PeakTrader.com

[arthur]

Over the past several weeks, institutions bought and held both bonds and stocks, in the belief they would hedge each other, while many hedge funds covered short positions. On Fri, institutions sold both bonds and stocks, which may indicate a break of the positive correlation between the two markets. It's uncertain how stocks will perform, because a "topping process," may take place for several weeks. However, bonds are relatively more overvalued than stocks, because stagflation, which is slowing growth with rising inflation, hasn't been priced-in.

Nasdaq rallied to 2,098 last week, and 2,100 has been previous resistance. Also, the stock market's technical indicators are currently mixed, although perhaps short-term oversold and intermediate-term overbought. Also, QQQQ held support at 38, while BBH (Biotech Holders Index) and DNA (largest component of BBH) created bearish engulfings Fri. I believe, Nasdaq 2,100 will continue to be resistance. SPX has no open upper gaps. However, there are open lower gaps at 1,174, 1,143, and 1,138, which I believe will close this summer.

The first chart is a TLT daily year-to-date chart that shows a bearish engulfing on very heavy volume or a "blow off top" Fri. The 10-year bond yield (which I use as a proxy instead of the 30 year bond yield) fell to 3.80% Fri and closed at 3.98%. Both the bond and stock markets have had "deep" rises and falls over the past two years without much volatility in-between. If this pattern continues, the stock market will fall sharply this summer, and TLT will fall below 90 in a few weeks. The bearish engulfing is a good sign that TLT will fall two points, to below 93 1/2, soon, perhaps, next week.

The second chart is a TLT weekly chart, since Jan 2003. Major support levels are just over 93, where a bullish white candle and top of three week consolidation area may provide support (see circle). Also, above 93 is a previous high. The 10 week MA currently at 91.8 may be support. The next major support level is just over 87 (two previous highs and a previous low). The 40 week MA currently over 88.5 may also be support. Note, the weekly RSI is severely overbought, and TLT was up for the week.

Next week is a light economic data week: Wed: Wholesale Inventories, Thu: Unemployment Claims, Fri: Export & Import Prices, and Trade Balance. Oil closed at over $55 a barrel Fri. Greenspan will testify before Congress late next week. INTC reports its mid-quarter update after the close Thu. The FOMC announcement is Jun 30th, which is also the end of the quarter. Moreover, earnings warning season normally begins in late Jun. The week after next is options expiration week. There are also lots of important economic reports that week.

Current Jun Max Pain expirations for the following major indices are: SPX 1,175 with the value of calls roughly 60% more than the value of puts, which is bearish (since it's a contrarian indicator). OEX 565 with the value of puts over twice the value of calls, which is bullish. QQQQ 37 with the value of calls roughly 40% greater than the value of puts, which is bearish. TLT Jun Max Pain seems to be 94 (although data not presented).

SPX closed at 1,196, OEX closed at 565 1/4, QQQQ closed at 38.10, and Nasdaq closed at 2,071 Fri. SPX rallied to just over 1,205 last week, and 1,190 may be short-term support. At that level, OEX should fall below 563, which may be an opportunity to buy OEX Jun 560 or 565 calls for a quick trade. OEX Jun 570 puts may be a buy at about 570. The OEX daily chart below shows recent support at 563, resistance at 570, the topping process may not be over, and lower longer-term support levels.