Option Investor
Index Wrap

CORRECTION COURSE

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THE BOTTOM LINE -
We may have seen the lows on Thurday/Friday for the correction that snowballed last week - it was a decent rally, especially coming after the terrorist bombing in Madrid on Thursday with 200 people dead and many times that injured, many seriously. This event of course hit European markets pretty hard ahead of the New York opening on Friday.

Last week's sharp sell-off arrived last just after I was starting to think that the indices could break out to the upside because stocks did at least keep rebounding after the S&P and Dow Industrials failed to exceed highs hit repeatedly in the same area.

Market action ahead may be choppy and not substantially down or up from Friday's close, until we get nearer to the releases of Q1 earnings in April - we may get some "warnings" on earnings in the coming week and they will be a focus for buying or selling interest. Specifics on the indices are seen below along with select stock index charts.

The Federal Reserve Open Market Committee meets Tuesday, and bond and stock investors will also be looking at any statements from them that could relate to any possible change in their interest- rate stance.

FRIDAY'S TRADING ACTIVITY -
The Dow lost 355.47 points on the week, which was a 3.4 percent decline. The Nasdaq Composite lost 62.9 points on the week, or 3.1% for the week. The S&P 500 (SPX), while rebounding nearly 14 points on Friday, had a loss for the week of 36 points and this also represented a decline of 3.1 percent.

On the NYSE advancers outnumbered decliners by nearly 3 to 1 - ditto the Nasdaq.

The University of Michigan on Friday said its consumer sentiment index fell to 94.1 in March, from 94.4 in February. This number was close to expectations of 94.4. On Thursday the Labor Department reported a decline in weekly jobless claims and this set a bit of a positive tone for the end of the week also.

Airlines, semiconductors, brokers, oil services and Internet stocks were among the best performing sectors. Gold and health care were losing sectors.

Disney (DIS), which had suffered a steady decline in its share price, after CEO Michael Eisner's negative press with shareholders and their withholding of support, rebounded to above 26, up nearly 5%. This action helped the Dow 30 and the S&P blue chip indices.

Helping out the Nasdaq, was an analyst upgrade of Dell (DELL) Computer. The stock ran up 3.5 percent to just over $33 after upgrades at Morgan Stanley and J.P. Morgan.

OTHER MARKETS -
The 10-year T note was down 15/32 at 102, ending at a yield of 3.76%. Potential bond buyers were not buying as many Treasury issues given yield under 4% and selling was the result by week's end. The 10-year was higher on the week however.

Federal Chairman Greenspan said Friday that U.S. job creation has been "badly lagging," but he also expressed some optimism that hiring would pick up soon. Lagging job growth has of course been a key factor behind current record low interest rates.

In late-day New York trading on Friday, the dollar was up over a percent against the euro, trading at 1.22.

There was talk among Forex traders that the euro's decline of over 6 cents (dipping below 1.23)after it hit an all-time high of $1.29 in Feb, has led to continued profit taking buying by holders of short dollar/long euro positions.

Some of the "hedge funds" as well as other speculators who held large long euro positions have pulled some money out of the euro.

MY INDEX OUTLOOKS -

Nasdaq Composite (COMP) Index - Daily:
Last week, a close over 2060 - above the 21-day moving average - was needed to suggest a renewed uptrend. Instead, the rally failed right in this area and reversed to the downside, suggesting that the Composite might again fall to the area of the lower envelope line set at 3.5% under the 21-day moving average.

At 1950 and in the area of my lower envelope line, COMPX again was oversold and would have some likelihood of a rebound - this is what happened: a final dip under 1950 and then a rally followed. The rally appeared seemed to be more than than short- covering type buying, as there was decent upside follow through on Friday as buyers showed up.

As I've been saying for awhile, the Nasdaq Composite might get to as low as 1900 but that is a "worst-case" downside projection. In general, I would now favor buying Nasdaq options with the Composite in the 1950-1900 zone.

Resistance in COMPX can be assumed again in the area of the 21- day moving average, currently intersecting in the 2030 area. A close above 2030 is needed to suggest that this index might be poised to get back up to 2060-2070, where I would take on bearish option plays.

I doubt that there is going to be sustained upside follow in the coming week or two, given the ease with which sellers took stocks down last week. Buying interest appears cautionary and not yet wholehearted as tech businesses await a better economic rebound than has been seen to date.

Nasdaq 100 (NDX) Index - Daily & Hourly:
A noteworthy technical event in the Nasdaq 100 or NDX, was that it fell to the lower end of its projected hourly downtrend channel and then rebounded. The channel lines are outlined in the chart on the right below. Support is suggested by this trend channel as in the 1400-1405 area, with resistance at 1460, where the red (down) arrow is seen.

I suggest call purchases around 1400 if there is another dip - if so, I also suggest exiting on a close below 1380. Index puts look favorable when the NDX is at or above 1460, with a suggested exit point being an Index close above 1480.

As with the Nasdaq Composite, a dip under the lower envelope line I've been using, set at 3 percent under the 21-day moving average, gave a good idea of where this index was both oversold and in a price area where the Index could snap back (see the daily chart, left below).

The other tendency we often see with the hourly chart is that upside reversals often occur when both the stochastic models, set at "length (number of periods) 5 and 21, fall to the lower extremes. The last time both got into overbought territory and turned down, there was a decline of some 90 points from the time when both lined up at or under their the lower extremes of the green level lines - see lower most indicators, above right.

Nasdaq 100 (NDX) Index - Daily:
The daily chart in a bit more detail and with a downtrend channel outlined is shown below. There were a couple of key technical events - one, when the index broke under its uptrend line and then could not get back above this line. Two, the same break and subsequent failure to get back above the 50-day moving average. NDX fell under this average and it was then the exact point marking the top of intraday rallies - before a next wave of selling came in, taking the Nas 100 index down again.

The top of the daily chart downtrend channel, intersecting currently in the 1470 area, is the key resistance in my estimation. If you are holding long calls bought near 1400, I suggest taking at least partial profits around 1470, if reached.

According to the 14-day RSI Indicator, the NDX Index got as oversold as it has been in some months, with a reading under 35 toward the end of the week. Readings in this area may not always reflect major potential for a trend reversal but it does suggest an "oversold" market and one that is ripe for taking profits held on puts.

Nasdaq 100 tracking Stock (AMEX:QQQ)- Hourly:
We didn't see the close over 37-37.50 that might have suggested some upside follow through to the last rally attempt prior to last week's declines. Instead, the Nas 100 tracking stock fell to the lower boundary of its downtrend channel, which was also suggested as a downside trading objective in QQQ - at 35-35.50 specifically. This area offered an opportunity to both exit short stock positions and puts and a place to do some buying of the stock anticipating a tradable rally.

I indicated last week that a fall to below support at 36.25 suggested downside potential to the lower end of the channel, at 35-34.75. This same prior support point is now likely to define a first important resistance are. Above 36.25, expect resistance and selling interest around 36.75.

Hopefully, those short the stock made a decent profit on my last week comment to cover shorts and buy back the stock beginning at 35.25 - I wasn't sure the Q's would get to 35 even - WRONG!

S&P 500 Index (SPX) - Daily chart:
The S&P 500 dipped to well under my lower envelope line set at 2% under the 21-day moving average - often I also use a 3 percent setting which marked the exact lows on Thursday and Friday.

In a strong uptrend, such as we have seen in recent months, declines tend to stop at a envelope setting that is not as wide as 3%, but more like 2 percent.

I tend to use a tighter setting until there is a decline that is back to a "normal" envelope range of 3 percent above or below a 21-day moving average of the S&P 500 (SPX) close. The envelope lines, as seen in the chart below at TWO percent, will be reset (to 3%) on my chart for the future.

The other Indicator worth mentioning here is my custom indicator that plots daily call to daily put volume, as seen on the lower portion of the chart above. The readings of this Indicator are suggesting a current or recent bearish extreme in market "sentiment" - one that is extreme to a point where it often precedes an upside reversal or the opposite of what traders expect. The magenta line is a 5-day moving average of the daily ratio number.

With put volume approaching an extreme relative to daily equities call volume, traders are about as bearish as they will tend to get. Once everyone gets that bearish, the market is often then setting up for a reversal to the upside as much of the selling gets done, such that a relatively small amount of buying can drive stocks back up.

S&P 100 Index (OEX) - Daily chart:
The S&P 100 or OEX Index broke the 561-562 support I was seeing on the charts and this event triggered more selling and the snowball effect (and with buyers retreating to the sidelines) took over last week.

I made mention last week that technical support might develop in the 558 area, assuming 566 was penetrated. Well, how about 448 instead?! The market decline took on significant downside momentum and the slide was more than I bargained for.

I also take a look here at the common 38, 50 and 62% retracments - the OEX has not quite retraced half or 50% of its last major upswing. 542 would be a 50% retracement - if this area is reached I think it offers a high potential trade in terms of (further downside) risk relative to (upside) reward potential.

Dow Industrials (INDU) Daily:
The sideways pattern outlined by the two dashed level lines in the Dow chart below, called a "line" or "rectangle" pattern, most often suggests that the market is consolidating for a new move up. Sometimes, this pattern precedes a downside break however, and a sharp and quick downside move, as happened last week.

The decline then stopped at the Dow's uptrend line - funny how that happens so often! I now look for what was support, at the lower end of the box, to now offer resistance assuming a rally takes the Dow 30 back up to the 10400 area (at the red arrow). I lean right now to exiting calls around 1040, at least in the way it looks to me now and before seeing further market action in the week ahead.

As noted in this column last week: "A decisive downside penetration below 10400 gives me a downside objective to around 10200 to 10100." Not a bad prediction as it turned out. I hope some of our OIN subscribers used this downside objective as the likely right area to exit puts and even do some call buying. I continue to favor buying calls in this same zone - 10200-10100. I doubt that we will see 10,000 in the Dow anytime soon.

Good Trading Success!

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