Option Investor
Index Wrap

CRUDELY PUT

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THE BOTTOM LINE -
Similar to what a certain President said about the economy being all-important: "it's the oil surge stupid". It may not be so smart in retrospect to have bought all those gas guzzling SUV's or fast sportive cars with big engines like mine - not when oil pipelines are being blown up, Russian oil supply gets chaotic and Venezuela goes in turmoil again - all conspiring to drive up oil prices to record levels during our big driving season.

What this has to do with stocks of course is that, when concern already exists about any slowdown in consumer spending and the strength of the economic recovery, such a spike in oil prices could well put the brakes on a rebounding earnings trend. Since earnings growth expectations that developed before this energy price surge are priced in, the market has to adjust downward.

I anticipated rally potential last week but once again the rebound was very short-lived. However, by week's end bad news had not driven at least the S&P indices to new closing lows - Nasdaq went to a slightly lower weekly low and has now retraced a full Fibonacci 38% of the late-'02 to early-'04 advance.

Holders of Index puts should be concerned about how much downside is left here as time premiums erode in a sideways trend. Rally potential is probably not big, but all my major Index indicators are at or below the kind of oversold extremes which does signal ongoing potential for a short-covering type rally, along with some bargain hunting buying. Specifics further on.

FRIDAY'S TRADING ACTIVITY -

THE NUMBERS -
The S&P 500 (SPX) gained 1.57 points (+0.1%) to 1,064.8, for a gain of less than a point on the week. The Dow Jones 30 (INDU) Average closed up 10.7 points to close at 9,825.35. The Dow (INDU) only gained +0.1% on the week - but I see some significance that the week to week decline stopped for now.

The Nasdaq Composite Index (COMP) gained 4.7 points (+0.3%) to 1,757.22, but well off its 1768 intraday top. Over the course of the week, all three of the major indexes touched new lows for the year. COMP fell on the week by 1.1%.

REPORTS & ECONOMIC NEWS -
The bombshell of the day was the U.S. Commerce Department report that the U.S. trade (current account) deficit increased by 19% in June to a record $55.8 billion, well above the consensus estimate for around $47 billion. This was the biggest 1-month jump in our trade gap since early-99. This is the kind of thing that is not watched a lot by consumers who like low prices above all, but is a long-term concern for our economy if all those excess dollars come out of where they are mostly parked: in the T-Bonds that finance our burgeoning federal debt.

The Labor Department estimated that prices paid to U.S. producers (PPI) increased only 0.1% in July, less than the 0.2% rise expected. Core prices, excluding the more volatile food and energy prices, rose 0.1% in July and consistent with expectations.

Consumer sentiment was below expectations in another report from the University of Michigan - it's August consumer sentiment index fell to 94 from July's 96.7, versus expectations of 96.4.

OTHER MARKETS -
Oil futures broke above $46 a barrel Friday to an historic high, for a gain of 6% on the week - traders bid up prices on September futures in New York due to weekend concerns related to a presidential recall vote in Venezuela and a possible battle against Shiite militants in Najef in Iraq, site of the most holy shrine for Shias everywhere. Such a battle could inflame the country. Such shrines can't be compared to anything we are accustomed to, as physical place and pilgrimage is a very big deal in Islam.

Traders were saying the lead futures contract could be up to $50 or back to $40 in short order depending on these events.

September crude futures closed at $46.58 a barrel, up $1.08 for the day - wild to see dollar up a buck in a single day after rising so much already: the gain was $2.63 for the week!

Sunday's recall referendum in Venezuela and its uncertain outcome has caused the shorts to scramble to cover and high prices to get traders to take the other side of those wanting to buy ahead of the weekend.

The fear for the oil market is a close vote that could start a cycle of violence, and violence could hinder oil exports to the U.S. Even a victory by President Chavez could see oil workers going on strike again, due to their animosity to him.

The oil market remembers well the last time there was a major uproar regarding President Chavez - a strike by oil workers cut the country's output to 700,000 barrels per day in January '03 from a daily average of over 3 million barrels - the country is the 5th-largest oil exporter globally.

In the currency market, the euro ran up a full percent to a 3- week peak of $1.2373 as the U.S. trade data hurt the dollar. The dollar was down 0.1 percent versus the yen at 110.07 yen.

U.S. Treasury bonds closed higher after the same trade data and the PPI release. The 10-year T-Note closed up 15/32 to 100 9/32 for a yield of 4.22% and down from 4.28% Thursday.

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:

Last week I assessed the S&P as not having a large further downside potential: ".. a mild rebound and then another slide to the lows or a bit lower such as 1060-1058.." I wish these things would "behave" that well all the time in terms of predictability!

I also suggested that to .. "anticipate a rally back to the gap area around 1080 .. which would then be met with renewed selling.." I still see a close above 1080 as key to an ability to get much of a rally going. 1090 is next resistance.

[Note how selling pressure or resistance comes in at some of these key points - most recently, at the downside gap area - before that, at the 200-day moving average which was former support. The indices act pretty "technically" in terms of turning points - individual stocks are more tricky.]

Support/buying interest has shown up around 1060 - next support I estimate at 1050.

Another bullish reading occurred this past week on my Call to Put daily CBOE equities options model. Because there are sometimes clusters of these readings, as bearishness generates more put activity, I tend to rely most on a overdone or bullish indication in this Indicator only when the other key Index indicators line up also, along with price action of course - the batch of my key index technical indicators is shown further along.

While the S&P 500 (SPX) can certainly see lows "hugging" the lower envelope line for some time, it more common for there to be 2-3 touches to it then a rebound - such as, at least, a rally back up to the 21-day average such as seen week before last.

S&P 500 Index (SPX) - Hourly chart:

The hourly chart better highlights the downtrend channel that SPX has been in, as well as resistance around 1080 - then in the 1090-1092 area.

Yah man, this Index is oversold. This usually precedes at least a limited rally such as occurred last week. And, right into that minor downside price "gap" area from awhile back - the area where sellers didn't get much stock off (sold) before on the decline. When it comes back to this zone, more (selling) comes in.

PRICE/KEY INDICATORS SUMMARY - S&P:

I know this chart is a bit of scroll, but it helpful to see em lined up. Price or the price pattern shows the recent closes at the low end of my downtrend channel. The slight turn up on Friday is of interest. I figure key closing level resistance ("R") at 1082-1083. A close under 1060 might suggest a new down leg but I think the market's two oversold for that - it has to go at least sideways for a while most likely. The S&P (both SPX and OEX) is oversold and the RSI oscillator has a minor bullish divergence with the higher low made by the indicator.

Very important on the chart above is that the 10-day average of NYSE Up Volume is back at its recent "baseline" - a turn up in the 10-day average would suggest some rally potential from here. Lastly, my "Sentiment" indicator has had another bullish reading as discussed above. The indicators taken together suggest a low probability for much of a further decline and moderate to good potential for another rally.

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

I didn't see the OEX slipping much under 520 and that looked again like an area to exit puts and do some limited call buying, looking for about a 10-point rebound to the 530 area. I peg resistance ("R") at 529-532. Support at 519-520, down to perhaps 513, at the low end of the hourly downtrend channel. If there was a further drop to this area, buying some more OEX calls should create a good average price.

Unless the Venezuela situation results in a bigger immediate crisis leading to a final spike to the $50 area in crude, there's better upside Index potential than downside, technically.

Dow 30 (INDU) - Daily chart:

As is often the case with the Dow 30 (INDU), there is a well- defined price channel that can be drawn, with support suggested around 9800 currently and with likely strong sell pressure coming in between 10100 and 10200.

As is the case with other indices, there is slight bullish divergence shaping with oscillators type indicators like Stochastics and RSI as they have not gone to a lower low, at least not yet. However, I don't see this as signifying much more than potential for an oversold rally at this juncture. A close above 10200 might suggest potential to the top end of the channel around 10400, where I would like to re-purchase DJX puts.

Nasdaq Composite (COMP) - Price/Key Indicators - Daily:

I was anticipating another rally attempt by this past Tuesday, then another decline back toward the prior lows which then carried on to a new low - so far, a bottom may have been reached if my downtrend channel is valid.

Besides price considerations, always number 1 on my list, the same oversold readings are seen in the RSI oscillator and the 10- day average of Nasdaq daily Advancing (Up) Volume. The Nasdaq Up Volume indicator doesn't have the same record of predictability as the NYSE, but it's one I watch for upside reversals when the other main indicators also get bullish, such as in March and May.

I use the same Call to Put ratio for the Nasdaq that I employ to attempt to measure bullish or bearish extremes in "sentiment" in the S&P and Dow Indices. The two extremes seen recently could be joined by other such readings of course. You never exactly know with this Indicator, but it's a good indication when the Volume average also turns up which could happen within a day or two into this coming week.

Nasdaq 100 (NDX) Index - Daily:

I thought that "further lows around 1315-1310 will offer some call buying potential, for at least a rally back up the 1350-1355 area at some point." My view is pretty much unchanged. The top end of the overhead "gap" is at 1350; i.e., occurring on the downside break as the next day(s) highs fell short of the prior low.

Nasdaq looks weak, weak, weak overall. The tech believers are getting hammered - a recent example was provided by the pounding that HPQ (Hewlett-Packard) took on their earnings warning and the slowdown/shortfall from two key business units.

Hard to know if its time to exit puts, but it has been a 200- point drop in a short while. Every dog has its day. Watch the 21-day moving average: a close above it (1369 currently) would suggest rally potential back to the 1400-1410 area.

Nasdaq 100 tracking Stock (QQQ) Daily:

Hey, I like it when I don't have to think of much more to say, such as what I wrote last week, accompanied by the chart below - 34 is key resistance; it was the line of prior support - also, the gap area that is outlined; that (the gap area) stopped this past week's rally cold: " The downside gap area is typically a place that prices come back to."

I also anticipated a 32 to 34 price range for a while. QQQ has reached the top bit of an area of support that extends to 21 - this based on a number of prior lows going back a few months.

Volume seemed to be drying up some on the decline, suggesting that those long have done significant liquidation and that the shorts may be done covering many of their positions for now.

I would still go with my prior suggestion to do some buying in the 32 area if reached, looking for a rebound back to 33.50-34. Not a huge upside potential - some would prefer to see if there is a greater rally (such as back into the 35-36 zone) to sell (short) into again.

Good Trading Success!

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