Option Investor
Index Wrap

TECH LEADS FOR A CHANGE

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THE BOTTOM LINE -
The blue chip weakness signaled by the recent new yearly low close in the Dow 30 (INDU), was masking the fact that the tech- heavy Nasdaq indices were holding up ok and were not far below their June highs.

Tech indices led the way in the renewed rally this past week. My take is that continued economic growth has led to the perception that these are the only stocks much undervalued based on upside earnings potential. Eventually, semiconductors, hardware, software, select Internet, etc. should see earnings growth the longer the economic expands.

The Nasdaq Composite (COMP) and Nasdaq 100(NDX) indexes look like they could work a bit higher still - to 2000, even to around 2050 in COMP and perhaps 1520 in NDX. The S&P 100 (OEX) has some room on the upside too, but also some tough resistance in the 546-550 zone.

FRIDAY CLOSING NUMBERS -
The S & P 500 Index (SPX) was up 2.7 points to 1130 and up a substantial 3.1 % on the week (+1.3% for October). The Dow 30 Average (INDU) closed 22.9 points higher to 10,027.47. INDU rebounded 2.75% on the week. However, unlike the broad SPX blue chip index, the Dow lost 0.6% in October.

The Nasdaq Composite (COMP) was down slightly - off 0.7 points at 1,974.9 by the close. However, COMP rose 3.1 percent on the week, same as the S&P 500 - but gained a far better 4.1% for the full month (October).

FRIDAY'S TRADING ACTIVITY -

In a mild disappointing note after such a strong week, the Commerce Department reported that GDP grew at a 3.7% annual rate in the third quarter, following a 3.3%. Hey, that's an increase, right! As always in the Street of Dreams, this figure was judged based on Economists expectations for a 4.3% growth rate.

The core inflation rate increased an annualized 0.7%, touted as the lowest in 42 years. Yes, we have no inflation - tell it to the Fed. Well, there is that pesky pump price marching up and up but that's not in the "core" inflation rate. You could have fooled me to the core due to my rising cost for fill-ups!

Bullish encouragement came next as the University of Michigan released its consumer sentiment index - it rose to 91.7 points in late-October from 87.5 earlier in the month. Expectations were for a decrease, to about 85.0.

Also, a Chicago region survey of purchasing managers showed stronger-than-anticipated expansion of business activity in October.

OTHER MARKETS -
The dollar was down slightly again on Friday against both the euro and the Japanese yen. The Euro hit a substantial new high this past week, trading in the $1.27 area, with no end in sight. Not much concern to the stock market right now, but not so great for visitors like me with dollars to convert while on a business trip to Spain.

There are other reasons to fear a dollar that falls too far, but it does moderate the oil price hikes with our major trading partners, given that oil is priced in dollars.

December crude oil futures ended up 84 cents at $51.76 a barrel on the New York Mercantile Exchange. Funny that I would we think that oil prices still above $50 would be encouraging! Well, after hitting $55, it seems a bit of a relief.

Crude oil gained 5% for the month, with the longer-range influence of China perhaps not being able to dampen its economy overly much, keeping its energy demands strong. That plus the usual suspects this year for supply disruptions somewhere in the oil-rich areas, given the high demand globally, especially from China and the U.S. - more SUV's anyone?

In a quiet bond market, the 10-year (Treasury) Note ended up 6/32 to 101 25/32, for a yield of 4.03%.

MY INDEX OUTLOOKS -

S&P 500 Index (SPX) - Daily chart:
Just as when the S&P 500 (SPX) dropped under its 21-day moving average and couldn't rebound back above it, suggesting further weakness, the reverse was true on the rebound back above this key trading average and the follow through strength.

I assumed SPX was headed back toward support in the 1090 area and might dip under even, before the next rally, but the trading range has been narrowing some. Indecision? Of course, if we listen the two parties, the fate of the world (for at least 4 more years) has to be settled just ahead. I'm not sure that who wins will be as significant as the fact that the uncertainty goes away.

I also pointed out the significance of a move through 1110 resistance (play the market for higher) for turning the chart picture bullish again near-term.

So what now? There is a significant overhead resistance in the 1140 area. SPX either fails and reverses in this area or achieves an upside penetration, in which case a next objective may be to around 1150. A close just slightly over 1140 lacking upside follow through the next day would suggest switching from a bullish to bearish trading stance.

Of course, the recent rally in SPX could reverse at any point shy of 1140 resistance, consistent with its pattern this year of going only to rally highs lower than the one that preceded it. Stay tuned!

Meanwhile, bullish sentiment is building to that "over-confident" stage that sets up the next decline so to speak. We're close, but haven't seen that one-day reading yet that would put my indicator in bearish warning territory.

S&P 100 Index (OEX) - Daily chart:
I had a downside target to the 52 area and the S&P 100 (OEX) got to 522 - close enough. Near support looks like 530-532. Near resistance is at 545-546, at its down trendline and 200-day moving average respectively. The June rally peak implies major resistance at 558. Only a close over this area breaks the bearish pattern of lower (up) swing highs.

I suggested exiting puts in the 520 area. Hope you did and perhaps went the other way into OEX calls for a trade. OEX was oversold enough finally last week on Monday's close to make a continued put play risky.

Dow 30 Average (INDU) - Daily chart:
Instead of a move to the lower end of the well-defined downtrend channel, the Dow 30 (INDU) managed to stay in the area of its prior early-August lows and rebounded before touching 9700. (9600 was my "worst case" downside objective.)

10,220-10,240 is resistance implied by the top of INDU's downtrend channel and the prior rally highs. I think it's doubtful that the Dow will close above the top of its channel. Not for more than a day especially - two consecutive days changes this picture. If so, next resistance is in the 10,350 area, at the cluster of prior highs from early-September.

The Dow did get into my oversold zone and if you look at the (14- day) RSI chart and reversals/rallies this year at least have been fairly consistent when this indicator has reached the oversold area as highlighted above.

Nasdaq Composite (COMP) Index - Daily chart:
After holding in the area of (or not far under) its 21-day average, rally potential was improved and came about last week. I figure next resistance as the 2000 area based on the psychological importance of this big round number. Technically, key resistance is assumed to be around 2050, the area of the late-June top.

Support is seen at 1900-1905 or just under at the minor up trendline intersecting at 1880 currently.

I had pegged 1900-1910 as key near support, so I hope those playing the put side took action when the strong rally developed after COMP reached this area - oil backing off from the $55 level was a help too!

Nasdaq 100 (NDX) Index - Daily chart:
Holding, then rebounding from the low end of its recent trading range, then piercing the top end of this same range kept the Nas 100 (NDX) chart bullish. 1520-1530 looks to be a possible objective. 1523 is resistance implied by the prior NDX top.

Key technical support is at 1420, at the up trendline.

The RSI Indicator was diverging from price action and gave a minor bearish outlook - it wasn't the most pronounced divergence but it was there, proving once again that patterns always have their exceptions.

At this point, I don't want to overstay in calls if there is any sign of a double top shaping up - watch for signs of a rally that stops at or short of the prior top (at 1523).

Nasdaq 100 tracking Stock (QQQ) Daily chart:
QQQ has gotten above the down trendline the way I've drawn it as touching the greatest number of highs. If I constructed it through just the intraday highs, QQQ has gotten to this resistance trendline, but not above it.

An even more key technical level is the prior 37.9 high. Failure in this area sets up a possible double top. Conversely, clearing this prior high sets up a possible re-test of the early-year peak in the 38 area. Stay tuned for what's next.

Election and terror jitters abound and Tuesday (election day) is often a "change" point - if the Q's rally into Tuesday, I'm inclined to go the other way and exit calls and the stock and play the stock for another pullback and continuation of the back and forth trading range.

35.25-35.30 is first support, at the low end of the recent range. Next is support implied by the last downswing low at 34.23.

I've figured QQQ to be in a 34-37 trading range, maybe that will be expanded to 38 on the upside.

Volume tapered off after the strong Wed. rally, with On Balance Volume (OBV) also turning down - not the best sign for a renewed bull market trend. Still a mixed picture - one seeming to continue to offer opportunities on both sides of the market.

Good Trading Success!

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