Option Investor
Index Wrap

WEAK RALLY, MORE TO COME

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THE BOTTOM LINE -
The market was attempting to find a bottom at recent lows, but the initial rally off though lows lacked solid follow through and conviction. Sentiment still has tended to turn quickly bullish in the extreme and final bottoms have a habit of following such displays of confidence. As if to say, not so fast there.

What I see so far suggests that the prior recent lows could be re-tested, even exceeded a bit, but this would still look to be a bottom building process for a spring/early-summer rally. I am primarily looking to position in calls once I'm more convinced that such a strong rally was close at hand. That is, once there was more trade around recent lows OR a decisive upside breakout that overcomes current selling interest.

Bottoms tend to be of too types. So called "V" bottoms, are a single touch to a prior low or whatever is the final low for that price swing. When a strong and prolonged rally develops after this downward price spike, the chart pattern looks like a "V".

Contrast that with a rolling bottom, which is a process of "building" a "base" as the bulls show their buying interest on dips and the fast buck traders and portfolio shifters sell rallies to prior tops or some level they think price-rich. After a while the bulls have taken whatever stock was for sale and continued buying tends to then start to lift index prices through resistance.

I assess the current market as being in a bottom forming or bottom building process, which suggests the market will dip another time or two. Resistance points now are clearer than support, which we sometimes have to guess at unless at a prior low or some natural support. More on these levels with my specific index commentaries and analysis.

Someone wrote me that they hoped to trade or size up markets as well as me when they "grew up". Thanks for the complement and opps, my many spring, summer, fall winter seasons watching the markets are making me seem too much like some ancient seer. NOT.

MARKET NEWS and INFLUENCES -
Closing index prices, a recap of market action, specific company influences and government releases are covered in the e-mailed and online OIN Newsletter, in the 'Market Wrap' section.

MAJOR STOCK INDEXES - COMMENTARIES/OUTLOOK

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

Last week's high was dead in my 500 (SPX) technical resistance noted last week for 1190-1192. The steep one-day retreat from two days of highs in this same area, was not surprising.

IF SPX can climb above 1190 and stay above it, the chart pattern would breaks out above its bearish down trendline. Right now and absent such a close, technical and chart, patterns suggests that recent rally may have run its course.

Recent rally highs and lows give the outline of a bear flag which is an upward sloping line of highs and lows after a steep fall. If so, expect another downswing ahead, perhaps back to 1165-1160 or a bit lower.

I also think that the bullish up trendline will contain any further declines as this trendline represents some long-term support. So, I'm not looking for prices to close under 1160-1158.

I would rather wait to buy S&P calls on another dip or, as I said, IF there started to be closes over 1190, suggesting another up leg had developed.

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

Rallies in the S&P 100 (OEX) still look like oversold bounces, without much conviction or strength yet. Another move down and trade around the 555 area, even 550, would be a call buying opportunity however.

I wasn't convinced that the first rally would be the last and doubted the market's ability to rally in a sustained (what I like for an index options play) way, after touching the lower envelope line. Once there is a move to the lower moving average line, it's a wait to see sometimes what will happen when the rebound carries to the (21-day) moving average. If it doesn't pierce this line then its going back to a lower price range.

Key resistance and support areas are noted on the chart below -

As I have been saying for awhile that my readings of trader "sentiment" was seeming to show too bullish of a market view; too bullish to suggest that the recent S&P low was going to be the final one or that there wouldn't be more trade in the same support areas. Lows tend to come when there is more pessimism about the market's prospects.

Dow 30 Average (INDU) - Daily chart:

If you study technical aspects of the indices for very long you may notice that, for the blue chips, the Dow 30 (INDU) seems to have this amazing ability to act within technical parameters or expectations. For example, this is the index that retraces EXACTLY the common one-HALF retracement of the prior major rally and THEN rallies a couple hundred points!

It also falls back precisely at its 21-day moving average as was the case on Friday. It seems that it may take some time for the market to get up a sufficient head of steam to mount a sustained rally. It would be more likely in fact that such a sustained advance will come after a period of "base-building" by prices dropping back to the same lows again, or to have one more steep but short-lived decline to support in the 10,200 area.

If 10,350 is seen again, that might be the bottom but I'm in no hurry as I don't thing any rally is going to "get away" from me. A call buying opportunity par excellance would be at 10,200-10,250 if there should be a second spike down.


When momentum lags, the slow stochastic, particularly when using 21 or some other longer "length" setting, the indicator drifts sideways like it appears in the bottom of the chart above.

Stochastics (and, RSI: the Relative Strength Index) measure MOMENTUM. When the market momentum is in fits and starts (lots of crosscurrents), the indicator of course drifts sideways, showing in another way that prices are probably at or near one end of a Trading Range; at the upper or lower end of it.

The reason I make special note of being in a trading range market is that these conditions are good for trading options. The problem with strong and prolonged up or down trends being, that once you get in and then get out, it seems too dangerous to buy again. A market that chops back and forth between a wide enough and predictable enough price range results in more, and "safer", trading opportunities on both the call and put side.

Nasdaq Composite (COMP) Index - Daily chart:

The Nasdaq Composite (COMP) looks to be in the approximate middle of a downtrend channel. 2050 would be the (upside) "breakout" point, especially on a closing basis.

Absent this minor miracle (for tech!), I anticipate prices working lower again, with some likelihood for a downswing taking the index to new lows in the 1950 area. COMP would first have to pierce support implied by recent lows at 1970 however.

I don't have confidence that the lower trend channel boundary (on the COMP daily chart below) can be viewed as a possible downside objective, but it does give an idea of the lowest-low potential given normal market influences.

The Composite has now had a decline, followed by a sideways trend, then another decline followed by another sideways trend. One more sell off would fit the common pattern of sell-offs tending toward 3-parts or segments.


Nasdaq 100 (NDX) Index - Daily:

The Nasdaq 100 Index (NDX) tends to trade in a very "technical" way. Its recent rally carried right to its down trendline, which was followed by a short-term reversal.

The pattern of rising intraday highs and lows is outlined by the two parallel (cyan) lines. This pattern has the appearance of a bear "flag" when it slopes upward. A break of the lower line around 1480 sets up an objective to around 1450. 1460 is near support, but a downward sales avalanche would pierce this pretty easily. Support is soft for tech currently.

What to get bullish? A close above 1500 and then having enough buying interest come in to keep it above this area. In which case NDX could reach 1550 again. I rate it more likely that the Nas 100 will see 1450 before it sees 1550.

1430 represents what would be a 62% retracement of the August to early-Jan advance. Since the rule of thumb is that markets with an average amount of buying interest will see retracements of 50%, but not more. Markets with above average interest won't see a decline representing 38% of the prior advance.

And, markets with BELOW average interest or with a lot of skittishness, will see retracements of up to 62% or at most two-thirds (66%), before the prior trend resumes. I rate NDX like this, as being of the weak trend type. Yes, it's in an uptrend, but it will not hold on to as much of its PRIOR gain as the S&P; or, Russell 2000, etc.

A 62% retracement of the last rally; meaning, if something rallied 10 from where you bought it, it's traded back down to only up 4 from where you bought it.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

QQQQ resistance came in right around 37 as anticipated. A close over 37.25 is needed to suggest that the stock was breaking out to the upside. I think there's some likelihood that price fall back again to the 36 area, maybe even to new lows (for this move) around 35.25, which is a definite buy point in my play book, if reached.

If we split the difference and assume that the tracking stock will exactly mirror the (NDX) Index, it will also retrace 62% of its prior advance and get down to 35.52. Yea yes, I would be an initial buyer of the stock in this area. Too many people would be waiting to buy it at 35.25-35.00 for it to get there. But on the chance that it does just this, then I would be a further buyer of the stock in the 35-35.25 area.

Volume indicators aren't providing any clues to the direction of the next move, except that volume should have expanded MORE than it did on this last rally for it to be in a bull move. Volume should EXPAND in the direction of the trend. So, a rally should see a volume surge. Instead we witnessed only lackluster volume, so the rally had more the appearance of possible short-covering.

INDEX TRADER - MIDWEEK UPDATES
I will update my Index Trader column midweek (Wednesday) when my schedule permits but only IF there is a significant change or adjustment needed to my Sunday commentary.

Also, on nearly every Wednesday in my Trader's Corner articles I relate some pattern, tool or indicator to a predictive view of the current market; e.g., last Wednesday's note on significance of the Dow's (INDU) completion of a 50% retracement of its October to early-March advance. They do "slide" faster than they "glide"!

MY LAST TRADER'S CORNER article -
"Finding Support and Resistance" can be seen by clicking here.


BEGGING FYI -
Please send any technical and Index-related questions to me at support@optioninvestor.com with 'Leigh Stevens' in the subject line, for answer and possible use in a future Trader's Corner article.

Good Trading Success!

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