Option Investor
Index Wrap

BIG WEEK

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THE BOTTOM LINE -
A big week for the Indexes - they sold off sharply of course into mid-week then rebounded strongly. The tip off that stocks might be bottoming came from the fact that they couldn't take em lower after 3 days where intraday lows were being made in the same approximate area.

Hey, it they can't take em down, there's no where else to go when the bargain hunters come in - who is going to sell em when the indices are already driven so far down from their peaks. The S&P 100 for example retraced nearly 2/3rds of the it's last upswing. Retracements of 62 to 66% is as much as I expect and still have it be a "retracement" - rather than a complete return to the prior lows.

The bottom line is that, while I had some still-lower price objectives, taking a look (below) at the same charts and looking some of the factors favoring an upside reversal leads me to the conclusion that the correction has mostly run its course. This is not to say that the market will resume a very strong upward course as before, but given an ok to good jobs number, good earnings reports coming up, etc. the market will be poised for some more upside.

FRIDAY'S TRADING ACTIVITY -
Stocks ended a bit lower Friday as an earlier rally faded and selling, mostly seen as profit taking, brought the Indexes down on the day. There was not much appetite, by short-term traders at least, to hold positions over the weekend after a volatile week. Profit-taking was the preferred action.

Traders were also slightly jittery about terrorism after the inflamed situation in the mid-east after and around Israeli actions in killing the Hamas leader. Plus the 9/11 commission meetings were in the headlines all week as well.

The Standard & Poor's 500 (SPX) closed at 1108, down 1.1. For the week SPX was unchanged. The Dow (INDU) was off 5.8 points at the close - it was up 26 points on the week after its 170 point rally of Thursday.

The Nasdaq Composite (COMPX) was down 7 points to 1960 and up on the week by nearly 20 points or approximately 1%.

Stocks got a boost early from the U of M (University of Michigan) consumer sentiment index - it rose to 95.8 from 94.4 in February, in its final reading for this month. The expectations were for a bit lower than this. For March, the index rose to 106.8 from 103.6 in February.

Airlines were up, as were financial stocks, gold, utilities, internet and networking. The SOX semiconductor index was down over a percent on profit taking type selling and this seemed to be the major factor in a late Nasdaq decline.

GE was up over a percent, after Merrill Lynch featured the company on its focus list - well, I remember this list from my days at Mother Merrill. On the downside, MMM (3M) fell over 1 percent as did Intel (INTC), with another Dow stock, McDonald's off some 2% - of course this has to be seen against the strong trend the stock has been in, rallying even when the rest of the Dow was declining recently.

All in all, Friday was not an eventful day and the volume was lackluster, especially when compared to Thursday's fireworks.

OTHER MARKETS -
Gains in the market this past week, cut into bond demand for which seemed expensive - yields TOO low - if we are to believe the stock market trend and the expectations for good economic growth.

In currencies, the euro fell slightly against the dollar, on speculation that the European Central Bank will move to cut interest rates

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:
Key resistance in the S&P 500 (SPX) still looks to be 1125 per the chart below.

I thought that the break of the 1100-1105 area could lead to a further fall to 1080, maybe 1060 at some point. NOT! My trading envelopes told the story. The second "touch" to the lower trading band and to the trendline drawn from the Aug-Sept lows PLUS a bullish RSI divergence was more suggestive of a reversal back to the upside. And forget the idealized price targets. I'll show the bullish RSI divergence on the Dow chart further on - this divergence shows up on all the NYSE-related indices.

There is one further indicator that is worth noting here with the SPX chart however - my Call to Put indicator which got as low as it typically goes ahead of a rebound did bottom some 6 trading days ahead of the low. It was only a day late! Typically, there is a next tradable bottom that occurs after low readings like can be seen below, within more like 1-5 days. Pretty much on "schedule" however - certainly with the cluster of lows that occurred mid week. Such advance warning means that we have to then zero in on factors that will pin down the reversal more closely than 1-5 days!

S&P 500 Index (SPX) - Weekly chart:
I thought to also revisit the weekly chart for the bigger picture. And on a weekly closing basis I can better this that SPX is still within its broad uptrend channel. This is the case however, ONLY if weekly closes turn up from here. I would also note that the decline of last week has again pulled the 8-week RSI momentum indicator lower and it is suggesting that this market is approaching an oversold condition. This of course only implies some further rally potential. At least we can figure that the probability for further sharp declines is lessening.

S&P 100 Index (OEX) - Daily chart:

Key overhanging resistance appears on the chart as 558-560. Major support is at 525. The correction has now completed a Fibonacci 62% retracement of the November to January advance. This is a good indication that a bottom may be in place. Stay tuned on that.

I suggested last week that OEX could be pulled to 530 or a bit lower - 527 was a target I had. We could still get there but the low made last week looked pretty convincing - this is not to say that there won't be some backing and filling for a time ahead of the release of Q1 2004 earnings.

INDICATORS -
The main note is the oversold stochastic. Rally potential is suggested. As long as the recent lows hold, OEX has potential for call buyers for sure. More can be seen next on the hourly chart.

S&P 100 Index (OEX) - Hourly chart:
I suggested last week a point to take profits on puts was at or below 540. The move "gave" more than that. Still a heck of a profit if you got in anywhere around resistance implied by the top end of the hourly downtrend channel.

Minor support looks now to be 538 per the notation on the hourly chart. Resistance is at 552. I anticipate support developing on any decline to the 535-538 area. Key trendline support is in the 530 area. I would watch for the next retreat and an oversold hourly stochastic on a 21-hour setting to judge a possible entry point for calls. If you bought on the last decline when OEX went sideways around 535 and bit under, showing the support in that area, it looks good to hang in with calls.

Dow Industrials (INDU) Daily:
As could be anticipated by the big fat even round number at 10,000, the Dow held fast. And, a significant RSI divergence set up as this indicator did not fall to a new low along with the Dow Average. A divergence like is suggesting a solid upside reversal and so far that is what it looks like happened. 10,400 is key overhanging resistance. Any pullback to the 10,000-10,101 area now looks like a place to add to DJX calls. Stay tuned.

Nasdaq Composite (COMP) Index - Daily:
I've long thought and been saying that 1900 would be as low as the Composite would go and I may be proven RIGHT! Right?

1920-1925 is the area to watch for support. Support, at the lower end of the hourly downtrend channel is at 1920, then 1900. 1980 is where I have highlighted near resistance as we see repeated hourly highs in this area. 2000 is key resistance as implied by this being at the top end of the broad hourly downtrend channel.

There is some way to go to now get the longer of my two stochastic models back to the lower extreme. I would watch this indicator for when it does. If this occurs in the 1920-1925 area or even back in the low-1900 area, it seems favorable for buying the Nasdaq calls again.

Nasdaq 100 (NDX) Index:
I suggested last week support looked to around 1400, then at 1380. I also favored call purchases bought on a decline into support, with an exit at 1370 - the Wednesday low was 1368 and the weekly close, 1415. Go figure - and hard to figure this kind of entry ahead of the fact.

If holding calls with an entry in the 1380-1400 area, the exit point technically where the further rally potential is called into question would be if NDX closed below 1380. I should also note that from the 1380 area to the Friday high at 1430 was a 50 point move and I was looking only for a 40 point trading objective.

As to the chart, I prefer taking a look just at the QQQ tracking stock for the Nas 100 this week.

Nasdaq 100 tracking Stock (AMEX:QQQ)- Daily & Hourly: I've been thinking that QQQ might get back to the 34 area (or a bit under) and it did - imagine that. But that is where the support was suggested based on prior lows and the low end of the hourly trend channel and so on.

QQQ does have a habit of trading fairly predictably within its hourly trend channel. The stock is being turned back around 35.5 right now. Resistance at the upper boundary of this channel is at 36. Buy dips, such at back to 34.5 and under, with an exit point or sell stop at 33.8.

For those short the stock or holding puts held from week before last, my advice from last week's column was to take the profits and run if QQQ got to the $34 area - I hope you cashed in!

TRADER'S CORNER article -
My past week's article (3/23/04) was on technical patterns that were seen at or after the prior top - namely, a rounding top formation on the Dow as well as a Head & Shoulder's top pattern and the "bear flag" that formed ahead of last week's sharp decline.

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