Brad Sullivan's Morning Commentary

[Hamzei_Analytics]

Posted 08:35 CST

Equity Index Update
Tuesday August 30, 2005

The index markets staged a sharp short covering reversal session after hurricane Katrina's eye missed downtown New Orleans. After a relatively uneventful first 30 minutes of trading, the indices started to push higher, helped by Crude Oil's drift lower from its overnight highs. By the afternoon, Crude was nearly unchanged on the session and the indices were all challenging key short term resistance levels - which happens to be where the markets settled after a quiet final 90 minutes of trading. Once again, Katrina will be the key in today's session, only this time it will be the aftermath.

Currently Crude Oil is trading at 68.70, up 1.50 on the session as nearly all the output from this region has been halted. Natural Gas is trading right at yesterday's high level, up nearly 7% overnight. Accordingly, the domestic indices are beginning to falter as the SPU is trading at session lows of 1210.50, -4.00. The key question in today's action is pretty simple - was yesterday's rally overdone in light of the potential aftermath of the hurricane. If the answer is yes, and Crude continues to rally the index market should be in for some difficult sledding. Simply put, this is an extraneous event. When these events occur, the markets typically follow the "lead" market or indicator. The lead markets in this event are Crude and Natural Gas...the equity market will continue to follow their lead until it reaches key support or resistance levels.

SPU key resistance is located between 1214.50 and 1217.00...key support is 1208.50 to 1206.50, followed by 1201 to 1199.50...then the critical 1196 to 1194 zone. NDX continues to chop above its key support zone of 1565 to 1550...resistance is 1575 to 1590... The Russell 2000 is trading at a key zone located between 656 and 661, any move out of this zone on a closing basis should signal a short term trend change and a potential trade to 675. The MidCap 400 is trading at a resistance zone between 704 and 708...above this zone, on a closing basis and the index is looking for 718...on the support side, a critical zone rests between 699 and 695, below this zone and the downside should accelerate.

Once again, the key to today's session will not be equity related, it will be based on external factors. This will make day trading choppy and difficult as most predictive type indicators will not be of use if Crude rallies or breaks another $2 per barrel. Keep it close to the proverbial trading vest and wait to see if the economic releases have any impact on the trading session.

Economic Releases

9:00cst Factory Orders
9:00cst Consumer Confidence
1:00cst FOMC Minutes



Good Trading to All,

Brad

 

[Hamzei_Analytics]

Equity Index Update
Tuesday September 6, 2005

The index markets participated in a quiet session Friday as the employment report begins to lose more of its importance in the current FED tightening cycle. Instead, the marketplace continues to focus on hurricane Katrina's aftermath, the future of gas prices, the potential rebuilding of New Orleans and whether or not the FED will halt the current rate cycle in light of this tragedy.

Typically, this does not produce the greatest of trading environments. While volume flows were strong at last week's index trading lows, they fell dramatically as the indices regained higher ground late in the week. Further adding to potential choppiness in this trading week will be the beginning of "rollover." This period is when institutions and funds begin the process of rolling their positions from SPU to SPZ. SPZ will be the front contract on Thursday morning this week, while SPU will expire on Friday September 16. "Rollover" will produce large volume readings over the next several trading sessions with most of larger scale type moves happening in the final hour of trading.

Technically speaking, the MidCap and Russell 2000 remain the strongest index markets as each rests above their key moving averages. The NDX is close behind as it is trading below only its 20 day MA, located at 1578. The SPX is a bit softer, resting below both the 50 day and 20 day MA's and nearly on top of the key 65 day MA. Any break of the 65 day MA on a closing basis this week (currently 1216.70) would be decidedly negative and could lead to move below the 1200 level. The most interesting index on basis of MA's appears to be the DJIA. This index essentially settled on top of its 100 day MA at 10451. However, what is intriguing about the index is the critical MA resistance resting overhead. Between 10517 and 10538 rest the 20, 50, 65 and 200 day MA's. Whichever direction the index takes away from this resistance zone should lead to a "follow" move that drives the index a minimum of +/- 3% from current trading levels. Keep a close eye on this index.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:30 CST

Equity Index Update
Thursday September 8, 2005

The index markets participated in a quiet, rangebound session yesterday. Even the strong intraday downdraft in the long end of the curve could not impact equities, as players seem to be "positioned" for the next leg of this move. Volume flows were light, while breadth measure were in favor of the buyside - actually there was a considerable reversal in the breadth readings from the first hour of trading into the bell. In the SP500 issues, after the first 60 minutes of trading, there were 154 advancing issues and -319 decliners. Yesterday's session ended with 295 ADV and -199 DECL within the index. Further, the Up/Down volume within the index settled with nearly 62% of the daily volume within the SP500 on the upside. Typically, these are constructive indicators for the buyside.

One potential fly in the ointment for the buyers came in the shape of Chicago Fed President Moskow's comments yesterday afternoon. Moscow argued in a speech that the FED needs to continue "appropriate monetary policy" to keep inflation well contained. That statement was the reason behind the reaction in the fixed income market where players quickly pushed the long end lower. However, the fixed income market was unable to take out lows made from the immediate post Katrina rally, and are trading higher this morning. In my opinion, this will add much to the importance of next week's economic reports. The FED is indicating that inflation will be a larger concern than the disaster in New Orleans, that should signal to the marketplace how much inflation is in the pipeline. I think Mr. Moscow took the immediate end of the hike cycle off the board yesterday, now the importance will rest on where the FED will signal their stopping point. The current bet seems to be at 4%, while some have it as high as 4.5%. Anyway you slice it, the index market will continue to float along - UNLESS - we get a strong whiff of inflation next week.

On the position front, I closed out my long 1225 call position yesterday in the SPU, leaving me long only the 1235 Sep. calls.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 07:30 CST

Equity Index Update
Monday September 12, 2005

The index markets continued their upward surge on Friday as players continue to position themselves for a retest of August's trading highs. To this point, it is worth pointing out that the internal condition of the marketplace - particularly in the Nasdaq 100 - continues its pattern of descending tops over the past 8 months. Further, the upside volume thrusts in this index remains at low levels, a clear sign of slackening demand. However, the net advances of the NYSE Operating-Companies only settled just below all-time highs on Friday. In addition, the DJ Utilities Average and the NYSE Index settled on all-time high prints. This is clearly a market where the strong are getting stronger and the weak are getting weaker. However, in my opinion, it is far too earlier to begin the serious discussions of this bull market's demise. Remember, selectivity in the final stages of a bull market is a normal pattern, as is the pattern of too many trying to time the exact high or low of the index markets. To this point, after several rounds of cocktails on Thursday evening with a variety of equity, option and index traders I could not find one player that was bullish. I don't know much, but I do know that this normally constitutes a buy sign.

Overnight, the SPZ traded above Friday's session high on the rally in Japan, as the Nikkeii finished up over +1.6% on their election results. However, since then the index markets have softened and the SPZ is lower by -1.50 at 1247. Europe is slightly lower as well. The largest action overnight was in the currency markets as the European currencies all fell sharply against the dollar and Yen. The domestic treasury market is a bit softer as is Crude Oil. Long only the September 1235 calls on the SPU...




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 07:30 CST

Equity Index Update
Tuesday September 13, 2005

The index markets are called to open lower this morning, with the SPZ trading at 1244, -2.50 on the session. The index has made up some ground since the release of the PPI report, which showed tame inflation once again. Since this report we have seen the treasury market moving up and the dollar moving lower.

Overall, the market traded in a contained zone yesterday, with late - program related selling. The key in regards to today's trading session will be whether or not the NOK update, PPI or Trade Balance reports have any lasting impact on the session. Currently, the answer appears to be negative as players will wait for tomorrow's Retail Sales and Thursday's CPI reading. However, before one writes this session off to another bout of sleepiness, it is worth noting that traders will begin to move into positions ahead of key reports. Given the expiration cycle hitting the markets on Friday, a CPI reading outside current estimates would have a significant impact on the marketplace. Accordingly, it would not be a surprise to witness positioning ahead of these reports today.

Techincally speaking, the index markets remain in a constructive mode above respective moving averages. Moving forward the indices will need to make a push higher in order to take out key resistance levels. If this fails to occur, I would anticipate a sharp move downward in the 5% range by mid - October. In my opinion, the next 7 trading sessions will be critical for the index markets. On the buyside, the anticipation of a slowdown in the rate hike cycle seems to be losing steam. However, on September 20, the FED will meet and their directive should be less murky than our current situation. Currently, the index market has traded to current levels based on optimism that the FED will signal an end to the current cycle by the end of 2005. The dangerous scenario is that this proves to be incorrect and the buyside is left to move out of their current positions in a marketplace that does not have broad breadth statistics. This is the -5% scenario.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 07:30 CST

Equity Index Update
Wednesday September 14, 2005

The index markets fell yesterday as sellers entered the marketplace ahead of several key economic reports due out the next few sessions. Today's Retail Sales report was bit dismal for the headline figure, however, the Ex-Auto portion of the figure was not as bad as feared. That being said, this is the worst Retail Sales reading since November 2001's (-2.9%) and will clearly add some economic punch to the sell side argument in the coming weeks. Tomorrow will bring the critical CPI report, however, one must be cautious as this report is looking backwards, the real CPI danger will be in the months ahead. Finally, Tuesday will put the FED front and center with a decision on rates and hopefully some clarity in terms of how much longer the current cycle will last.

Given the magnitude of events - let us not forget expiration this week - over the next few sessions, it may be difficult for the indices to gain much traction in either direction from current price levels. That being said, we are entering the seasonal weakest period for the index markets, and many players seem to be ramping up on the sell side of this equation. My difficulty in this current assessment of the trade is quite simple - it appears too easy. Much like yesterday in the SPZ when the market dropped to 1239.50 only to rally to 1246, I suspect their will be one giant head fake rally before the sell side is cleaned out. Typically, this would be the ideal time to initiate short positions - in the aftermath of players getting stopped out.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:15 CST

Equity Index Update
Thursday September 15, 2005

The index markets slid lower yesterday as technology issues led the decline. Settlement in the major indices occurred near short term support levels, particularly in the DJIA. The DJIA settled on top of its 200 day MA at 10544 and any serious break of this level leaves a high potential for a whipsaw reversal from last week's rally in the index. This morning the marketplace is digesting a better than anticipated CPI reading and a disturbing reading in the prices paid component of the NYFED manufacturing index. The prices paid reading shot over 50 from 29 last month and will certainly add more economic fuel to the fire of inflation in the pipeline. Adding further potential pressure on the marketplace is the meeting today at the NYFED to discuss credit derivatives. Let us not forget that this nugget of news is what pushed the SPU from 1222 to 1210 back in August. Finally, the Tuesday meeting of the FED, option expiration and the Philly Fed index at 11:00cst will add to potential market movement today.

Since Katrina hit the coast, volume flows have been relatively tame in the index markets as players attempted to wait out the damages. Initially, the economics of rebuilding and the potential for the rate cycle to end boosted the index markets. The past couple of sessions, however, the marketplace has lost some of its bullish shine. Both the SP500 and NDX failed to move above cumulative breadth reading highs that were registered back in August. Now, the key question becomes are we about to base at above the August lows before moving to higher ground, or is the rally over? At current trading levels, about the only thing I know for sure is that there are no "value" bets to be made. Simply put, the indices are quiet and relatively firm. The weakest index remains the DJIA, with the Russell and Mid cap 400 the strongest. Seasonally, we are entering a very difficult period for the markets - although 2003 and 2004 Septembers were relatively tame. So, what is an index trader to do? Day trades have proven to be efficient as the marketplace is moving in one-way directions quite often. Value trades seem to be represented at lower and higher levels than the current market prices, so position trading at these levels seems a bit futile. My advice is to wait out these levels on position ideas and to look for a few day trading opportunities throughout each session.

One aspect of the marketplace we have not discussed in a bit of time are commodities. Currently, Gold is up around 1% and trading near the key 460 level, Silver is firmly above 7.00 and Palladium is nearing key trading resistance levels. Further, the grains continue to be weak, particularly Soybeans which have moved sharply lower since the initial bounce at 6.00. The meats are on the come line as Live and Feeder Cattle have broken out to recent highs. Given the current dullness in the index markets, these markets have continued to garner some of my attention - and in my opinion, will present tremendous trading opportunities over the next several years.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:40 CST

Equity Index Update
Friday September 16, 2005

The index markets settled moderately lower in quiet trading ahead of today's option expiration. Interestingly enough, there appeared to be ample reason to mark prices lower in the indices as the Prices Paid Component in both the NY and Philly Fed Manufacturing readings were dramatically higher than anticipated. The treasury market dropped rather aggressively as the long end of the curve settled sharply lower on these rising inflation fears. In addition, Gold continues to move to highs not seen since the late 1980's. So...why are the equity markets holding up so well?

There is little doubt that the rally in Japan, Germany and Great Britain are having a helpful impact on the U.S. market. Further points of merit on the buy side of the trade is the fact there has not been a down year ending in a 5 for the SP500. Think about that for a moment...given the seasonals that are upon us, one should expect some type of downdraft in the next couple of weeks. But, as I have pointed out many times before, the markets rarely give us what appears to be so easy. I still think the greatest danger is shorting the markets too early and being forced out on a rally above 1260 in the SP500. In my opinion, the day trade is there to make your short bets, as our options for leverage - however, it makes no sense to me to pick a fight with the buy side at these levels. Wait for a move then strike. In the meantime, keep looking at the commodity markets.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:40 CST

Equity Index Update
Tuesday September 20, 2005

Today, the FOMC will meet and announce a decision on interest rates. Most participants feel the FED will continue on the rate hike path, although some continue to hold out that the impact of Hurricane Katrina should be enough reason to pause the cycle. Whatever one's opinion of this decision, it is important to realize what the marketplace is focusing on in terms of the FED's decision and statement. The index marketplace has remained bid throughout the typically torturous month of September, and with only 9 trading days left in Q3, it will be up to the sellers to reverse the current up trend for the quarter. Given the insight that today's meeting should provide about the FED's intentions moving forward we should receive a key part of the trading puzzle for the remainder of 2005.

Yesterday's trading action was muted in terms of volume and relatively shallow - by the end of the session - in terms of the downdraft. However, before the rally in the final 30 minutes of trading it appeared as though the majority of the indices would settle at or lower than -1% for the session. That changed as day trade shorts were forced to cover near the bell, but, that does not change the fact that breadth and volume readings were awful for the overall marketplace. In the SP500, 406 issues DECLINED yesterday and Down volume led up volume by a measure of 2.4 to 1. The ultimate question for the remainder of the week is whether or not the sell side can build on a host of negative factors, the most important being the increasing selectivity of the winners in this market advance - this is a longer term key to the health of the market, the current state of the domestic fixed income market which appears to be headed towards 4.55% in the 10 year note and the whiff of inflation that participants are feeling.

The difficulty for the sell side, however, resides in a number of other factors that point to this market carrying higher throughout the remainder of 2005. These factors include a global index market rally (Japan crossed 13,000 last night), increasing global economic demand and in the light of Katrina, another 200 billion in estimates for rebuilding the gulf coast region and the fact that years ending in 5 are HISTORICALLY POSITIVE FOR THE INDEX MARKETS. So, where do we go from here? As a person who attempts to learn from predicting mistakes, I will say this : the index markets are NOT ripe for any type of heavy buy or sell at current levels.

In the meantime, day traders should be able to profit from solid one-way directional moves - so long as opinions are removed about future market direction. While this may sound a bit glib, my worst trading losses have happened when I have scaled into large positions due to my opinion about where the indices will finish that session. As a discretionary trader, I make a living on timing a variety of markets, however I have learned over the years that one cannot apply day trading techniques to longer term trades. In most trading sessions, it is imperative for the day trader to have a plan, followed by the ability to empty their brain and let the market show the direction it wants to establish. The key levels for today's action in the SPZ contract will be the support zone from 1232 to 1230, below this level look for 1225 to trade. On the upside, the index needs to move above 1246 before one can momentum buy for a test of the 1250 to 1252 zone.




Good Trading to All,

Brad

 

[ukhero]

Posted 08:40 CST

however I have learned over the years that one cannot apply day trading techniques to longer term trades. In most trading sessions, it is imperative for the day trader to have a plan, followed by the ability to empty their brain and let the market show the direction it wants to establish.

Brad

Hi Brad,

Totally agree with the above. Chalk and cheese, as we say.

Yours

UK

 

[Hamzei_Analytics]

Hi Brad,

Totally agree with the above. Chalk and cheese, as we say.

Yours

UK

Brad is one the best -- it takes a special person to consistently trade about 1% of CME index volume

can't wait to read his upcoming article for eSignal Exchange Newsletter !!


Fari

 

[Hamzei_Analytics]

Posted 08:10 CST

Equity Index Update
Wednesday September 21, 2005

The FOMC kept up the pressure on the index markets yesterday as the bid that had driven us higher post-Katrina turned flipped over and led the marketplace lower. Volume swelled, particularly in the 1:30 to 2:30cst hour as longs seemed to liquidate a fair amount of positions. Breadth and volume indicators were sharply negative for the 2nd session in a row, leaving many feeling decidedly bearish in the near term.

If on accepts the trading theory that I have been discussing behind the recent rally in the indices (Katrina rebuild and the FED signaling the end of the rate hike cycle in the near term) one of those underpinnings were cut out yesterday. The FED did little to push any trader or analyst towards the idea the tightening cycle ending. In fact, it appears as though inflation will be the operative word over the next several FED meetings. Given the current "contained" long term inflation and the short term bump that Katrina will provide, the markets are now fixated on Hurricane Rita. This could be the double whammy on the economic front that the country does not need. However, action in the yield curve continues to flatten this morning, leading me to believe that the marketplace is not placing bets on Rita being the reason the FED pauses in the near term. The curve continues to look at inverting, typically a bullish situation - historically speaking - for equities.

In the near term however, it appears as though the sell side has gained "hand." In the SP500 yesterday, -404 issues declined and 75% of the volume was traded on the downside. I suspect that today's action will produce further sell attempts, particularly if any bounce fails at key resistance levels between 1229.50 and 1232. The ultimate short term key, in terms of price and volume rests in the 5 minute bar from 1:45 to 1:50cst yesterday. It pushed the SPZ from 1235 to 1230 and traded over 61,000 contracts - well above a 3 standard deviation on both price and volume for such a time frame. In my opinion, this zone will hold key psychological influence in the near term and will most likely be the driver that pushes the market back to a test of the 1200 level. As I have written for numerous sessions, the market was biding time before choosing a direction - it appears as though that direction is down. Position stops in the SPZ should be impelemented on any settlement above 1237.50.

This morning, the index markets are offered lower as Crude Oil advances to 68 per barrel...the dollar is sharply lower...the long end of the curve is well bid...QCOM raised its quarterly guidance.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:20 CST

Equity Index Update
Thursday September 22, 2005

Another dismal session in the equity markets transpired yesterday as sellers continue to press the marketplace lower ahead of Hurricane Rita's landfall and in response to the FOMC statement on Tuesday. Breadth and volume figures remained sharply negative and while some short term indicators are now approaching oversold levels, there does not appear to be anything holding the marketplace back from breaking below August's trading lows in the near term. However, one aspect of the current trade that cannot be overlooked is the potential that this decline is in ANTICIPATION of Hurricane Rita. If this is the case, yesterday's sharp increase in trading volume on the NYSE (1.93 billion shares, the highest session since the April 15, 2005 low) could be looked upon as a positive. Keep in mind that during the April low and subsequent July decline, volume surged before the indices staged a turnaround. While I feel it is too early to bottom fish in the current situation, it is worth keeping a close eye on as we move forward in today and Friday's session.

I have always implemented a 3 day rule on trading rallies and declines. This rule is pretty simple and it reminds me not to be the last guy to the party. The following are the moves for the current week of trading in the major index markets:

INDEX 3DAY % QUARTERLY% YTD%
RUSSELL 2000 -3.27% +1.6% -0.2%
MIDCAP 400 -2.7% +2.01% +5.4%
DJIA -2.47% +0.94% -3.75%
NDX -2.3% +4.5% -3.7%
SPX -2.2% +1.6% -0.1%
As you can see, this week has gained serious traction on the downside, in the SP500 we have had 3 consecutive sessions with Declining Issues readings of greater than 400. In addition, the down volume each day this week in the index has been greater than 75% each session. These are warning signs of a potential bounce, but, they are also warning signs that this time something could be different. We have had a great number of discussions as to the complacency within the index markets and their respective price action. Similar to the volatile periods we witnessed in both March and April, the current state of the trade is at key inflection points. If the sell side is able to gain more traction, or the indices are unable to bounce into the end of this month it should signal a continuation of the current downtrend. That move, which I expect would occur within the first 3 weeks of October, could push the indices lower by another -5% across the board. The catalyst to this move would be the buyers we witness in the next few sessions being forced to liquidate trades at lower levels, creating a cascade effect. Again - this is only a scenario, we need to see how this plays out in the next couple of sessions.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Posted 08:15 CST

Equity Index Update
Thursday September 29, 2005

The index markets continued to band their respective moves around Natural Gas and Crude Oil in yesterday's action. Day traders were the main drivers behind the move to 1217.50 in the SPZ, and the subsequent rally towards the 1225.50 area. When the dust settled, it left the main indices within the boundaries of tight ranges that we have seen over the past 5 trading sessions. However, some minor technical damage was done in the Russell 2000 and the MidCap 400 as these indices continue to probe lower price zones during the intraday movements.

The record, some would say, remains scratched - repeating the same line over and over...in this case the line is to hold tight in the SPZ until one of two situations present themselves. The first scenario is one in which the index continues to find itself unable to probe higher price points throughout today and tomorrow's trade, breadth statistics remain on the defensive and the quarter ends with a bit of a whimper. In this scenario, I would expect the SPZ to move towards the -2% breakdown level discussed in yesterday's comment. I would add that this move has the potential to happen with velocity - so be prepared.

The second scenario is wrapped in end of the quarter buying across the SPZ and NDZ at the expense of Midcap and Russell 2000. I would view this as a potential longer term setup and should lead to an aggressive move lower in the Midcaps and Russell over the first couple of weeks in Q4. However, this situation is dangerous for those looking to short the ND and SPZ due to the dollar rotation the indices would witness in this move. Most likely, the best shorting situation would occur during the option expiration week in October.

This morning, the index markets are trading around unchanged levels...the domestic fixed income market is lower after the final GDP release - which showed a slight uptick in the deflator reading...yesterday the 2 year and 3 year notes went inverted...the dollar is mixed...Crude Oil is higher... Gold, Silver and Copper are slightly lower...more Fed speak today.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Brad Sullivan (1% of CME Volume) Morning Commentary

Posted 08:45 CST

Equity Index Update
Friday September 29, 2005

The index markets staged a strong rally yesterday as the buy side added positions in technology and energy related issues. Yesterday's rally has the potential to be the start of something stronger, however if end of the quarter window dressing is behind the crux of this move, it could lead to a potential trading reversal in the next several sessions. Further along this scenario is the historical movements of October, which mark a sharp trading bottom before reversal into the year end. The question moving forward is simple...is this time different? As a trader who is short both the Russell and MidCap futures, I will confess that yesterday's rally spooked me. Many combinations and scenarios are floating around right now, but, the one I find most compelling is the fact that just about every trader and fund I know are short. Further, none of them are short at better prices than yesterday's closing prints in the major indices. This leaves me confused and a bit gun shy. There is a potential, and I stress the word potential (30% odds roughly) that we will see the classic "fire in a crowded room scenario." In this scenario, it will be short covering that pushes the market into new high territory on a move sometime in the next few weeks. Again, I want to reiterate that I have not turned to the long side. However, in my opinion, if this scenario is correct it would prove pretty easy to jump on the bandwagon for a 2 to 3% move. The other day in my commentary I stressed the consecutive closing sessions around 1215 in the SPX. Further, I felt that any breakout from that zone would produce a 2% move. It will be critical for the buy side to push forward, or at a minimum hold serve today and into early next week. The longer this market holds at higher/lower ground the more buyers/sellers will be attracted after a period of sessions. Regardless, I am playing the long side on day trades due to this breakout. Finally, one final note...I have stressed the remarkable record for years ending in 5 over the past few weeks in the equity markets. Starting in 1905, the DJIA has finished higher in each year ending in a 5. Maybe with the start of a new century, the pattern will change - but I doubt it. Keep the larger picture in mind over the next few weeks, as a decline could prove to be a tremendous buying opportunity.


Good Trading to All,

Brad

 

[Hamzei_Analytics]

Brad Sullivan (1% of CME Index Volume) Morning Commentary

Posted 09:30 CST

Equity Index Update
Monday October 3, 2005

The index markets settled moderately higher on a final buy program in the last minutes of Friday's trading to signal the end of Q3. Each index finished the quarter with higher markings, in addition, the often feared month of September produced positive results across the index board. Volume flows were on the light side, and that may continue ahead of today's religious holiday.

In my opinion, the key to making money in trading comes from being able to "listen" to the market. If a trader can show patience and wait for the opportunity, without putting their "wants" ahead of the market signals, they will be successful. Over the past week I have written about the pervasive bearish sentiment from traders I speak with on a daily basis. Typically, these traders are correct in their positions, however, I have the distinct feeling that a "squeeze" appears to be in the cards for the index markets. As I pointed out last week, nobody I speak with is short from higher price levels than we are currently trading. That leaves a very short leash on the loss side if we continue to move higher. Thursday's upside breakout from a 5 day price consolidation may very well have been due to end of the quarter window dressing, but, it may also have signaled the beginning of the "short squeeze."

Given all the headwinds facing the current equity market, it is hard to believe that we are poised to move higher, but if you laid out the destruction of a major city, strong up ticks in natural gas and crude oil along with a healthy dose of commodities moving to multiyear highs on inflationary fears, I dare say not many would have predicted the indices to be HIGHER than when the first hurricane hit. It is this very reason that the odds for a squeeze are very high. September failed to deliver its normal bearish pattern, earnings confessions will put Katrina front and center on the blame game - but, and this is important - the market will discount these disappointments, giving companies a reprieve in the short run. IN THE INTERMEDIATE TERM, THIS IS DECIDEDLY BEARISH AND SHOULD LEAD TO A POTENTIALLY SHARP DOWNDRAFT IN EARLY 2006. Why? Simple, if the market is cheering the companies getting a sharp boost in rebuilding the Gulf, the odds are that we have a disconnect in reality. If companies get the Katrina "pass" during earnings season, but, the markets reward those other companies rebuilding, it should lead to a combination of the Katrina "miss" companies continuing to miss targets and the rebuilding companies losing their large one time earnings boost. Keep in mind the equity and index markets are a forward looking mechanism.

As for today's trade, keep a close eye on the MIDCAP 400 which is within 1.5% of All-Time Highs. In my opinion, a new closing high in this index could be the "buy stop" that triggers the broader markets much higher. On the flip side...If my analysis is incorrect and the "squeeze" does not occur, wait for the markets to break support zones built up in August and September before launching on the short side.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Brad Sullivan (1% of CME Index Volume) Morning Commentary

Posted 09:11 CST

Equity Index Update
Thursday October 6, 2005

The index markets suffered a broad selloff yesterday on the heels of a significantly weaker than expected ISM-Non MFG Survey headline reading. In addition, the ISM reported the highest prices paid component reading since the survey began in 1997. After being dealt this initial blow, the indices bounced off session lows and were moderately negative until Fed Governor Hoenig's remarks. In these remarks, Hoenig stated that current infaltion is running at 2.2% y/y. He went on to discuss that the FED does not want to see this reading move higher. The indices took this as another sign of the FED fighting inflation and pushed markets significantly lower into the closing bell.

When Hurricane Katrina hit, and the SPX traded as low as 1201, buyers came into the marketplace on a two-pronged based scenario. First, the rebuilding of an entire region would be beneficial to the bottom line of many corporations. Second, the FOMC would quickly put a halt to the current rate hike cycle. Over the last two sessions, the rate hike scenario ending has been shattered by Fed Governors Fisher and Hoenig. Accordingly, the buyside has gone running for cover, pushing the indices back to or through Katrina lows. After speaking with many index players yesterday, it appeared much of the selling was tied to liquidation of long positions. The indices now find themselves in a precarious position moving into tomorrows NonFarm Payroll Report.

The SPX closed below its 200 day MA for the first time since early May, when the index vascillated around this MA for nearly 4 trading weeks. How bad was yesterday's trading action? At the close, in the SP500 issues, 92% of the volume traded was registered on the downside and only 44 issues advanced - while -451 declined. Normally, such volume distribution readings signal a short term bottom. I would be wary of expecting much follow to the downside in today's action. Nevertheless, that does not take away from the overall technical damage accomplished in yesterday's market action.

The Russell and MidCap indices were hung out to dry in yesterday's action. The Midcap, which on Monday afternoon was only 0.4% away from an all-time trading high, has reversed by a whopping -3.5% from that level. The Russell 2000, which had not shown the ability to challenge all-time highs recently, has dropped by -4.4% in the same amount of time. If these indices take another hit in today's trading session of -1% or greater, it could trigger a move on the line of -7 to -10% from the recent trading highs before this move ends. Current short positions continue to be marked profitably, now comes the litmus test...can the bears create the next leg down?



Good Trading to All,

Brad


--------------------------------------------------------------------------------
Posted 08:30 CST on Thursday

Equity Index Update
Wednesday October 5, 2005

The index marketplace suffered a dramatic reversal yesterday on the heels of Dallas Fed President Fisher's comments on inflation and the current economic outlook. He noted that the data present "a less than clear picture" in terms of the economic outlook. Fisher also cautioned that inflation remains "near the upper end of the Feds tolerance zone" and that the "pace of economic growth had begun to slow slightly prior to Katrina." Equities began declining soon after this statement was released and ramped up when the SPZ broke below the 1230 support zone. By the time the bell rang, the reversals were staggering:

Contract Reversal in % (yesterday afternoon)

SPZ -1.53%
NDZ -1.62%
DJZ -1.43%
ER2Z -2.05%
MDZ -1.81%

Simply put, yesterdays action was a classic "one way street, stay out of the way" type of move. Oftentimes, in reversal situations, the move becomes larger due to canceling of resting bid orders underneath the current price zone. I suspect, after talking with some brokers, that many resting buys below 1225 were canceled in the SP market. This gave the sell side a "free look" at lower prices after the first leg of selling hit the market. When buyers kept their hands in pocket, it opened up the ability to "press" the trade significantly lower. The question now becomes will today's trading action continue the downside probing, or will a recovery bounce ensue?

I suspect that this mornings action will produce choppy trading with upside resistance zones for the indices being their respective final hour trading highs. The key to the session will be whether or not the sellers commit more to the downside and begin the attempt at 1195 in the SPX. If this scenario shows itself, it will most likely be in the afternoon trade.

Yesterday's breadth and volume figures were bad, but not as poor as one would suspect for such a down market. SP500 had 119 advancers to -376 decliners, while the NDX had 32 advancers and 68 decliners. Volume figures on the SP500 registered 74% to the downside.

I have spent most of the past week discussing the chance for a short squeeze in the marketplace. Yesterday's action took that off the table for now, but, who knows if it will reassert itself later in the year. One of the aspects of trading that remains critical to success is constantly envisioning multiple trading scenarios and your reaction around them. I use this comment to voice many of my different scenarios, and attempt to determine my future positions around these ideas. One scenario that I did not envision was Fisher coming out aggressively on inflation, but, sometimes we all get a little lucky. My scenario was off on the short squeeze, but, my short positions in the Russell and Mid cap look a whole lot better marked to market this morning than they did yesterday.




Good Trading to All,

Brad

 

[Hamzei_Analytics]

Brad Sullivan (1% of CME Index Volume) Morning Commentary

Posted 08:50 CST

Equity Index Update
Wednesday October 12, 2005

The index markets, particularly the beta leaders of this advance, fell yesterday as longs continue to lighten up on overall market exposure. It is important to realize that during bull market runs, the current trading decline is common in terms of scope for a correction. The Russell 2000 and MidCap 400 have led the decline since last week, followed by the NDX, SPX and DJIA.

The FOMC minutes did little to change the tone of the FED that was evident last week in remarks by governors Fisher and Hoenig. In the immediate time post minutes, short covering seemed to present itself as the SPZ moved from 1189 to 1196. However, sellers quickly regained the upper hand - particularly in the ER2 and MDZ contracts and kept the sell button on for the remainder of the trading session.

In terms of the Russell 2000, the index settled below its 200 day moving average for the first time since May 17, when the index was trading below the key 600 level. Since that time, the index rallied to its all-time high in early July, just below 700, and subsequently has failed with a series of lower highs and lower lows throughout the remainder of the summer. The current decline seems to be mirroring the -11% drop the index witnessed from the end of March 2005 to the May 2005 lows. The current decline is now greater than -6%...keep in mind that this is over a total of 6 TRADING SESSIONS. When declines get as aggressive as this, it is critical to have a price level or percentage level on the board to take profits. 625 is minor support in the cash index, below this 615 to 610 will represent a near -10% move from our recent trading highs of 674 and should be used to establish partial trading longs and full short covering.

Technically speaking, the damage continues, however, both the NDX and MidCap 400 remain above their respective 200 day moving averages. That may prove tough to maintain as we move further into earnings season. After the close of trading yesterday, AAPL reported disappointing earnings and is down sharply in pre market trading. In addition, the energy complex remains well bid overnight, ahead of the DOE stats. Copper, Gold, Silver, Platinum and Palladium continue to break multiyear trading levels. The meat complex remains very firm as Live and Feeder Cattle have made new All-time highs in this move...Pork Bellies and Live Hogs remain strong as well. The grains continue their slow slide...the treasury market continues to struggle as it cannot seem to sustain any type of real trading bounce. Keep a close eye on 4.45% in the 10 year note, a move above this could trigger sharply higher yields. Given an already skittish equity market, this scenario would be quite bearish for the indices.

Finally, in terms of trading positions, I have 50% left of my shorts in both the ER2 and EMD contracts. I expect to cover another 50% of the position over the next couple of sessions, particularly on any challenge of 625 in the Russell cash and 677 in the Midcap cash market.



Good Trading to All,

Brad

 

[Directional]

is that 1% of all the S&P emini futures traded?

 

[Hamzei_Analytics]

Brad Sullivan (1% of CME Index Volume) Morning Commentary

Posted 08:20 CST

Equity Index Update
Thursday October 13, 2005

The continuation of selling pressure remains as the indices - particularly the Russell 2000 and Midcap 400 as they were offered aggressively throughout yesterday's trading session - places the equity market at a key junction for the next 2 quarters. Can the indices begin to hold serve as we move to key support levels? Is the technical break of 4.45% in the 10 year note signaling more inflation in the offing? Will the index market continue to respond in a downward slope? These are some of the critical inputs within the current decision making environment for the equity market.

In my opinion, the most disturbing damage from a technical perspective occured yesterday in the MidCap 400 as it settled below its 200 day MA for the first time since October 2004. While it was a breech of minute portions - .75 only on the cash index - it nevertheless signals faltering demand for the hottest sector of the marketplace. This situation only becomes bearish if there is nowhere for the money to rotate towards. To this point, we have only seen some indices not go down as much as the Midcap, but we have not seen clear buying in any area of the market. This is a key point as we move forward over the next couple of months and into 2006. As for the short term outlook for the MidCap, critical support rests at 650 and UNCH on the year is at 663. As the last man standing - in terms of positive return for 2005 - it would be a psychological blow for this market to begin seeing red ink so close to year end.

The Russell 2000 broke below 620 before rebounding slightly into the closing bell. Heavy volume was seen in the ER2 contract as it traded over 200,000 contracts and produced its largest volume of all-time. Could that mean washout? Possibly, however, with so much on the plate over the next few trading days it is difficult to say that the bottom is in. I continue to look at buying the cash levels between 615 and 610 for a partial long position. In the short time frame, the continuing rise in yields is not helping this index, and could lead to further problems if we get a severe spike in yields.

Overall, the DJI and SPX are holding up relatively well...but they have been unable to shake the sellers that are seemingly waiting for any decent bid to hit, sending the markets lower. I have spoken to numerous traders over the past several sessions, and to a trader they seem to think much of driver of this move is long liquidation. When the liquidation ends, I would look for continued volatility over the next few weeks as the indices attempt to build a base.

Overnight, the treasury yields moved sharply higher. The 10 year note broke above 4.5% and currently finds itself at the 4.49% yield...the dollar is stronger on a trade balance report that came in as expected...Gold continues moderately lower...Crude Oil is quiet ahead of the DOE Petroleum stats. Position wise, I now have 25% of my original short positions in both the ER2 and EMD contracts.

Good Trading to All,

Brad