Equity Index Update

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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

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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.

FOMC and The Morning After

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From our Virtual Trading Room Transcript
May 10, 2007
about 0549 PDT

Jason_Roney> With expiration next week, the monthly patterns suggest further upside by next friday's open. In fact the SP500 is just 1% from the March 2000 all time high close (1527 in the cash). Given the solid uptrend, there's reason to think we'll hit that level sometime next week. But in the short term, the next few days would seem to offer the bear's best chance for downside. As I'll note in the afternoon discussion, there is often a counter-trend move towards the end of the week prior to expiration week. As well, the market tends to struggle with any follow-through on the day after an FOMC meeting. But a look at the daily patterns suggest an even greater probability of short-term pause.

Jason_Roney> Here's some observations: (1) the SP Futures have 7 consecutive closes above the open price. there have been just 10 occurrences over the last 10 years (in 2007, April 23 and Feb 23 were next day - both closed down) and 7 of those closed below the open; (2) the NDX finished higher for the first 6 days of the calendar month. looking back to 1995, this happened just 3 times before and each time the index finished lower; and finally, (3) the Treasury Bond closed below the prior day's low while the SPX finished above the prior day's high. this happened at the March Meeting and resulted in a flat next day's trade with close below the open.

Jason_Roney> The bottom line is that Thursday's action has a higher probability of finishing below the day's open. The overall trend remains solidly higher into expiration but the next 1-2 days offer more downside than upside risk.


Click here to read the complete transcript of Jason's chat.

Click here to read the Trading the SP Gaps by Jason Roney.

Equity Index Update

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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

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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

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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

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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

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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

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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

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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

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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

Crude Oil, VIX and S&P-500

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Sally Limantour

The relationship between oil and stock prices is on the front burner again as prices skyrocketed with May crude oil trading to $68/ barrel. “Oil surged $5 in 7 minutes late yesterday on speculation the U.K. would mount a rescue attempt.” (Bloomberg)

As the situation between Iran and the UK gains attention and concerns over the stability of the Persian Gulf and the Straits of Hormez move to center stage we now have concerns over the US naval forces there. This many ships in the Persian Gulf are of great concern… but should we be surprised?

Back in late January I voiced concerns over the changing “guard” in the Middle East. For the first time President Bush was putting in a US Navy Admiral as the US Central Command Commander-in-Chief. Admiral William Fallon was appointed on January 30, 2007. That seemed suspect to me as what had been up until now a protracted land war was soon, in my opinion, “going to see water - lots and lots of water. Can you really have a navy admiral running things and not have some ships in the picture? The geography of this war may be shifting.”

Stocks are acting defensive. We have geopolitical concerns, a slowing economy and inflation in some of the commodity prices. My favorite trade is long gold/short stocks right now and will continue to hold this.

The VIX is still relatively low when looking at a monthly chart and I wonder how long the VIX will find support in the 12-13 area. Will it soon have a higher low – 15-18 as its support line as we move into heightened concerns in the Middle East and inflation kicks up?

The next two are market profile charts for S&P-500 and Russell 2000 e-minis . The long horizontal letters represent supply above the market.

SP500, Grains, Cotton and Base Metals

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Sally Limantour
February 6, 2007

In stock land we have little data this week, but keep your eye on budget headlines coming from Washington. The bears are gun she and rightfully so. That said, as mentioned last Friday, my short-term proprietary model is signaling a sell for early this week. This does not mean a top, just a short tem correction and with that in mind, I will look to short ESH 1458-1460 with stops over 1464.

The grain markets and cotton, my two favorite sectors for 2007 continue to act well. We have corn (March) trading over $4.00 a bushel and new crop beans (November) trading over $7.75 a bushel. Corn did fill its gap from 1/12/07 and long positions were re-established last Friday in the $3.95 area. With the $4.00 level for new crop corn, farmers are going to plant more corn this spring which will take away acreage from soybeans. The new crop beans are outperforming due to this and with the bean to corn ratio at 2.1 this creates a huge incentive for the farmers to plant corn.

Cotton has been sleeping, but woke up yesterday to close up +1.32%. I am still holding long positions from December (52.50) and with talk of reduced acreage (13.2 vs. 15.2 year ago) we may see the fund buying especially if we start to see prices breakout above 56.00.

There were reports last Friday that the large hedge fund, Red Kite (a $1 bn metals-trading fund) had hit trouble and copper prices fell 4.8%. Nickel and zinc were also down in London and perhaps that could explain the $19.00 sell off in gold (from Thurs. high to Friday’s low). It was a buying opportunity in silver and gold and I continue to think the precious metals will outperform.

Red Kite has brought out some speculation concerning the base metals. One report put the London firm down as much as 20 per cent in the first 3 weeks of January, leading to forced liquidation of copper, zinc and other base metals. In an attempt to prevent a stampede for the door among their investors, the fund requested approval for an amendment to extend 45 days from 15 the notice required for investors to withdraw their money. As the FT reports, “that smacks of the proverbial horse having already bolted.”

This has prompted the question on the role of commodities funds in driving up prices – and how that picture might unravel. Questions from the Markets Risk blog are, “What happens when the hedge funds who bid up prices in global assets start to get investor redemptions because of poor performance? What happens when the leverage unwinds and managers with little experience managing systemic or core market risks are faced with “improbable” risks?”

Answer: massive liquidations. It is estimated that more than 500 hedge funds specializing in commodities have started in the last 2-3 years. These funds represent a large percentage of the trading volume of base metals financial derivatives and it makes you wonder just how much of the 146% rise in copper prices from late 2005 to May 2006 was due to physical demand (China?) and how much was due to leveraged hedge fund derivative speculation. Perhaps a bit of both.

Remember to use stops!