.50 to 1515 zone. Given the strength of yesterday’s close in the large cap SP and DJIA one has to wonder if today will be the day to finally break above our resistance. Keep in mind that – TYPICALLY SPEAKING – the Thursday prior to expiration is a one-way street. In other words, the odds are suggesting a choppy morning, followed by a late morning push into the close of trading.

Accordingly, the zone of resistance from 1515 to 1518.50 remains crucial for the session. Any 30 minute close above this zone should be purchased – HOWEVER, if it is early in the session (within the first 2 hours of trading) I will not chase ‘em up. I will try and get long in that zone with some reasonable breathing room for a stop (30 minute close below 1513 would do it for me). IF the index takes off higher and does not allow entry, we should be on the cusp of a strong one-way street rally session. Typically, I would look for a net change greater than one Standard Deviation…now my 8 day reading in STDEV are very small (only a net of +5.50 would take it out) however the 22 day reading is at a more reasonable +10.20. Essentially, if a one-way street develops I would look for the market to trade +10.50 to +1300 on the session or 1528 to 1531 in a zone for exiting longs. Along the way look for some stoppage around the 1525-1526 level, but expect any dips to be shallow.

On the downside, if the market fails to make any inroads above the key resistance zone, one has to play for a move back towards the 1512 to 1510.50 support zone. Below this, look for a choppy move for a trade into the familiar 1507-1504 zone. Only a 30 minute close below this zone will open up the selling door for a move towards 1496. HOEWEVER, much like I wrote yesterday, in this scenario expect lots of chop and spike oriented action.

I have gone a little chart crazy today and have included several that are worth examining. One of the key elements in trading is focusing on what the market is focusing on. Accordingly, I have the resurgent IBM (now 6.5% of the DJIA weighting), the Yen Futures vs. SP futures chart, a possible divergence in the Copper and SP chart as well as potential blow off top move in the long DJIA vs short Russell 2k chart. These charts represent a nice cross section of what has moved the market the past few months.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets suffered a lunchtime reversal from higher levels in action that was whippy and aggressive. Volume flows were heavy, particularly around certain price zones in each contract. After the market pushed lower from its lunchtime high prints, the selling was reminiscent of the old days (think mid 1990’s) when the markets would have big swings during expiration week. The last couple of years volatility during expiration week has been infrequent…however, when it has appeared the moves have been violent and typically on the downside. I recommend caution on any rally buying for the remainder of the week.

Yesterday’s trading action continues to show that we are in a trading range. How long we stay and the size of this range remains the proverbial X factors. However, it is worth noting that given the sharp rally over the past 8 weeks (wasn’t it just March’s expiration week when the indices printed collective lows during Wednesday’s lunch hour?) we SHOULD expect some type of sideways to downside action. In fact, that downside action has been playing out in the Russell 2000 and NDX. The Russell is essentially trading at UNCH for the month and the NDX is holding just above its flat line level for May. Both indices are severely underperforming against the SP and DJIA. If this rotation out of small and into large caps continues it should bode very well for higher ground in the world of mega-cap indices.

Here are today’s levels for the SP : On the upside…Resistance should be found between the 1510.50 and 1512.25 zone. I suspect that this zone will find many willing sellers that are looking to capitalize on yesterday’s selling from contract highs. A 30 minute close above this zone brings us back into the critical 1515 to 1518.50 zone. Only a 30 minute close above this area will turn the dial to “buy”…however, at the risk of sounding like a broken record, DO NOT CHASE ‘EM UP HERE. Wait for the trade to settle back into the 15-18.50 zone and attempt to position build for a sharp bid into the close of trading. If unable to build the position, wait for the final 30 minutes before playing the “chase” game. In this scenario we should see a continuation move higher into the close of trading. The levels would be a guessing game, but I think 1525 to 1526.50 would be worth targeting.

On the support side of the equation, 1507 to 1504 remains my CRITICAL SUPPORT ZONE. Any 30 minute close below this zone should produce a CHOPPY downward push towards 1496. Be on the lookout for violent program trading spike moves both higher and lower in this scenario. In other words…1502 new low, 1505.50 trade, 1501 new low, 1504 trade is a sequence that could play out. Accordingly, one should get the chance to build a short position on any 30 minute close below the zone, in the actual zone itself at a later time (1504-1507). HOWEVER, I would look to put on a partial position on the first 30 minute close below this zone – at levels lower than 1504-1507 – in case the above scenario does not play out. If the market moves above 1510 after creating a 30 minute close below 1504, then all bets are off. On the way to 1496 look for support points at 1501.50-1500…1498.50 and 1497.

I have included three charts today…one 5 minute SP mini chart over the last 4 sessions with comments, a NDX daily chart and the spread chart that keeps on giving of long SP-short Russell 2k.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The table above was all the excuse needed for the index markets to move sharply higher at 7:30:02 CST. Currently the SPM is trading higher by 1.80 at 1510.50…however, that does not tell the whole story as the contract was trading around 1504 before the CPI release. The question now becomes this for today’s trade…can the indices hold this pre-market turnaround bid?

On Friday I wrote that the odds were moving towards a trading range type of environment of roughly 2% in SPM…essentially 1519 to 1488ish. We have yet to test the downside of that target range and actually came within a whisper of challenging the high level of the upside range yesterday morning. However, the indices could not sustain any buying at higher pricing zones and the SPM failed to generate anything but SELLING interest in the key 1515 to 1518.50 resistance zone. That zone is becoming more powerful with each failed attempt to push above it. The subsequent selling yesterday took the SPM to a shade under 1503 where it challenged a 30 minute close below the KEY 1507-1504 support zone. HOWEVER, the contract could not generate any sustained selling underneath 1504 and it proved to be a solid entry point for a trade higher into settlement as the SPM contract finished at 1508.70.

When looking at yesterday’s trade in the SPM it is becoming more evident that the contract is biding time between the 2 key zones 1515-18.50 and 1504-1507…whichever zone breaks first should produce “follow” price action. In “follow” I simply mean a momentum based push higher or lower. Once again, I will be using a 30 minute close for these zones to initiate any follow positioning.

On the resistance side today…1510.50 to 1512.20 should be a difficult zone to get above for SPM…if it moves higher in here the contract should once again challenge the key 1515 to 1518.50 zone. I suspect that any probing of this zone will take TIME as the long side will quietly use a supporting bid at/underneath trading levels to exhaust the sellers. Once/if the index gets into this zone, all bets are off as it should provide a choppy 2-way trade that gets a little bit higher than yesterday’s 1516ish trade. Look for a probe into 1517.50 and some short sales to push the index back down. If we get the holy grail 30 minute close above 1518.50 I still will not chase ‘em up. Rather wait for a pullback into the key zone to establish longs for a late session push higher. If this pullback does not materialize, wait for the final 30 minutes to establish a run higher into the bell position.

On the support side…look for the 1509 to 1507.50 zone to be the first support zone. This zone was the first level at which the market traded after CPI was released. Underneath 07.50 we have the critical zone of 1507 to 1504. Again, a 30 minute close above this zone should lead to a push towards 1496. Along the way, 1501 to 1499.50 is support and minor levels are found at 1498 and 1497.20.

ONE KEY TO REMEMBER DURING EXPIRATION WEEK…MUCH OF THE BUYING THAT TAKES PLACE COMES IN AFTER 10:00CST. IF THIS PATTERN HOLDS, LOOK FOR AN EARLY PUSH LOWER THAT CREATES A FIRST HOUR TRADING LOW, FOLLOWED BY A STEADY BID HIGHER INTO THE CLOSE OF TRADING.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets zigged when many a trader was looking for a zag on Friday. A tame headline on the PPI reading and a weak Retail Sales report may have rekindled some hope of a FED easing before the calendar year ends. However, Friday’s sharp bounce seems reminiscent of many moves during the past couple of years in the index world.

Seemingly many shorts, players on the sideline and active traders continue to wait for that elusive “green light” to get short. Days like Thursday get the interest going and players tend to walk into a bull trap type of session. The strong buying that hit the market around 9:10-9:20CDT (which remains a KEY time zone for relative highs/lows intraday) pushed the SPM7 back into the critical 1504-1507 trading zone. From there the index was able to register a 30 minute close above this key zone and turn bullish. However, as I pointed out on Friday, the odds were to get long back in the key 04-07 zone for a push higher. That push happened on heavy buying near the cash close of Friday’s trade, eventually leading to a settlement in the SPM7 at 1512.20 and all but erasing Thursday’s downdraft.

So…what was learned from Friday’s session? Simply the same pattern we have seen play out over and over the past couple of years in the marketplace – the comeback rally -lives on. And in each of these instances, the market has eventually found its way higher. The fact that we recovered so much of Thursday’s decline during one session and that we are heading into option expiration week, puts the potential for another round of higher highs clearly in view. Certainly CPI and Housing Starts (released on Tuesday and Wednesday respectively) will have something to do with that. But, keep in mind that option expiration weeks tend to trade one of two ways – a slow push higher…or a violent decline. The odds of the decline look small – however, we must register them with the data hitting the tape this week. If CPI were to come in “out of line” with inflationary readings, the snowball selling potential would be in play for the majority of the week.

As for today, here are the levels for SPM7. On the upside, look for a moderate choppy zone between 1512 and 1514 as players begin to establish their positioning in here. Above 1514 we hit the key zone between 1515 and 1518.50. Any 30 minute close above this zone is bullish – however, once again I will not be chasing ‘em in here. I will, however, use any dip back into the zone (15-18.50) to enter long positions with a potential trade towards the 1520.50 and 1522 zone. If there is no chance to enter the long side in this zone, wait for the final 30 minutes and look for an aggressive push higher into the bell.

Support zones are found from 1509.50 to 1508.50…below this is the key zone from 1507 to 1504. Any 30 minute close below this zone adds a certain amount of confusion moving forward and should be sold short with a target of 1496-1495.

Equity Index Update

Tweet Equity Index Update

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.

I AM LOOKING FOR THE TRADING BELOW 1494.50 TO BE SPIKE ORIENTED WITH SWINGS OF 3 TO 4 POINTS BACK AND FORTH.





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.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

Thus spoke the FED…and the market could not make up its mind in terms of what to
do with the new information. After the initial spike lower, the indices came roaring back to new intraday highs, followed by another push lower, then onto contract highs. After a nice consolidation period below intraday highs, the indices made a final push – and failed to gain higher ground. At the close of trading, longs (mostly of the day trading ilk) were selling out positions and this led to a respectable discount from fair value readings across the index board. This morning, the offer continues, with the SPM trading lower by -4.25 at 1511.25 and a full -6.00 from fair value. Asian trading was mixed to lower and Europe is trading moderately lower.

Today’s action should provide a solid litmus test for the indices as the FOMC
provided about what was anticipated. Is there enough fuel in that statement to push us higher? Or are the indices a bit tired and looking at a trading decline? Tomorrow’s PPI reading, next week’s CPI reading and option expiration should help provide the marketplace with a catalyst for our next directional move. In the meantime, it appears as though the indices are trading in a “capped” rally environment. If we look at the SPM contract, the inability to push through the resistance zone of 1515 to 1518.50 (for any extended period of time…as I know we traded up to 1519 yesterday) is a short term negative. We have now tested this zone each day this week and have yet to make a strong foothold at this zone. Accordingly, there seems a good chance that the index will make a push for the support zone between 1507 and 1504. And this is where it gets a little tricky. IF we get selling pressure in this zone, there is potential to push the contract back towards the 1491 level, creating a trading range scenario that could provide numerous buy and sell points over the ensuing weeks. However, the net change in that time frame would be negligible in the market. In fact, this scenario holds up pretty well with some of the extension readings we are seeing in various indices.

Now that I have put out a longer term scenario, let’s focus on today’s session. In the SPM contract…Resistance remains between 1515 and 1518.50; a 30 minute close above
this zone is CRITICAL for the upside to continue. However, as I wrote earlier in the
week, it is no place to chase ‘em. Wait for the market to forge into the 1521 to 1522 zone and look for afternoon buying pressure to build for a late pop towards 1526. On the flip side, given the weak close (relative to fair value) and the negative open – I suspect we will see the index make a push towards the key support zone between 1507 and 1504. IF this zone is taken out on a 30 minute closing basis it will shift the momentum to NEGATIVE and should lead to a trade around the 1500-1498.50 support zone. One should be careful on the timing of these trades as the potential for a 1502.50 print followed by a bounce to 1508 or so is certainly in the cards and it will be critical to focus on the closing prints at the 30 minute intervals to get the proper trade setup. Again…don’t chase ‘em at points that are too extended as we are still in a contained trade and in these sessions you must counter the moves at key support and resistance levels.


I have include a few charts today…the MIDCAP 400 extensions on both the 20 and
200 day MA readings is getting a little top heavy at current levels. In addition the DJIA 20 day MA extension is quite elevated. The final chart is one showing the volume in SPminis on a YTD, 5 day MA and yesterday basis. Notice the explosion after FOMC (and that is to be expected) and its subsequent failure to generate both volume and price at the key resistance zone in the late afternoon.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets held serve after an attempt to push the indices lower failed to pick up steam at short term support levels. A late morning, lunchtime push higher allowed the market to probe, but never get above the unchanged level in all but the NQ futures. Volume was moderate ahead of both the CSCO earnings report and today’s FOMC statement.

As for CSCO, the stock was not able to match “whisper” expectations in its report and during the subsequent conference call. The issue is called to open about -1.45 at 26.90. This has put moderate pressure on the futures with the NQ contract trading lower by -5.00 at 1900.50. The SPM is trading lower as well, at 1510, down -2.25 on the session.

While we may have some moderate trading around the CSCO news in the first 45 minutes today, the odds play seems to be one of hands-in-pocket until the 1:15cst FOMC release. Attempting to handicap this release is generally futile as one verb added or subtracted can mean a few billion in market cap changes hands in the SP over the ensuing minutes. In other words…keep it close to the vest post announcement. Expectation wise, the markets are continuing to expect similar wording from the FOMC as it has received in the recent past. A change in this wording will move the markets…but to what extent?
From a trading perspective, the question we have to ask ourselves is pretty simple…is it time to fade this move and put a counter trade to work? So far, only the DJIA (as I showed yesterday) is extended from its 200 day MA. All things being equal, this represents a good time to get flat (if long the DJIA) or look to premium sell/outright sell the index. HOWEVER, the warning trade in this environment is that we are at the cusp of a major mega-cap upside explosion. If this scenario occurs, the extension readings could move sharply, possibly towards the +15% zone. Accordingly, proper use of stops and such are needed when fading a beast.

The other night I pulled down a book from the coming of age master J.D. Salinger and turned to a page that had a Taoist tale. Without rehashing the whole section, I will include this portion which is the tale end of a conversation between a Duke and his horse breeder that is about to retire. The breeder has sent the Duke to another breeder…a few months later the new breeder sent the Duke a horse that was supposed to be a dun-colored mare, but, turned out to be a coal-black stallion. When given this news the old breeder was amazed at how advanced his friend had become in choosing horses.

“In making sure of the essential, he forgets the homely details; he looks at things he ought to look at, and neglects those that need not be looked at.”

A traders mantra if I have ever read one…accordingly I have enclosed 4 charts for viewing today. One is the NDX extension readings for the 200 and 20 day MA’s. So far, the readings are elevated but not overbought.

Also included is an analog chart showing the performance of the Euro/Yen and SPX over the past year. The linkage is simply amazing. The third chart is showing the cumulative SPX breadth for the top 100 issues only. This continues to show the mega-cap extension as the upside ride continues. Finally, the last chart shows the 2007 performance for both the NDX and SPX top 100 from the OPEN print, in terms of net breadth for that session. You will see that yesterday showed a divergence in the NDX/SPX performance…it can possibly be explained by buying into the CSCO number. However, that seems a bit simplistic and it could be that mega-tech will continue to move higher.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

24 wins and 3 losses over the last 27 sessions for the DJIA as it moved ahead of 13,300…should one dare look to fade this beast? I have enclosed a chart that shows the differential from the current price and the 200 day simple MA in the DJIA. The chart begins on the first day of trading in 2006. As you will see there has been a move to higher ground or “extension” away from the MA. Historically, an extension this large in the DJIA has led to one of two scenarios. A sideways trade that allows the MA to catch the current pricing levels or a fast bout of selling that ends around the -4 to -5% levels.

I have also enclosed a chart on the MIDCAP 400 and its 200 day MA differential. This index is showing similar action to the DJIA, however, it has not extended to new recent highs. Still, it is worth paying close attention to as this index was the first major one to hit all-time highs during the current rally.





This morning, the indices are called lower on global index selling. After the close of trading, CSCO will report its quarterly earnings. This morning, HPQ announced stronger growth forecasts for the next year and the stock is called moderately higher. More importantly is the currency situation which has seen a bid placed in the Yen/Dollar and Yen/Euro. Keep in mind the strong correlation between these pairs and the global index markets…indeed we are inextricably linked.





Given our called to open area of around 1511 in the SPM contract, few zones of support and resistance have changed from the past two updates. 1515 to 1518.50 remains as the first resistance zone and with yesterday’s moderate probe it is becoming even more formidable in the near term. Support is seen from 1511.25 to 1509.50…below this zone we should move towards the key support zone from 1507 to 1504. This zone should be choppy and liquid, leaving plenty of opportunity for short covering. A 30 minute settlement below this zone could lead to increased selling around the close of trading. IF THIS SCENARIO PLAYS OUT it will be due to buyers going hand-in-pocket ahead of the FOMC tomorrow. As I pointed out yesterday, the indices have not been at their highs moving into one of these meetings and a reversal trade is potentially upon us. In the meantime, don’t chase ‘em at areas that are too low as bottom fishers and short covering could provide a lift at any juncture…and keep an eye on the currency pairs.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets continued their winning ways with another close at or near the high marks for this 50 month bull move. Further firming things was a sharp rally into the futures close of trading that led to the SPM contract settling nearly +3.50 to fair value. This morning, the indices are holding around their respective unchanged levels. There is little activity in Europe as Great Britain is on holiday.

Clearly the focus of this week will be on the FOMC meeting adjournment which takes place Wednesday afternoon. Throughout this push higher in the marketplace, the tendency has been to rally into and through the meeting. Thus far, there seems little reason to fade the conventional trading wisdom. However, I will point out one differential and that is that this meeting will mark the first time the FOMC will meet with the market trading at all-time highs. Reversal potential is worth keeping in the back of one’s mind for Wednesday afternoon and Thursday.

On Friday, I focused on the first resistance zone between 1515 and 1518.50 in the SPM contract. The trade pushed into that zone early, but did very little trading in that zone. Today’s action, particularly in light of the bullish close on Friday, should lead to greater probing and duration in this area. Once again, I will find it difficult to chase the long side up here and would rather wait for a clean move above the 1520 level before playing the long side in the late portions of the session.

Support areas today in the SPM contract will be from 1513 to 1512; 1510.20 to 1509.50. If we get below this zone, look for a push lower – most likely in a sell stop driven mode during a light volume time of day (late morning/lunchtime) towards the key support zone of 1507 to 1504. Only a settlement on an hourly basis below this zone would put the recent upside swing in short term jeopardy.





One index to key on today is the ER2 contract, which had a large burst of buying into the futures bell on Friday afternoon. The contract has traded in a 0.8% RANGE since our rally ended on Wednesday morning. In addition, this contract has a strong history of “follow” from strong/weak closings. Looking to be a buyer around the opening few minutes of trading for a push towards 840 seems plausible.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets are celebrating takeover news on the domestic and global fronts this morning. MSFT appears ready to launch a bid for YHOO which is higher by about +14% in the pre-market session. In addition, Reuters is bid sharply higher on another takeover bid in the news arena. European markets are higher, but not substantially and one wonders if these markets will remain quiet ahead of a Monday holiday.

As for the domestic action…up, up and away remains the singular theme, particularly in the large cap arena. The market, as I have pointed out in the last few posts, is at a critical juncture – one that has the potential to lead to continue and generate significant trading upside from current levels. This has been the “skeptical climb” in my opinion, a rally that continues to defy explanation after a frightening plunge a mere 6 weeks ago. The trail of tears seen underneath the market are those bids being placed by desperate shorts trying in vein to cover positions that, on the surface, seem to be coverable only at the markets current pricing. And that is painful for those short around the 1450 level.

Today’s trade should be interesting and potentially volatile as the SP probes into new contract highs and rests within the shadows of the ATH made in March 2000. Keep in mind that the index made its high close on consecutive sessions at 1527 and change. The intraday high was 1552 and change, followed by a sharp reversal that session. What do we need to learn from this brief history lesson? Simply this…when markets are trading to/near/through All-Time-Highs, one should always be on the lookout for the potential profit taking reversal trade. This morning, assuming we open around the current bid of 1514 in the SPM contract, and the fact that the employment report was a touch soft, I have to consider today – POTENTIALLY SPEAKING – today to be one of those reversal sessions. The key word is POTENTIALLY as selling short this market has been a nail in many traders coffin…and yet the setup is there. A news induced bid to overall marketplace and new contract highs off a questionable employment reading.

As for support/resistance zones…here is what I am looking at for today’s session in the SPM contract.
Resistance should be found in a zone from 1515.50 to 1518…any 30 minute close above this zone is a step towards a potential short covering “blowoff.” However, I would not be chasing the long side up here. Instead, I would wait to see if the market can extend into the 1522 area before making any bets. If the SPM can hold up in 1521/1522 area the table should be set for a strong move into the bell and early next week. If the SPM fails to gain traction in the first resistance zone (15.50 to 18.00) then a sale for a move towards 1509 support is in the cards. Support is found between 1510.20 and 1508. Below this zone, look for the contract to move back into its chop zone from yesterday between 1507 and 1504.50.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets survived the “sell in May and go away” slogan as buyers stepped in after sharp early morning selling. The brunt of the selling was felt in the Russell 2000 and NDX, with the SPX and Midcap 400 performing a touch better. However, the sell side was unable to push the larger cap indices beyond moderate net losses and buyers crept back into the session. When it was all over, the indices finished with net slight gains for the first trading day of the month.

The biggest question facing the market today will be one of “follow.” Simply put, can the indices continue to build on yesterday’s bounce and push through Monday’s trading highs? This question should be put to the test in the DJIA and SP as they are the clear market leaders at this juncture. If the SPM can get a 30 minute close above 1500.20, it would suggest a push towards contract highs can be reached today.

I have included a couple of charts, one being a YTD performance on certain commodity contracts – and looking at the performance it should be hard to fade an equity market with Copper up 20%.


The next chart is the SP minis 30 minute volume flows. This table is based on the opening 5 minutes as one reading, followed by 30 minute bar volume readings until the runoff 3:00 to 3:15cst session, which receives its own bar. The volumes are then compared to the YTD average for that time frame and a 5 day MA of that same frame. As you can see from yesterday…the SPM made its low during a massive volume bar from 9:00 to 9:30cst. Accordingly, players were able to walk ‘em back up after the sales were made.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets were marked lower with afternoon selling and “hands in pocket” buying as players decided not to support the bids at the recent high zones. The lead index selling was seen in the Russell 2000 and Midcap 400 indices. Both markets, which have underperformed in the last two weeks (after hitting all-time highs), were hit as dollar flows seem to be moving towards large cap indices. This can be seen in the table below which lists the spreads between the DJIA-Russ 2k, SP and Russ 2k, DJIA and Midcap 400 and the SP-Midcap. As you can see, the large cap indices put a dramatic rally on the board versus their smaller counterparts. Of course…the Midcap is still higher YTD versus the DJIA and SP. But, the relative weakness in the Russell is signaling a pretty dramatic shift in money flow. In fact, the SP has traded to its highest level vs. the Russell since 2003 – the beginning of this bull move. This is significant. And its significance lies in the fact that every bull market must rotate its leadership…if this signifies a dramatic shift towards large cap equities I suspect we will continue sharply higher throughout 2007.

I have also included a couple of other charts…one of which shows the top 100 issues of the SPX and their daily plotted net change from the opening print (on a breadth basis). What is interesting about this is that the distributions on the top and bottom end are significant – statistically speaking – than one would anticipate. Essentially, this shows the potential to let winners run in the course of one’s day trading.


The other chart I have placed is the Russell 2k and its % differential from its 20 day MA. Yesterday the index closed below its 20 day MA and this has the potential to lead to some more aggressive selling in the near term.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

And the Midcap 400 shall lead them. Was it not just 6 weeks ago that the market suffered from an intense bout of “forced” liquidation? Now, here we are looking at new all-time closing highs in the Midcap 400 Cash index and watching the remainder of the indices get within shouting distance of their 2007 highs. The NDX was helped by comments from the CFO of CSCO when he stated that earnings would be towards the high end of estimates during Friday afternoon. The stock immediately shot from 26 to 27 and provided the lift needed to boost the index market on a quiet Friday afternoon.

This morning the indices are called higher based on several factors. First we had strong rallies in the Asian markets and that has carried into European trading. In addition, Sallie Mae agreed to a private buyout that put a nearly 50% premium on the stock. Finally, earnings from two key banks C and WB were much better than anticipated.

Of course, we cannot forget our old friend the currency market which was given the all clear signal from the G7 over the weekend to continue the “carry” trade with abandon. Indeed, overnight the Euro/Yen continued through its respective all time high and the USD/Yen appears not too far behind. This liquidity driven currency trade has produced one of the key elements for tracing index moves both domestically and abroad. Simply put, comments out of the G7 meeting show just how sensitive the central banks of each nation are when it comes to the carry trade. Given the tremendous growth of funds using this trade over the past several years, it is easy to imagine how ugly a liquidation of this trade would end up being for the global markets. Indeed all one has to do is look at charts from last spring and a few weeks ago when hedgies were forced to liquidate positioning under “margin call, gentlemen” types of situations. Nobody wants that again, and the banks appear both coordinated and committed to ensure that the “carry” will not end the game.

This morning there is a potential early setup on the buy side. Even with are sharply higher open, players have been getting used to selling the open and getting long somewhere in the first hour for a walk the line rally. If players get caught trying this and the dealers come in on the buy side, look for significantly higher pricing in the first hour.

Finally, the final 2 hours of Friday’s session produced a significant volume increase in the SPminis and ER2 contract, when compared to their respective YTD and 5 day averages. Considering we settled on the highs of the session, this week looks potentially quite bullish.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets continued to trade in a narrow range with a sustaining bid underneath the current pricing zones. Activity was light as volume flows are running at a -30% clip in some of the indices versus their respective YTD averages. This afternoon will bring the release of the Minutes from the last FOMC meeting and should spark some bit of trading activity. In addition Dr. Bernanke will speak in Washington and Richmond Fed President Lacker will speak on the economy in Charlotte. Given the lack of movement, I have included 5 charts today, 4 of which are focused on the MA % differentials since the start of 2007. The other chart continues to show the strong correlation between the YEN and SP.

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets rallied off the surprisingly strong Non-Farm Payrolls data released on Friday morning. The SPM7 contract settled the trade at 1458, up over 5pts on the session. This morning our domestic market will be open, however, the DAX, FTSE and CAC are all closed and volume flows should be dramatically reduced.

As for the employment report, the headline reading was +180k versus expectations around -30% lower. In addition, the rate of unemployment dropped to 4.4% and revisions for the last two reports were sharply higher than anticipated. The true damage done was in the short end of the yield curve, where Eurodollars were hammered lower by -10 to -16 basis points in their shortened trade. The long end held up marginally better, but still finished with significant losses on the session. The dollar was able to rally against nearly all the major currencies.

The question on the board now becomes this…if the index rally from our recent lows has been predicated (at least partly) on lower rates, what happens now that the cut appears off the table in the short run? My suspicion is nothing that would take us lower. I think the marketplace was much more concerned with any Sub-Prime leftover worries a couple of weeks ago during Fed speak. When those fears were not shared with the FED, the indices took off to the upside. I would argue that most of the longs have been building positions based on the continued global economic expansion (Copper anyone?). However, there are two potentially damaging issues that the indices must overcome to gain any territory from the current pricing.

The first issue is the breaking of the staircase rally since the July ’06 retest of the 1225 level in SPX. The violence of that break in February remains and it materially changed the steady low volatility environment players had grown accustomed with trading. If this move is nothing more than a retest, late April and early May could prove to be a velocity driven trade on the downside in equities.

The second issue facing the marketplace is the erosion in the Money Center Banks and Broker/Dealers. These issues have been “liquidity” leaders for the current bull move and right now they are flashing caution in the near term.

Finally, with Europe on holiday today, trading should be thin and quiet. I would anticipate at least one attempt for the SPM7 to trade towards the 1453 zone, which is where the index was moments before the employment release. 1454.50 to 1457.50 should provide a choppy “no fly zone” throughout the rest of the session.

Interesting Trades on Globex Last Night

Tweet Interesting Trades on Globex Last Night

From our Virtual Trading Room Transcript
April 4, 2007
about 0717 PDT

Brad_Sullivan> one thing worth noting
Brad_Sullivan> that happened in the SPminis last NIGHT
Brad_Sullivan> nearly 28,000 contracts traded at 1447.50
Brad_Sullivan> and it was all in a short time period
Brad_Sullivan> with buyers coming in at 1,500 contracts a clip
Brad_Sullivan> and they were immediately pared off
Brad_Sullivan> by a seller
Brad_Sullivan> I have to say that I have never seen anything like that
Brad_Sullivan> it happened around 5:30 pm CDT
Brad_Sullivan> not sure what it means if anything
Brad_Sullivan> but it wreaks of something

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

Welcome to Q2…it seems like yesterday we were making our new year resolutions and now we are 25% through 2007. From a market perspective, we have witnessed a shift from the downward sloping volatility over the previous 8 months and now find the index markets in a rather interesting position. Clearly the global indices are a crossroads in terms of velocity and direction. Was the February 27th decline a warning shot of what may lie ahead? Is the U.S. economy slowing to the point of a needed rate cut? Is the Sub-Prime fiasco about to play a much larger role in the domestic consumer? Will the U.S. dollar continue to drop against the rest of the world? If the FED is worried about inflation…when will it show up in our readings?

As you can deduce from my thinking…there are many scenarios facing the index market over the ensuing months. One aspect of the trade that appears to be a pretty good bet from where I sit is that volatility has put in a floor and will remain elevated (relative of course) to those lows seen earlier this year. Listed below are the global performances for the indices. Once again…the U.S. is a laggard.

Global Stock Market Recap

Equity Index Update

Tweet Equity Index Update

Brad Sullivan

The index markets continued to show a tremendous amount of resiliency as early selling off the New Home Sales reading for February turned into a terrific buying opportunity. When the dust had settled, each index closed at their respective intraday highs in the CASH indices…however, heavy selling hit the futures market during the run session from 3:00 to 3:15 CDT and pushed each index significantly below their respective fair value readings. This morning, the indices are called to open moderately lower from those discounted closing readings, with the SP M7 trading down -1.50 at 1443.75. This would equate to a cash open of nearly -4.50. Keep a close eye on the programs as we move throughout the session as there will be many given the current disparity between the cash and futures.

Anyone want to buy a new house? Apparently not as new home sales plunged to 848,000 versus a consensus estimate of 985,000…a mere -14% below the estimates. In addition, the January reading was revised lower by -172,000 homes. Further, the inventory of unsold new homes shot to 8.1 months – a 16 year high. Accordingly, the indices plunged on this news as the SP M7 went from 1447 to 1433.50 within 45 minutes of the release of this report. However, the sell side could not build on this push and the market stabilized. Once the indices began to hold steady, around late morning, it became increasingly apparent that day traders were stuck short and players drove the bid increasingly higher. The key question remains whether or not yesterday’s rally from the lows was end of the quarter induced as funds try and mark positions higher…that may very well be the case, but, any way you slice it --- it was a pretty impressive bounce.

This morning will bring consumer confidence, but the main thrust of the markets collective focus will be squarely on FED Chair Bernanke's testimony on the Hill tomorrow on the state of the economy. In addition, with the end of Q1 upon us…it would seem plausible that we have not seen the near term highs just yet.