Option Investor
Index Wrap

OIL SHOCKS AGAIN

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THE BOTTOM LINE -
The market looks headed still higher but watch for the ability of the S&P 100 (OEX) and Nasdaq 100 (NDX) to close above resistances at 546-548 and 1478 respectively, as well as at 10,300 in the Dow 30 (INDU). Price action continues to be best predicted by strictly technical patterns and indicators. It was hard to understand by the market fundamentals the strong late-week rally. The week before last, reversals came right at down trendlines (both S&P indices and the Dow) and at key retracement and moving average points (NDX). This was followed by strong upside reversals at technical supports at 1100 in SPX (S&P 500), 10,000 in the INDU and 1850 in the Nasdaq Composite (COMP).

Technically bullish before and at, this past week's reversal points, were 2 of my 3 key indicators: sentiment and up volume (more on this in the charts). Low volatility (VIX) and related key fundamental factors like crude oil prices at $50! - didn't suggest a continued decline like they have at other times this year. Go figure.

The bottom line is that it was not easy to figure why the market rallied so strongly except it was ready to, wanted to. That and still oversold tech and semi-conductor sectors. Some pundits said the market rallied cause participants think President Bush will be re-elected, but they thought Kerry won the debates. Again, go figure.

WILD CARD - Oil looks to me like its going to 52 next and I don't know how long the market will shrug this off. Technically, both the market and oil look headed higher so I go with how both charts present currently.

THE NUMBERS -
The S&P 500 index (SPX) rallied 16.9 points to 1,131.50. SPX was up 2% on the week. The Dow 30 Average (INDU) closed 112 points higher, with a 1.5% gain for the week.

The Nasdaq Composite (COMP) advanced 45 points (+2.4%), to 1,942.20, which was it best single day gain since late-March. COMP rallied rose 3.4% for the week.

Tech is back!? - the jury is out still - this sector has been depressed for some time and any news that tech has turned the corner will cause a big short-covering type rally.

FRIDAY'S TRADING ACTIVITY -

Friday was day 1 of the new quarter and money managers got in a buying mood early and that buying feeling never went away even as Crude oil closed over $50. It goes to show that when the market wants to rally and the bulls stampede down Wall Street, other influences are not seen by the herd as showstoppers.

And early bullish influence in U.S. stocks was after gains in overseas markets, based on a closely watched Japanese business sentiment survey.

The two main influences that fueled the advance was a strong rebound in the chip stocks - +4.6% in the Philly semiconductor index (SOX) - after JP Morgan's analyst came out with an estimate that the chip equipment sector bottomed out in the third quarter.

Intel (INTC), Microsoft (MSFT) and Hewlett-Packard (HPQ) were 3 big gainers in the Tech area, that are also Dow stocks.

Another strong bullish influence on Friday came on the release of the monthly report from the Institute of Supply Management or ISM. Although their report showed a dip in factory activity for September, falling to 58.5% in September from 59%, their employment index rose to 58.1 from 55.7 in August, a significant rebound. This led to speculation that we may see strong grown in non-farm payrolls in this coming week's report from the Labor Dept. (Friday).

The University of Michigan reported a bigger-than-expected fall in consumer sentiment in late-September. Their consumer sentiment index fell to 94.2 in September from 95.8 earlier in the month, but some softening was expected

The Commerce Department reported a surge of homebuilding pushed total outlays for construction projects up by a better-than- expected 0.8% in August. July's output figures were also revised higher. It now looks like housing construction will make a strong positive contribution to third quarter GDP

As I mentioned, political talk on the floor and buzzing around was that while George Bush might not have put on the best or a great debate showing the night before, he didn't have any big gaffs, the betting was that our Business friendly President would win next months election.

The market doesn't like uncertainty or any more than we got in this day and age - better the leader you got rather than a new sheriff in town.

OTHER MARKETS -
Nearby or lead contract November crude futures gained 48 cents to close at $50.12 a barrel in New York trading and ending above the key $50 mark for the first time, a gain of nearly 3% for the week

U.S. Treasury bonds fell for the 4th straight session, as the 10- year note lost 18/32 to close at 100 15/32 and yield 4.19%, a 3- week high.

The dollar strengthened in New York Friday trading against the euro and the pound after weaker than expected manufacturing surveys were reported in Britain and in Europe, raising concerns over the impact of higher oil prices on economic growth. However, the Euro is still trading close to 1.2885, around the highs hit in July.

MY INDEX OUTLOOKS -

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

The S&P 500 (SPX) found support at 1100 as anticipated but I didn't think last week however that there would be a sky shoot back up past the prior highs and trendline resistance. Surprise, but as one old saying goes, at least sometimes, "trendlines are made to be broken" -

The chart pattern has turned bullish with the very strong rally on Friday. I have to figure there were a lot of shorts that ran for cover to help explain this much of a rebound. Prior rally highs in the 1145-1146 area can be figured as the next key resistance. First support should now be 1126-1125, at the previously broken down trendline - what was resistance "becomes" support. Next support should be 1115, then again at 1100.

I thought the least likely scenario was a "quick rebound to resistance at 1130" - WRONG! Any puts bought in the 1125 per my suggestion, if not sold on the close over 1130, ought to be exited if SPX does not close back below 1126 in early trade in the week ahead.

I didn't put a lot of stock last time in the bullish reading on my sentiment indicator - see the green arrow on the "sentiment" indicator chart just above. However, when within 1-5 days, "confirmation" is seen with a 10-day NYSE Up volume reading at the baseline (green arrow on the middle chart) this is typically a good buy signal.

It didn't pay in my own case to put much focus on the S&P not coming down to an oversold RSI/Stochastic reading (see next chart) or, by the low Volatility (VIX) reading or spike in oil prices - these are not my primary indicators, especially things like inter-market analysis; e.g., what oil is doing. Well, if it were so easy to figure out the market would not humble us all at some time or other!

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

The S&P 100 (OEX) held key support in the 530 area and will achieve a bullish breakout if there is a penetration above its trendline at 546, then above its prior (up) swing high at 548.5. If the prior high is exceeded, OEX could be headed toward the upper trading envelope line. The 14-day RSI is still well below registering a near-term overbought reading. Stay tuned!

If however, OEX tops out in the area of the prior high, this is another indicator for a top and defines the high end of a possible trading range - in which case, put positions are again suggested.

The rebound back above the 21-day moving average was a bullish reversal indication suggesting exiting any puts taken at the last cluster of highs at the resistance (down) trendline.

While not shown on the chart above, last week's low was an exact Fibonacci 62% retracement of the prior rally - ditto with the Dow (INDU) average.

I've been writing on retracements as points to look for potential trend reversals in recent Traders Corner article.

Dow 30 (INDU) - Daily chart:

The Dow 30 Average reversed strongly after retracing 62% of the last rebound as shown in my last week's Trader's corner.

INDU of course is still not broken out above key resistance implied by its down trendline and its 200-day moving average which intersects in the 10,300 area. A move to this area, followed by a rally failure suggesting exiting calls and going into puts as a next trade.

10,140-10,150 is near support, then the 10,000 area more major technical support.

Momentum is up as suggested by the 21-day stochastic and there is plenty of room for this indicator to expand before reaching a bearish reading again. Readings on this indicator on a daily chart basis and with "length" set to 21 has been a good one to watch for indication of the market being vulnerable to a fall.

Nasdaq Composite (COMP) Index - Daily:

The Nasdaw Composite (COMP) has resumed a bullish chart pattern with the decisive upside penetration of its prior rally highs. COMP now looks like it could be finally headed to its upper trend channel line around 1985. Support is at 1900, at the bottom end of the upside gap achieved Friday when the low was above Thursday high. The upside gaps were a tip off for the strong rally that developed at week's end.

COMP is in the beginnings of an overbought area on the (14-day) RSI - markets can get and stay overbought. Overbought readings mostly suggest that the market is vulnerable to news "shocks" - ones that are seen having possible bearish impacts of course.

What was bullish at the lows last week was upside reversal after the pullback to the recent or short-term up trendline.

Along with bullish action in the chart pattern, came the contraction of Nasdaq Up volume, on a 10-day basis, to one of the two "baselines" from which rallies have been developing in the past few months - see the green up arrow on the Nasdaq Up Volume chart.

Nasdaq 100 (NDX) Index - Daily chart:

The Nasdaq 100 (NDX) chart turned bullish after Friday's upside gap and acceleration. Support in fact is suggested at the low end of this gap in NDX, in the 1420 area, then at 1410.

I figure significant resistance as in the 1478 area, at the upper end of the "internal" down trendline; i.e., a line connecting the most number of highs at major tops since late-January, explaining why this line bisects two intraday highs at the June top.

A reversal in the 1478-1480 area keeps with a still-bearish pattern of lower rally highs that we've been seeing over past months. I would like to enter NDX puts on signs of a rally failure around in this area.

The RSI is nearing an overbought reading again. Something else to consider - if NDX reversed without exceeding Friday's peak level, RSI would not confirm the new high, which is a bearish divergence price/oscillator.

Absent that, if RSI gets up in the 65-70 zone, this index will become increasingly overbought - this is where the market becomes vulnerable to reversals, so those in calls ought to be alert to downside reversals.

Nasdaq 100 tracking Stock (QQQ) Hourly chart:

QQQ reversed above, and without digging into, support in the $34 area, then in a very strong move for the Q's, closed above key resistance at 36. Next key resistance is around 37, at the down trendline. This is the area to watch - inability to get above this area would maintain the stock in a downtrend. Reversal in this area would suggest going from long to short the stock also.

Watch whether QQQ can now hold above 35.75-36 on a closing basis - failure to do so could suggest a bull trap reversal by a move to new high and if this was followed by an immediate downside reversal.

An advance to the area of the prior peak at 37.9 would set up a double top - pushing above this area would create a reversal to the 2004 downtrend pattern.

Note - My suggested stop for a bearish play on a rally toward the 36 area, was at 35.7. I would look again at the short side in the 36.75-37 area, with a suggested stop at 37.50.

Good Trading Success!

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