If You Trade The Mini-Sized Dow, You Should Know These Weightings

January 29, 2004
Chris Curran

Stock index futures opened Wednesday’s session with a
gap to the upside ahead of the FOMC’s afternoon announcement
regarding short-term rates and future bias. The first few hours were a yawner
as the market entered a holding pattern ahead of the news, but that all changed
at 2:15 with the announcement. While the Fed left rates alone, as expected, the
committee changed its policy bias statement to say
“the committee believes that it can be patient in
removing its policy accommodation.” That phrase replaced an earlier formulation
in which the central bank said it could afford to keep interest rates low for a
“considerable period.” That statement change sent stock index futures into a
freefall, led by Merrill Lynch, who was a seller of at least a couple thousand
SPH contracts. Bonds also got trampled on the news and closed down over 1
point. The ES gave the usual 3 moves, but the 2nd retracement move was cut short
by more broker selling.

The March SP 500 futures closed
Wednesday’s session with a loss of -13.25 points, and finished in the lower 1/2
of its daily range. Volume in the ES was estimated at 821,000 contracts, which
was well ahead of Tuesday’s pace, and 33% above the daily average. Looking at
the daily chart, the contract cracked both its 10-day MA and uptrend line
support, and settled right on its 20-day MA. A break of that support leaves an
air pocket down to 38% Fib support in the 1,107 area. The contract also broke
short on the daily 3-Line Break chart, leaving a new break price of 1,154.25.
On an intraday basis, the contract is a bit extended with 13-min resistance at
1,136 as the first obstacle, followed by 30-min resistance at 1,141.

Tuesday morning we have the
Weekly Jobless Claims report at 8:30 am ET, with an estimate for a slight
decrease to 340,000, along with the Q4 Employment Cost Index, which is expected
to come in at a 0.9% increase. The pre-market also gives us earnings from Dow
components
(
BA |
Quote |
Chart |
News |
PowerRating),
(
XOM |
Quote |
Chart |
News |
PowerRating), and
(
HON |
Quote |
Chart |
News |
PowerRating). After three days of wider ranges
(pinch me, I must be dreaming!), I’d normally expect some range contraction, but
with price extended below intraday resistance, we have some room to retrace.
With the past 4 out of 5 sessions ending on the downside, the bulls will need to
make a stand here to fend off revenge-minded shorts, even though after the past
2 weeks, they’re missing 2 arms and a leg.

Know Your Index Weightings

As many of you know, I often
talk about watching and following the action of the Philadelphia Banking Index (BKX)
as part of the toolbox for trading the SP 500 E-mini (ES). Why? Because the
Banking and Financial sector is the most heavily weighted sector in the SP 500
(SPX), and acts as a good “gauge” to measure the relative strength and/or
weakness of the ES. For those of you trading the Dow E-mini (YM), do you know
which stocks have the highest weighting in the index, and can influence it based
on what they’re doing that day? It’s relatively easy to remember, since there
are only 30 stocks in the index.