Option Investor
Index Wrap

The Bigger Picture

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Sometimes it's instructive to look at the very broadest trends - I myself forget where we are in that regard, being mostly involved in day-to-day options trading, especially in indexes.

On the advance since the 2002 low - the strongest index/market is the S&P, always represented by the broader S&P 500 index (SPX) - To date, the peak on the rebound from the '02 low is half of the distance from the 2002 bottom back to the all-time high (2000).

At this point it's not possible to consider we're in a bull market until SPX can at least climb above its halfway marker. A common rule of thumb is that stocks, and by inference, indices, often retrace about half of its prior trend and then reverse (back) to the direction of the biggest trend.

If we look at the Composite (Nasdaq: COMP) index on the long-term weekly chart, it shows up that COMP has only retraced a bit more than a meager 25% of its big fall from 2000. Not an impressive showing to date. Retracements of only a quarter are the lowest level on the strength scale -

What does all this mean to someone interested in the day-to-day, week-to-week time frame? Nothing and everything - it keeps it all in perspective at a minimum.

We seem to be headed into a more volatile period and when that means more of the same - continued wide price swings - that's my kind of (options) market.

The S&P 500 (SPX) was up 4.90 points (+0.5%) to 1,108, with SPX down 1.2% on the week. The Dow 30 (INDU) was up 38.9 points, at 9,933, but putting it down 1.2% for the week.

American International Group (AIG) the big Dow decliner, fell 3.6% on the news of New York Attorney General's probe into its commission practices; Pfizer (PFE) was another large loser, falling 2% on concern over the safety of a profitable drug for the company, used in the treatment of arthritis. The market doesn't like uncertainties!

The Nasdaq Composite (COMP) was up 8.48 (+0.4%), closing at 1,911.5. COMP however was also lower on the week, off 0.4%.


In the afternoon the overall market rallied after Fed chairman Alan "the man" Greenspan said in a speech that the economy should weather the recent rise in energy prices better than it did in the 1970s when OPEC, the oil cartel, raised oil prices sharply higher.

Greenspan speculated that the rise in oil prices so far this year has perhaps subtracted three-quarters of 1 percent of GDP, but (in addition) that much of the increase in energy prices over the short-term is also due to specific factors including political ones, hurricanes and rapid growth in developing countries (read 'China').

Rumors that France had captured a high level al-Qaida figure seemed to fan the bullish mood on Friday afternoon.

I put a big highlight last week on what crude futures were doing, in a sky-shoot bubble type market. I had objectives to at least 54, so 55 was not surprising. I predict that oil prices moderate some from here, at least based on the technical pattern.

Crude-oil for November delivery hit a new peak on Friday, reaching a top most print at 55.00. Some climb! This put oil up another 3% for the week, half the rate of increase of the week before, but hefty indeed.

Oil traders were bidding up the contract as they weighed uncertainty about the overall effect of high energy prices on demand, against concerns over dwindling heating-oil supplies for the winter. November delivery crude oil closed at $54.93 a barrel on the New York Merc Exchange, up 17 cents for the day and $1.62 for the week.

The bulls were encouraged by a U.S. retail sales report that was up a substantial 1.5% last month (Sept) as auto sales jumped the most since October 2001. Excluding the 4.2% auto sales rise, retail sales were up 0.6%, double Street expectations.

A bit of damper on the consumer spending side of the ledger, the University of Michigan reported its U.S. consumer sentiment dropped in October, overshadowing stronger than expected retail sales somewhat. The U of M consumer sentiment index fell to 87.5 from 94.2 in September.

The Labor Department released its wholesale measure of inflation, the PPI (price index of U.S. wholesale goods and services) and it rose 0.1% in Sept, inline with expectations, while the core producer price index rose 0.3%, a bit higher than expectations.

And the Commerce Department released a report on business inventories - they rose 0.7% in August, in line with expectations.

Lastly, we saw some media and market attention fall on the New York Fed's report on manufacturing activity in the New York area, as it showed expansion in October, but at a slower pace than the previous month.

Some big names in the Insurance group took a pounding - as mentioned already, AIG (American International Group) was off sharply. Insurance stocks are ill favored in the wake of NY Attorney General Spitzer's suit against Marsh & McLennan (MMC). Spitzer said several other brokers, including AIG, were involved in "contingent commissions" paid to sales people, but hat the Attorney General also alleges to be a fraudulent scheme.

Prudential Securities downgraded the property and casualty insurance sector to "unfavorable" (from "neutral") based on the logic that Spitzer's lawsuit will act as a significant overhang in this sector in general for the foreseeable future.


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

Generally, when the S&P 100 (OEX) gets to about 3% under its 21- day closing moving average, it has been "oversold", and that level is noted at 523 by the green up arrow on the OEX daily chart below -

The lower trading band is of interest, not because it will end up defining the low for this current (down) move, but because, at 3% under this average, the probabilities go up dramatically for a counter-trend move - in case up, or AT LEAST a slowing of the decline. Slowing decline, means lowering of time premiums generally. OEX at around 520 makes its optimal to exit any puts in this way of risk assessment.

538.6 is the current 21-day average - only a close over the 538- 540 level favors a retry of the OEX to make it to 550. The Index appears to be struggling to maintain itself at 530 support. There is more to go on the downside, but short-term, this index is oversold so there could be first a rally attempt of 8-10 points, back up the 538-540 area.

The other way to measure "room on the downside", is to see whether the index in question is yet at an oversold extreme - defined above by the 14-day daily RSI (Relative Strength Index). OEX is not yet in area where the best rallies have been coming from. You can see this on the chart above.

Read more about the overbought/oversold concept in my last week's Trader's Corner article. Imagine that, I wrote about it and now I'm using it to make real- time analysis!

Dow 30 (INDU) - Hourly:

The oil price spike is still keeping the market under pressure, but oil has reached an technical objective and should back off or even rather sharply fall from Friday's high at $55 in the lead November futures contract. This could allow the Dow to rebound, although OEX is the stronger index, as far as the outlook on calls.

1950 is support implied by the low end of the expanded parallel trend channel line.

A parallel (to the upper trendline) or channel line can be "assumed" to go through the first low made after the decline from the 10300 area.

This lower channel line wasn't a bad reference as it turned out later on to be in the area of the recent hourly lows in the 9900 region. This area - 9900 - is a likely near support, but major chart support starts around 9800.

The 10,000 area or what was "key" technical support is now viewed as an important resistance by technical traders - support, once broken, often "becomes" resistance.

I figure INDU works a bit lower from here, perhaps reaching 9850, before there is a stronger rally attempt back to the 10,000 area. Stay tuned!

Nasdaq 100 (NDX) Index - Daily chart:

Based on the chart and momentum patterns, the Nas 100 looks headed still lower, but I would also note a key juncture here as prices are in the area of the 21-day moving average. Look for a lower price swing ahead if NDX can't stay above this key average, that is useful in how the indexes tend to trade.

I thought support would be likely to develop around 1420 in the Nasdaq 100 (NDX), at the low end the upside gap from late last month and this proved to the be the case in late-week trade. So, it still looks that 1420 is immediate NDX support; then, under 1420, at 1395. Support implied by the prior (down) swing low is 1380, with major support looking to me like 1460.

1465 is immediate overhead resistance, then if penetrated, 1475. The 1495-1500 area is major resistance -

The market got all the way into my overbought zone on the rally up toward 1480. Eventually, the next strong rally ought to come AFTER the RSI gets closer to an oversold condition - this starts with a reading around 35.

In a trading range market like this one, there is a market tendency for this indicator to go from one extreme to another - sound familiar? - at some point I think before the next strong or prolonged advance, there will be an RSI indicator reading in or close to the oversold zone.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

I think we're looking at an upcoming trading range of 34 to 37. Support is expected at 35.25, then more significant technical support around 34.25-34.00

Key technical resistance is 36.60-36.75. A close over 36.75 would suggest some upside potential to the 38 area or even 38.70. I don't this is less likely than a rally failure at or shy of 36.75.

The "break-down point" was 36.25 - I suggested last week shorting the stock on rallies back to 36.25 area and the Q's reached 36.14, so I suppose officially I'm not short on this recommendation.

Good Trading Success!

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