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SPX, NDX: Pick Your Spots


If you are playing the Nasdaq, heed Toddo's advice not to make an investment out of a trade gone bad.


Regardless of which camp you are in, we can probably all agree that since 2:18 p.m. on Wednesday the MInx has shown her temper. There has been no lack of discussion on the site about the big forces that might drive the market up or down. Nothing much has changed on that front, except perhaps a palpable sentiment among traders that Boom Boom does not have a firm grip of the situation, nothwithstanding whether you agree or disagree with his thinking. That's no small item when one considers that the "perception" of where the Fed stands constitutes a large (I would submit "overwhelming") portion of the reality of asset prices.

With that out of the way, for traders and nimble investors, sharp movements either way are not such a bad thing if one can take advantage of them. What follows are several looks at the S&P 500 (SPX) and the Nasdaq 100 (NDX) using different measuring sticks (short, intermediate, and longer term), in an effort to spot price levels that both Hoofy and Boo might try to defend.

For short termers, and I mean intra-day types, some futures traders look at support/resistence levels off of a "pivot price," i.e. the key inflection point from the prior day's range. Please do not think that come Monday the Minx will obediently turn around once those levels are reached. Those prices merely reflect areas of focus where, if other things are in place, fast money types might get interested either way. The green lines represent support levels and red lines resistence. SPX, NDX.

Thinking beyond today, when price swings increase for an individual stock or the market as a whole, using Bollinger Bands levels has always made intuitive sense to me. For the newer Minyans, Bollinger Bands show price levels at determined Standard Deviations away from a pre-selected moving average. The theory goes that - on average, in the long run - prices revert to the mean, and taking advantage of price outliers can provide some lucrative trades. (Click here to read a bit more about Bollinger Bands, or here if you want to overdose on the topic.) For today, I am using the basic 20 Day Moving Average as the starting point and here you can see the 1, 2, and 3 standard deviation price areas for the SPX and the NDX. The proper use of Bollinger Bands can be a very effective trading tool, but it is not the holy grail of trading. In blow-off/wash out type moves for example, B-Band could leave you on the wrong side of the track for a long painful time.

My view is that keeping it simple is often the best recipe, and moving averages and support areas, with a few thoughts on both, is the best I can offer. First, my sense is that the SPX and the NDX are in very different situations. The SPX has been in a (cyclical?) bull market since March of 2003. The 200 DMA is well below the current price and solidly upsloping, the 50 DMA is also upsloping, and the important support areas do not come into play until the 1220 and 1170 areas. If your anxiety level jumped over the last three days because the SPX lost a whopping 2.7%, you may want to re-evaluate your risk tolerance for investing in equities.

In Boo's corner, things could not be more different when looking at the NDX. Putting on the rosiest of glasses, one might argue that the NDX had a bull market from the October 2002 lows to January 2004. Since then it has been consolidating (churning?) within a +12% / -16% range. And now things have turned flat out ugly. The daily NDX chart shows a gap below below the 200 DMA; the 50 DMA sloping down; a resurrected Head & Shoulder pattern with the neckline either already broken (diagonal neckline), or right at Friday's closing level (horizontal neckline), with a price projection of 1500 (July '05 lows); the NDX is down 7.5% since the January highs, 5% since the open last Monday, and Friday's closing price was a new low for 2006 by almost 1%. If the capital expenditures revival that's supposed to pick-up the slack for the consumer has arrived, the 100 top companies in high-beta land did not get the memo. Arguably the NDX is not in a bear market, but it seems to be marching quickly toward one.

So there you have it. If an increase in volatility is here to stay, pick your time frame, choose your spots, but perhaps now more than ever, heed Toddo's advice not to make an investment out of a trade gone bad.

Good luck this week Minyans!

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Positions in SPX, NDX
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