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Trading places, or trading targets\?

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Mid-week declines in stocks have brought a resurgence of interest from bearish traders on the thought that August's rally has come to an end and a September lull is in the making. However, this morning's reversal from a lower open and the major market averages now showing gains has some bears wondering just what is going on.

Last week and early this week, we were trying to instill in shorter-term traders the discipline of trading some bearish targets in their trades.

The NASDAQ Composite (COMPX) 1,339 +1.90% did test the mid-level of regression this morning near the 1,300 level after a brief pierce low at 1,295. Bears now look for the trending lower 50- day MA at 1,352 and psychologic resistance to hold into the early part of next week. I think today's action is highly attributed to some shorts trading for short term gains, while shorts that entered positions below the 1,280 level in the NASDAQ Composite were looking for weakness to cover into after a bullish run in this index above the 1,400 level last week.

NASDAQ Composite Chart - Daily Interval

With the NASDAQ Composite Bullish % ($BPCOMPQ) and other major market Bullish % charts still in columns of X, we felt on a shorter-term basis that bearish traders in some technology stocks that found a 7-10% gain in their bearish trades should be taking some gains, especially if the stock they were trading hit a near- term bearish target. Today's action in the NASDAQ Composite not all "that" surprising and I'd expect bears to be looking for new entry points on a NASDAQ rally near the 50-day MA and 1,400 level of psychological resistance.

NASDAQ breadth today is positive by a 3 to 2 margin. New highs versus new lows continues to widen and deteriorate with 19 stocks hitting new highs, while 79 stocks hit new lows.

One sector I spent a lot of time on last week and early this week was the Semiconductor Index (SOX.X) 306.57 +0.94%, which has rebounded from a morning low of 293, which violated my near-term bearish target of 300. Bearish traders that may have taken some partial gains in stocks like Maxim Integrated (NASDAQ:MXIM) $32.64 +3.39% or QLogic (NASDAQ:QLGC) $35.13 +1.29% at near-term target, will most likely correlated any rally attempt in those stocks with the above mentioned NASDAQ Composite (COMPX) and Semiconductor Index (SOX.X) levels of resistance.

Semiconductor Index (SOX.X) Chart - Daily Interval

In yesterday's market monitor at OptionInvestor.com, Steve Price thought bearish traders might want to take partial profits in Maxim Integrated (MXIM) near current levels of trading. I also thought it was a good idea with the SOX.X getting so close to the psychological 300 level and a technical level where the SOX held on an early August pullback. Bears that booked some gains now raise cash in their accounts, perhaps holding partial positions. On a rally back near the 332 level, look for resistance to be formidable, with bears then targeting new lows and the point/figure chart's bearish vertical count of 260.

Jeff Bailey
Senior Market Technician
Option Investor

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