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Nasdaq 100 to S&P 100 Ratio

 
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arthur
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PostPosted: Sun May 29, 2005 6:14 pm    Post subject: Nasdaq 100 to S&P 100 Ratio Reply with quote

The stock market has likely been in the process of a short-squeeze for around two weeks. Many institutions and individuals are using trailing stops, and hedge funds are covering much of their short positions. So, with less selling (holding stocks with stops) than buying (buying to cover), the market continues to rise. These "tug-a-wars" are normally resolved three ways: A blow-off top, an acceleration of selling, or a lengthy and more volatile trading range (i.e. a consolidation), before a big upside or downside move. However, so far, the market has continued to slowly grind higher on below average volume.

The first chart below is a daily NDX (Nasdaq 100) to OEX (S&P 100) ratio chart, since 1992 (i.e. max chart). The Ultimate Oscillator (ULT) is currently at the highest level over that time period (see red line), which indicates NDX is far more overbought than OEX. Consequently, it's likely that NDX will fall greater than OEX, or OEX will rise greater than NDX. So, buying OEX calls on dips and QQQQ puts on QQQQ bounces may be the best strategy next week. Oil prices rose recently and a pullback in oil prices may cause OEX to outperform QQQQ. Also, OIH (oil ETF) puts may hedge OEX calls, along with QQQQ puts.

The second chart is a Nasdaq daily chart, since late 2003, that shows a general trading range between 1,900 and 2,100. The congestion areas (two circles) may be future support and resistance areas. Nasdaq fell sharply to 2,100 the first two days this year, which may be short-term resistance. The 10 day MA is short-term support. The indicators RSI ULT MACD and CMF generally moved from oversold to overbought quickly, which is typical of a short-squeeze.

The third chart is a QQQQ daily chart, since Dec last year, that shows a sharp fall the first two days in Jan (small circle), where the low at 38 1/2 has been major resistance most of this year (gray line). If QQQQ closes above 38 1/2, next major resistance is at 39 1/2 (Price-by-Volume bar). However, with QQQQ short-term overbought, there may be some consolidation, e.g. closing the gap at 37.80. If QQQQ closes below the 10 day MA, then it may trade within the consolidation area (big circle). Major support levels are 38, 37.60, and 37.25.

"Max Pain" works well over half the time two weeks before options expire. The Jun options expire in three weeks. Currently, SPX Jun Max Pain is 1,175, with the value of calls almost twice the value of puts, which is bearish, since the put/call is a contrarian indicator. SPX closed at about 1,199. OEX Jun Max Pain is 565, with the value of puts about twice the value of calls, which is bullish. OEX closed at about 569. QQQQ Jun Max Pain is 37, with the value of calls roughly one-third greater than the value of puts. QQQQ closed at about 38 1/4.

Economic reports next week are: Tue: Chicago PMI, and Consumer Confidence (both 30 minutes after the open), Wed: ISM Index, Construction Spending, and Auto Sales, Thu: Revison of First Quarter Productivity, Unemployment Claims, and Factory Orders, and Fri: Nonfarm Payrolls, Hourly Earnings, Unemployment Rate, and ISM Services. The economic reports Fri may be the most important. Productivity has a powerful influence on the price level and corporate profits. Stagflation (slower growth with rising inflation, athough growth started from a high level and inflation started from a low level) should be the greatest concern at this point.






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