Option Investor
Index Wrap

DOWNWARD PULL

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THE BOTTOM LINE -
I thought we might have seen the lows for this current correction in the week before last, but Friday's renewed downward pull makes me wonder. Of course it came on a triple witching options expiration and the selling came late without apparent "news" connected to it. There is also nervousness ahead of the next round of full-blown earnings releases coming up next month.

The indices may hold at or above 1100 in the S&P 500 (SPX), 10,100 in the Dow, and the low-1900 area in the Nasdaq Composite (COMPX). Of course major support is seen at Dow 10,000 and could be the key test if 10,100 give way. The Nasdaq looks the most vulnerable to breaking to new lows given the Semiconductor (SOX) Index closing under its prior mid-December (down) swing low.

Money managers seem too complacent on the S&P being in a mild correction only for the market to move into a strong renewed uptrend, especially ahead of seeing Q1 earnings. The recent rally failed just under the prior SPX lows in the 1125 area, which now looms as significant resistance. It looks best to trade for short-term objectives and let the market sort itself out as to the next major move. Technically, longer-term weekly oscillators need to fall further before the market is again really oversold.

FRIDAY'S TRADING ACTIVITY -
BULLS ARE WONDERING HOW LOW THEY CAN GO -
The S&P 500 (SPX) has now shed nearly 5% off its highs from earlier this month. The Index closed at 1118.8, off about one percent or 12.5 on Friday. The Nasdaq Composite has fallen double the SPX corrective figure and the COMPX is now fully 10% off its peak of late-Jan (at 2154) and closed on Friday, down 22 points, to 1940.4.

Not much news, some rumors - short sellers were in short supply most of the day - until about 3 pm Eastern - as there was the still active talk about a possible capture of the #2 to Ben Laden in Pakistan. A wild fight was going on for sure.

Indexes spent the day not doing much until option expiration activity seems to take over according to our man Jeff (Bailey). UTX (United Technologies) put a bit extra selling pressure on the Dow Industrials on a ratings cut and the stock lost nearly 3%.

There wasn't much news as I mentioned, as the market waits for the main season for Q1 earnings reports coming up in April. Decliners outdid advancing stocks by nearly 2 to 1 on the NYSE and nearly that much on Nasdaq.

A triple witching day, so it remains to be seen if there is Monday downside follow through. A surprise capture? There may not be much buying interest otherwise and on such a surprise it may be more short-covering in nature.

OTHER MARKETS -
Bond prices were off a bit on Friday (6/32nds). For the week, the benchmark 10-year Treasury was off slightly after a 3-week rally.

Bonds have been trending higher since the weak jobs report early in the month. The 10-year note was at 101 and 26/32nds to yield 3.78 - this versus 3.76 a week ago. Not much change for sure, but prices were lower given the higher yield than the week before.

I still remember my Sociology Prof saying that an INVERSE relationship is when two related factors move in the opposite direction - when one is up, the other is down. Never knew that this would come in handy when I traded bonds many years later and needed to remember that with prices up, yields are down and vice versa.

The dollar staged a rebound on Friday trading in New York, based on the possibility of the capture of al-Qaida's #2. The rise I should say was against the Euro - against the Yen there was virtually no change. The dollar gained nearly a full percent again the Euro and closed in New York trading at 1.2272

The backdrop to the dollar/yen steady trade was that dollar buying had been going most of this month by Japanese central authorities - on Friday talk around the FOREX market was that the Ministry involved would stop trying to keep a lid on the rise of the Yen and might for now stop trying to keep the U.S. currency from falling.

Japan usually wants to buck the trend to a rising yen, based on not wanting to see the price (in dollar terms) of their exports going up.

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:
SPX need to get, and hold, above 1125 to suggest a renewed uptrend. If the recent rally is the approximate mid point in a corrective down leg - this is plausible given the wide double and triple top formed over several weeks - if so, a measured move objective (2nd down move is equal to the first) is to around 1060. Given that this is the area of the 200-day moving average it would not be too surprising either. The S&P 500, and the component stocks will often pull back to the area of the 200-day average after a prolonged uptrend.

The key is whether recent lows in the 1105 area are penetrated especially on a close. If so, an immediate next downside objective is to 1080 with the next lower objective to 1060.

A move down to the area of the 200-day average would give me some confidence that the correction was near an end as I think institutional buy support will be found in this price zone. This kind of a move would then suggest entry into Index calls.

SPX and OEX put purchases have a favorable risk to reward on another rally, assuming "risk" is held to exiting puts on a close over 1125 basis the S&P 500. Downside profit potential at that point should well exceed risk, given the risk that 1100-1105 might get penetrated. My assessment of market sentiment, as mentioned, is that participants are complacent that the correction won't be much deeper. Maybe, maybe not.

THE BIGGER PICTURE -
S&P 500 Index (SPX) - Weekly chart:
Good to look at the bigger picture when at a juncture like this and from the weekly chart it can be seen that:

- The major resistance hit at recent highs
- Recent lows were at an up trendline, more or less reflecting the rate of change on the rally from the fall
- The RSI on an 8-week basis is falling, but is still at a midpoint and is not yet reflecting an oversold reading.

The market will get oversold again if the market just goes sideways or drops lower. Either or. Stay tuned.

S&P 100 Index (OEX) - Daily chart:
PATTERNS -
The S&P 100 (OEX) didn't quite complete a 50% retracement of its last advance from its mid-November low to the first of several tops it made. Just on this basis, the correction could be deeper still and be within what is a "normal" retracement. Something I keep in mind. The other is that the strongest chart support is still well under where the Index has gotten to so far on this pullback. The dashed green line suggests that this line of support is around 527. Heavy resistance is assumed to be at 557- 558, in the area of those late-Jan/early Feb relative lows.

INDICATORS -
Traders have been trading a lot of equities puts relative to calls - enough so to pull my Equities Call/Put indicator down to it lowest level, in terms of the 5-day average (magenta line), since October, around the time of the start of a major rally. I don't rely on this indicator in isolation. If the chart pattern gets more bullish with a close above 550 - and ability to hold this area on subsequent pullbacks - this Indicator will have greater weight in terms of my trading.

The 14-day stochastic is indicating a first oversold reading. This alone is not enough to get bullish, as it can stay in this lower area for a while. At a minimum however, it suggests that one more shot down, say to 535, or worst case, a brief dip below 530, would set up a great Index call buy in my estimation. Stay tuned. As to put suggestions, the hourly chart is next -

S&P 100 Index (OEX) - Hourly chart:
Basis the hourly chart, would favor puts on signs of rally failure in the 555-560 area. Those who held puts from the area of the triple top at 565-570, profit taking is suggested on a move to the lower end of the trend channel, especially to the 542-540 area. At that point, the longer stochastic (21-hour) would likely be fully oversold again also.

Dow Industrials (INDU) Daily:
Based on the appearance of this pattern and the Friday close, it does look quite likely that the Dow has another dip to the lower envelope line and to test key support at 10,000. When buying interest wanes, selling doesn't usually dry up and institutional buy support come in until there is a retreat to a recognized support point. The other, more major support will likely kick in if there was a decline to the area of the 200-day moving average intersecting currently in the 9800 area.

The rounding top pattern formed in the Dow and outlined below is of interest and not seen on the S&P indices. Often after this kind of arc pattern there is a sharp sell off once prices fall off the midpoint (of the circular pattern) on the right side.

The Dow Index (DJX) has first resistance at 103-103.3, next at 104.25, then has a more significant resistance overhang at 105.3 - only a close above this area in fact, and the ability to hold this point on subsequent pullbacks, would suggest that upside momentum had been regained.

Nasdaq Composite (COMP) Index - Daily:
Support, at the lower end of the hourly downtrend channel is at 1920, then 1900. Momentum is down as measured by the longer range (21-hour) stochastic and measuring the 3-day trend. No doubt there could be some follow through weakness into Monday- Tues before another rally attempt. Rallies have not been too impressive so far and, as mentioned before, the SOX Index is leading the way lower in that it fell to a new closing low.

I've been figuring to buy calls in NDX or QQQ (or, buying the stock) based on the Nasdaq Composite getting to the low-1900 area. I still favor this for a trade, but am somewhat less convinced that this could be a "final" low. Maybe best to look at the Nasdaq 100 and QQQ next.

Nasdaq 100 (NDX) Index - Daily & Hourly:
The new low close for this move ended the week on a definite bearish note. Below support in the 1400 area, next support is at 1380 at least as implied by the intersection of the lower trend downtrend channel line.

First resistance is at 1430, then 1440, at the upper boundary of the downtrend hourly price channel. Basis the daily chart, the key resistance is at 1455-1460, the area of the relative lows of February. Significant support, once broken, often "becomes" resistance.

I lean to buying NDX calls, and exiting puts in the 1380 area, looking for another rally attempt with a (at most) 40-point objective. My exit or stop point if this trade was realized would be to 1370.

Nasdaq 100 tracking Stock (AMEX:QQQ)- Daily & Hourly:
As is often the case with QQQ, areas of buying (support) and selling interest (resistance) are pretty well defined on the hourly chart on the right. Repeated recent highs in the 35.5 area show this as first resistance, then at 36 - the area of prior lows. Finally, taking a clue from the upper trend channel boundary, next resistance is 36.5.

Support is implied around 34.5 based on the lower trend channel line. A cluster of prior lows going back to December, show up on the daily chart in the 33.80 area. I think the stock is a buy on dips under 34 if seen, with a relatively close stop-out point at 33.5, looking for a recovery rally to at least 35.5 or perhaps to 36-36.5 which I see as more significant technical resistance.

Those short the stock or holding puts - I would use the same price points I outline above as potential support and take the money (profits) and run. You may disagree and figure that we are in a new tech bear trend - but, the Nasdaq segment of the market is now quite oversold relative to the S&P.

The 8-week RSI on QQQ is now at 32 (not shown) - it can dip under 30 for sure, but the odds increasingly favor a rebound at some - some decent tech earnings and there will be another buy binge in those stocks we just can't stop lovin as we dream of another tech boom some day.

TRADER'S CORNER article -
My past week's musings (3/18/04) were on the principle methods that I use to find support and resistance technically.
Click here

AND, keep those cards and letters (e-mails) coming, especially that relate to trading/technical analysis tools I use and abuse.

Good Trading Success!

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