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Major Market Average Update

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The averages have had a substantial run since bottoming two weeks ago. But, in the short-term, the averages are somewhat overbought and may be due for a consolidation phase. That's not to say an overbought market cannot grow more overbought.

The military action over the weekend may be a reason for some profit taking on the part of longs and lack of demand on the part of shorts. Although, the opening rebound felt like short covering. Nevertheless, traders can identify risks in the broader markets with short-term retracement work.

By overlaying a retracement bracket over the averages' recent runs, we can begin to identify where risk may exist, either to the upside or downside.

The Dow Jones Industrial Average ($INDU) rallied from roughly 8060 to 9190 in the space of about two weeks, which is a big advance by any measure. The index pulled back last week down around the 8980 to 9000 area, which was about a 19.1 percent retracement of the entire two week move. That retracement level may again serve as support if the Dow weakens further Monday. In fact, at the time of this writing, the Dow's low had been traced at 9012.

The S&P 500 (SPX.X), like the Dow, is somewhat overbought in the short-term. Also like the Dow, the S&P retraced about 19.1 percent of its two week move last week. That two week move was from roughly 944 up to 1084.

The S&P coiled around the 1057 level last week, and is holding at that level at the time of this writing. Its intraday low last Friday was traced at 1053.50, which may be a good reference going forward in today's session.

The Nasdaq-100 (NDX.X) is trading the strongest of the three this morning, which may be a byproduct of short covering in tech shares. The tech laden index was more volatile last week, but is currently trading above the 19.1 percent retracement level, which seems to be a magnet in the Dow and S&P.

The NDX does, however, face some serious resistance above its current levels around the 1311 mark. That level was the NDX's intraday high following the terrorist attacks. It served as resistance last week and may do so again this week if the NDX rallies from current levels.

In times of uncertainty, trading is all the more difficult. But, employing some simple retracement techniques can help traders to manage risk more effectively, whether it be to the upside or downside.

Eric Utley
Option Investor

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