Follow the Leader

 | Sep 13, 2011 | 2:22 PM EDT
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There is almost always one index that plays the dominant role in determining market moves. But the index in that lead role changes from day to day, sometimes from hour to hour. One of my jobs is to try to figure out -- preferably, ahead of time -- which index is the one calling the shots. Lately it's been the Nasdaq 100, the NDX.

You may recall that in last Friday's column I talked about (and showed in one of the charts) the bullish island reversal at 2189 and the big gap from Sept. 6 at 2167.60, which I was watching as a possible downside target. I noted, "Now, I will plan to re-establish some of those same positions once the gap at the 2168 level is probed." Not that this gap had to mark a low, but simply that it was a level where I was willing to re-establish some bullish bets after selling out my Nasdaq 100 positions the day before with the NDX at 2238 (the morning pricing at Rydex).

In fact, the gap was easily filled on Friday as the NDX sold off to the 2151 level, about 17 points below the gap. As announced, I bought the close that day in the NDX, at 2164. Then, Monday morning came -- that's where things got especially interesting.

The market got off to another rocky start, but the NDX held up better than most indices. The NDX bottomed at 2139.58, only 12 points below Friday's low and well above last week's low of 2113 (from Sept. 6). This action was in distinct contrast to the plunge in the Dow to its lowest level seen since Aug. 22. Here, yesterday's low of 10,825 was a full 110 points below Friday's low. Similarly the SPX broke a full 1% below Friday's low. But the NDX held up better than everything on the board, and was the first index to turn positive on the session.

Now fast-forward a few hours to this morning. Again, the NDX telegraphed the turn, this time a reversal from the highs. This morning's high in the NDX, about a half hour into the session, was 2214.19. That happens to be just 0.10 points from the top of last Friday's gap at 2214.29. This time the NDX was telling us that, short term, the move was done -- the index was telegraphing a downturn. Note that no other index was close to filling last Friday's gap. In the case of the SPX, the gap is way up at 1185.90; this morning's high of 1174.05 wasn't close. More to the point, if you were waiting for that gap to get filled to signal a near-term top, you're still waiting -- that was the wrong index to be watching.

In any case, I used the pop up into that gap this morning to re-establish my bearish hedges in the NDX and flatten out my positions in the Nasdaq 100 at Rydex. From that morning high, the NDX (and everything else) sold off back toward the morning lows. In the case of the S&P, it was another pretty good swing of better than 1%. Very tradable. The e-mini made its high at 1168.00 (December contract) and sold off 14 points to 1154.00; it's now bouncing back.

For the moment I am again flat the NDX at Rydex, as my long positions are hedged with inverse OTC leveraged (2-to-1) positions. Overall, I'm still bullish on the market, but only up to about 55% levels. Meanwhile I continue to watch these indices to see what they are telling me about the near term.

By the way, if the NDX now were to exceed its morning highs and pop above the top of that gap from last Friday, I would rate that near-term bullish. But that doesn't mean I will chase that index -- I will just hold my other positions and look for the next opportunity, whatever it may be.

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