Option Investor
Index Wrap

A bottom AND renewed uptrend is confirmed

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The Bottom Line -
Taking new call positions after pullbacks and being somewhat selective on entry, is suggested. It's doubtful that the market will be in a runaway advance. However, trader sentiment appears only mildly bullish, which suggests staying power for an advance.

Index price action of the week before last strongly pointed to a bottom formation. I made the case that the 7-week decline had ended in my most recent (Wednesday) Trader's Corner article; you can see this column by clicking here.

Last week, as anticipated, brought a definite upside technical breakout and intermediate trend change from down to up. Now we know the territory we're in so to speak and the better trading opportunities should come by buying index calls on dips (or, in other bullish strategies like selling puts) especially in the S&P 100 (OEX), which is showing the best relative strength so far of the actively traded indexes.

The S&P 100, OEX, has regained 40% of its last decline on a close-over-close basis; the Nasdaq 100 (NDX), some 23%. I should note also, NDX has not yet achieved an upside penetration of its downtrend channel.

The employment growth pointed to potential for earnings gains in Q2 & Q3. Hampering a steep run up in the immediate future is that Q2 earnings are unknown for a while yet. Nearby oil futures held technical support and another run higher is quite possible. Oil prices can be of course a drag on economic growth, enough to dampen a steep rebound in equities prices. The main immediate effect comes in slowing consumer spending.

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.

My schedule is more permissible going forward in terms of allowing me to update my Index Trader column on Wednesday and I did a short midweek update this past week. Such updates are also governed by whether there is a significant change or adjustment needed to my Sunday commentary.


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

1182 in the S&P 500 (SPX), at the previously broken up trendline is where I figure key resistance (at the red down arrow). A close back above this trendline is significant technically. The next upside objective would be the area of the prior highs around 1190. If reached, 1190-1200 is likely to prove to be major resistance.

1165 is key support, then at 1160, at the down trendline. What was a "line" of resistance should take on the opposite characteristic. A close under 1160 would make this recent strong rebound suspect. It doesn't appear likely to me, but its always good to have these points in mind.

Volatility implied by the VIX index continued to fall last week. Sometimes thought of as the "fear" index, this current pattern as seen in the lower part of the chart above, is consistent with the recent rebound in SPX.

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

563-564 (it varies depending on the day it intersects it) is the equivalent resistance in the S&P 100 (OEX), where it again hits the previously broken up trendline. I take this prior trendline as a key potential resistance. Stay tuned on that. Not far above this line is a cluster of prior highs at 568. A close over 568, better yet, two consecutive closes above 568, would be a technical "confirmation" of a renewed uptrend.

I wouldn't be surprised to see to a move 563-565, then another downturn. Whether after another rally attempt or ahead of that, I suggest buying if a pullback took OEX back to the 553-552 area. My risk at that point would be 549, and my objective would be 565 at a minimum.

I find it bullish that my call-put "sentiment" indicator (bottom of the OEX chart above) ratio FELL after prices stopped advancing last week, suggesting that traders had become cautious in their expectations for a further advance. This is quite bullish action as far as my indicators go.

Dow 30 Average (INDU) - Daily chart:

The Dow Industrials (INDU) upside penetration of its down trendline last week, which was also at the prior rally high, was a bullish turnaround last week.

The Dow 30 (INDU), lagging the S&P because of GM's influence especially, now has key resistance around 10375, at the low end of the January to April trading range. A close over this level is needed and more. The "more" would be an ability to hold this area as a support floor once it was above it. 10550 would then become a next upside target and key resistance, as noted also by the red down arrow.

On the downside, only a close below 10,100 would suggest that the current rally was failing.

Assuming you didn't already purchase calls when INDU bottomed in the 10,000-10,050 area, or are looking to add to positions, I suggest buying DJX calls on a pullback in the Dow to the 10,200-10,180 area. Risk to 101.2, with an objective to at least 105.

Nasdaq Composite (COMP) Index - Daily chart:

Last week's strong advance took the Nasdaq Composite (COMP) above its minor down trendline and above its prior rally high. It looks like there is clear sailing up to at least the 1992 area, at the 200-day moving average, which may act as resistance. More significant resistance is at 2010, the top of COMP's broad downtrend channel; not far above is 2022, resistance implied by the prior high. My estimate of key technical resistance then is the 2010-2020 zone.

The hourly chart (not shown) pattern suggests that near support may be found in the 1950-1952 area. A pullback to the daily chart down trendline at 1940-1942 would be where even more key technical support/buying interest comes into play; what was previously a line of resistance should now act as support, assuming that this emerging up trend keeps intact. Major support looks to be in the low-1900 area.

Nasdaq 100 (NDX) Index - Daily:

Last week I was looking for a rally in the Nasdaq 100 Index (NDX) into the 1148 to 1460 area. I was cautious, as I my crystal ball was hazy about NDX's ability to climb over 1460, at a cluster of prior lows. We have not yet cleared that hurtle. If you bought calls in the 1400 area and exited when the index approached 1460 on Friday, good trade. I don't always want to stick around to see if what had been a lagging index will clear significant technical resistance or not. The red resistance arrow is highlighted at the down trendline just a bit above, around 1464.

A close over the down trendline is needed to suggest that the Nas 100 was breaking out of its prolonged multimonth downtrend. The next area that becomes significant on the upside would be the prior highs in the 1500 area.

I will assume that minor NDX support could develop on a pullback to the area of its 21-day moving average at 1438. I'm inclined to buy pullbacks to this area, figuring upside potential then to be 1495-1500. In such a trade, I will risk to 1433 only as my exit/stop point. Major support is in the low-1400 area.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

The rebound I was looking for back to 35.75 was realized and then some last week in QQQQ. The 36 area is the key technical resistance. When I say "key" support or resistance I am almost always referring to a level where, if pierced, would change the chart pattern and trend significantly; e.g., an upside penetration of 36 being the level at which QQQQ would achieve a definitive bullish breakout and change in its trend. 36.00 is also resistance implied by the top end of its hourly downtrend channel in QQQQ. The hourly chart is not shown; resistance shows up clearly enough on the daily chart which is shown below.

I also mentioned last time that a move through 36.00 would likely bring in a surge of buying. I think it would also signal a next upside target was 37.00. Key support is at 35.25. Buy pullbacks to this area, risking to 34.85, with an objective to 36.90.

A close over 37.00 really starts to change the bearish down trend pattern seen in 2005 to date; the cluster of lows for several weeks in January over February was in the 37-36.75 area, just above its 200-day moving average which was then a support. Currently the 200-day intersects around 36.70 and a close over it is significant.

I follow On Balance Volume (OBV) as a related indicator to simple daily volume. It is showing a strong up trend as of early last week, even as daily volume was trending lower. This suggests that accumulation of the stock is going on and is an ancillary bullish indicator for QQQQ.

Please send any technical and Index-related questions to me at support@optioninvestor.com with 'Leigh Stevens' in the subject line; not only for answer, but also for possible use in my coming week's Trader's Corner article. Hey keep those cards and letters coming! AND ....

Good Trading Success!

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