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Posted 10:00 CST
Equity Index Update
Wednesday August 17, 2005
The index markets suffered under the weight of institutional selling yesterday. The main culprits seemed to be the weaker than expected Industrial Production reading and further weakness in the retailers after WMT gave disappointing guidance moving forward. Today the markets should focus on the PPI report and any response to yesterday's trading action. However, before traders put on their bounce cap, it is critical to understand that during the expiration weeks it is common for the marketplace to move one-way during the Tuesday - Thursday time period. Given that we rallied and settled higher on Monday, there is a strong chance - after yesterday's action - that we will see a Monday high, and late week low for expiration.
The NDX traded as low as 1572 before a slight bounce into settlement yesterday. The index now has critical support resting between 1565 and 1550. I think this zone is a proper area to scale down buy for those covering short positions. The fact remains that this index is well above the lows seen on the London terrorist bombings - 1484 in the index - and is the current relative strength leader in the marketplace. The short positions placed in early August have played out well, but, I suspect we will test the aforementioned support zone then bounce back towards 1600 around Labor Day.
The SPU settled on key support yesterday, located between 1223 and 1220.50. The tradable downside target remains 1215, any settlement below this zone should lead to a trade of 1205. The key to the downside action appeared with a substantial institutional sell order yesterday beginning at 1232.50 and carried down to 1228.50 before the order was complete. All told their appeared to be a net sale of roughly 2,000 SPU contracts in that zone. The market was never able to recover, only able to drift in a tight range before the final hour selling knocked the index to 1220 before settling at 1221.50. Near term resistance will be the old low zone from last week 1224 to 1225.50, but, the key remains the 1221 to 1219 zone in the CASH market.
The Russell 2000 and MidCap 400 had brutal sessions to the downside and continue to be offered from the institutional community. My tradable targets for short covering remain 645 to 640 in the Russell and 700 to 690 in the MidCap. The fact that the MidCap settled at 705 indicates the relative weakness leader of this downdraft. The Russell settled at 654.90, only 3 points above its settlement of July 7 - the London session. More importantly is that the Russell has now dropped over -5% from its August trading highs. The key question is whether or not we can see -10% before a legitimate bounce opportunity. While it is possible, I continue to think that scale down bids, just above unchanged on the Q3, is the way to cover the current short trades.
As I wrote in Monday's update, this week was critical for the sell side in order to make a move through key support levels. Otherwise I would have to give into the underpinning bid that seemed to be the dominating theme in the marketplace. With yesterday's action, the onus has shifted to the buyers. Clearly we are at some interesting support levels, but, I suspect the buyers are waiting for prices to be a bit more discounted before stepping into the fray. This scenario, if it plays out, is ideal for those who are short and looking to cover over the next couple of sessions. As for my SPU shorts, I will be a scale down buyer between 1217 and 1214.50 in the futures arena. I will also cover 1/2 of my August 1235 puts at those levels, then look to see if the weakness continues until Friday for the final 1/2 of the put position. On the flip side...any bounce above 1230 will leave me utterly confused and scrambling for the antacid bottles and buy tickets.
Good Trading to All,
Brad
