THE BOTTOM LINE -
The potential for an oversold rebound grows stronger because of these benchmarks. My key sentiment indicator suggests that the decline could be deeper than the common tendency for indices, once in a substantial correction, to retrace about one half of their prior move. Namely, traders seem too bullish for a bottom to be made in short order. Call activity (daily volume) jumped at the end of the past trading week (Thursday) to a level more suggestive of a TOP.
One question is what's a savvy holder of puts to do? Well, the old saying about never going broke taking a profit may apply here. Further downside potential looks about equal to the point potential for an oversold rebound that could come any time. Myself, I like to let others fight over the last bit of a move. But mostly, I like to have the upside risk (to any option profits) be LESS than the further potential for my options to gain more value.
I talked about this very topic in fact in my musings in my Wednesday (3/23) Trader's Corner article. Said ravings and rantings can be see by clicking here.
The section I'm referring to is the later part of this article (AFTER the info on chart "scaling") and is about the use of stop points and in general, about risk-to-reward considerations.
MARKET NEWS and INFLUENCES -
INDEX TRADER - MIDWEEK UPDATES
The need for guidance is in the eye of the beholder. Well, you can also e-mail me and say when help is appreciated. I've thought that the decline was proceeding about as expected but the potential for some kind of rebound is growing. And the option traders sure seem to thing so ... which makes me wonder ...
MAJOR STOCK INDEXES - COMMENTARIES/OUTLOOK
S&P 500 Index (SPX) - Daily chart:
1150, at the August - October up trendline, is another noteworthy technical level if there is a dip under 1160. A move to 1150 would not only be a good objective and exit for any remaining puts, but would get me buying some Index calls, looking for a rebound to at least 1180 at that point.
1180 is near resistance currently. 1200 is major resistance at this point. A close over 1180 is needed to turn the short-term chart picture bullish.
There is a lot of trader/investor interest at a prior important low like 1165 and raises the question whether there will be enough selling to get it there. Thursday's rally didn't get anywhere, but it was ahead of a 3-day weekend, which makes potential buyers more inclined to exit positions ahead of it.
A successful re-test of 1165, meaning it goes there and enough buying shows up to get a rally going, would set up a potential double bottom and also get me interested in buying S&P calls and not just exiting any remaining puts. Double bottoms are not something to bet against and offer good risk to reward to bottom fish. It's a speculation of course, but a reasonable one as long as there's a plan to exit; my exit point (on calls) would be a close under 1160, or intraday to 1158 initially.
On a 2-3 week time frame, SPX is now fully oversold according to the Relative Strength Index (RSI) indicator, but this is not yet the case on a longer term (weekly chart) basis.
The S&P 100 (OEX) could still hold its prior low in the 556 area - it hasn't yet decisively penetrated this area intraday and the weekly close was above it - Monday/Tuesday looks to be important as to a clearer picture of the trend in the indices. Namely, is the uptrend over - some may say OEX is headed lower still once it broke below the 567 low.
I consider the 553-556 area to be the key one, not only because of the prior low and being in the area of my lower trading envelope (where rallies can start), but also because of OEX retracing fully half of the last rally and importantly, due to support implied by the 200-day moving average. Stay tuned.
A close over 567 is needed to suggest a potential turnaround. IF this develops, resistance is often then found at the 21-day moving average, currently intersecting at 572.8.
Strategy wise, I suggest exiting OEX puts around recent lows and definitely in the 554 area. While the near-term trend is down and my sentiment indicator took a surprising and questionable leap, I find the nearness to these potential price supports a cause to step aside from a continued bearish play.
Dow 30 Average (INDU) - Daily chart:
10,600 is key overhead resistance in the Dow 30 (INDU), with a close above it suggesting upside rebound potential back to 10735 - 10750.
Conversely, 10,400 is potential near support. More key even is the prior low at 10,368; also, 10,350, representing completion of a 50 percent retracement of the October to early-March advance.
My best guess is that the 10,350-10,400 holds as the low end of INDU's trading range. I have been saying for some time now that I thought that the slightly higher high was only a minor upside expansion of the Dow's trading range; but, that the major NYSE indices were going to be range bound. Hey, maybe this is frustrating to holders of stock mutual funds (the 401k-ers), but a great option-trading situation when a broad price range like this becomes somewhat predictable.
I most often use the lower number in the Fibonacci sequence (13) for length and use the RSI overbought oversold indicator, but the 21-day setting for the slow stochastic also gives a fair insight into possible trading tops and bottoms in the Dow.
As you can see above on the low end of the Dow chart, the longer- range daily stochastic indicator is down in the basement. This is not to say that a decline can't and won't continue, but in terms of probabilities (and index option trading is all about probabilities), holding puts much longer is going against the usual odds.
Nasdaq Composite (COMP) Index - Daily chart:
The tech wreck revisited. Tech really continues to languish as a prior chart low at 2008 has been pierced without a rebound developing. The Nasdaq Composite (COMP) has not yet completed a 50 percent retracement or the Aug - Dec advance. Based on this retracement, 1970 is a level to watch, as is the 200-day moving average. COMP has closed 3 times under this key average, but remains in the area of it.
Completion of the aforementioned retracement (one half) of the August - December advance, followed by a rebound back above the 200-day (at 1993) and above 2008 would be enough to turn the chart picture bullish on a very short-term basis. Longer term, the key resistance to be overcome is 2050 to suggest the possibility of a retest of the 2100 area, where puts would become quite attractive again.
After a 100-point fall in the Composite, related puts in the Nasdaq seem begging to be sold, based on the "easy" profit objectives having being realized. From here it gets more difficult to know how long to hang on (to puts).
I won't say that the Composite couldn't be headed to around 1900, based on the chart pattern and measured move objectives. Watch 1970 for clues to that possibility or potential on how low this thing will go. Stay tuned!
Nasdaq 100 (NDX) Index - Daily:
The weekly close under the January low might be a harbinger of another down leg in the market, but it's too soon to tell. A rally in the coming week wouldn't be a surprise based on the depth of the retracement to date at fully half of the several month fall advance.
1440 is a potential target too. If the Nasdaq 100 (NDX) is ahead of the Composite and leading it, NDX can get down another 10 points. If so, I would exit remaining NDX puts and reverse into at least some calls.
A close over near, and pivotal, resistance at 1500 could set up a possible break out attempt above the down trendline at 1516-1520 (depending on which day it is). My guess is that NDX has another shot down and will get more oversold before it mounts a challenge to overhanging selling that should come in again around 1500.
On a strategy note, favoring an NDX call buy around 1440 if reached, is, based on a risk to reward assessment and experience of how often these trading envelopes contain the price swings. But if they don't, a related suggestion is to exit at 1437.
Many will wait until there is again some upside momentum before playing calls again, which is ok. I myself tend not to be a "momentum" trader in index options. In index futures yes, but not in index options. Options offer more profit potential at lows and at tops, assuming you can pick them. This approach uses assessment of technical factors, not on just "taking a shot" or throwing the dice.
Nasdaq 100 tracking Stock (QQQ) Daily chart:
QQQQ fell under the 36.75-37.00 support I talked about last week and just about touched my downside objective for 36.25-36.15. The low was 36.26.
A target of 36 is based less on prior price history as on the tendency for QQQQ to find buying interest around the even number levels, or just above. Something buyers may only zero in on is that the key October bottom was in the 35.25-35.35 area.
A successful retest of this prior low would of course set up a potential double bottom. If enough buyers were waiting in the wings and buying around 35.50, the Q's might never fully test its prior low. The prior bottom is the key target however.
If so, buying the stock in the low-35 area, given the potential for a double bottom and risking to 34.85 on a sell stop, would offer rebound (reward) potential to 37.50.
An immediate or next move back that carried back above 37 would suggest that the lows may have been seen short-term. 37.50-37.60 is then pivotal and key technical resistance.
There was a turn up in the On Balance Volume indicator at the end of the past week and the OBV indicator could be foretelling of a bargain-hunting rally in the early part of the week.
Good Trading Success!