Option Investor
Index Wrap

WANING UPSIDE MOMENTUM

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THE BOTTOM LINE:

It's easy enough sometimes, as it was recently, to see where a rally is stalling and to foresee strong potential for a pullback (per my comments of last week). A harder part can be then knowing how shallow or deep the ensuing correction will be.

Basically I can say that I don't look for a strong move through resistance in period just ahead; at least, such a breakout is my least expected scenario. If it was 'easy' enough to see the stall coming before the fact, why not buy index puts? Good question.

I think the market will have more of a propensity to rally ahead and surprises more likely to come on the upside. Puts can work for the nimble trader who is able to watch the market closely. But, that is just not my game usually.

My strategy here is to look to buy calls again after a correction has either taken prices sideways for long enough or the pullback (price-wise) has been deep enough to make call entry lower risk and with good upside potential. As always, timing is crucial in index options, at least on the buy side, as the challenge is to get in when premiums stop getting eroded by the market marking time or going basically sideways.

In a way, I don't care overly much about the longer-term outlook for the market, since there are occasional good opportunities in BOTH index calls and puts, assuming you wait for those opportunities. However, I do, as I mentioned in this past week's Trader Corner (I write the Wednesday article) look at weekly charts and sometimes it's instructive to comment on what the long-term chart/technical picture looks like.

S&P 500 (SPX) - WEEKLY
While the S&P 500 (SPX) trend is up on a weekly chart basis, given the pattern of higher highs and lows (off the 2002 bottom), a major down/resistance trendline now lies in the 1200 area. A weekly close over 1205 would suggest a bullish upside breakout.

Conversely, any weekly close below 1150 would be a bearish break of the up trendline dating from the 2002 bottom.

S&P 100 (OEX) - WEEKLY
The S&P 100 (OEX) has pierced its longer-term weekly resistance trendline, but has not been able to get back into its previous uptrend price channel. It's not a coincidence so to speak, that the past few weekly highs have touched, but not gone through, the previously broken up trendline. There are cross-currents here.

The previous up trendline in the OEX weekly chart has 'become' a 'line' of resistance. A weekly close over 570-572 is needed to get the bullish weekly trend back on track.

NASDAQ Composite (COMP) - WEEKLY
Both weekly Nasdaq Composite (COMP) charts, using both the "log" (logarithmic) and the arithmetic price scales, are bullish.

In the top Log (equal PERCENT moves are equal) scale, two prior April weekly COMP closes defined a long-term up trendline. This chart, this scale, shows the key (weekly closing) resistance as 2140, then 2175; i.e., a weekly close over 2175 presents a weekly chart breakout. The support trendline currently intersects in the 1960 area; a weekly close below 1960 pierces long-term support.

In the lower regular arithmetic scale chart (equal prices moves are an equal distance), COMP has regained a key weekly up trendline on the recent rebound. Key weekly support is suggested around 2018 currently, based on its common price scale.

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.

** INDEX TRADER - MIDWEEK UPDATES **
I update my Index Trader column midweek (Wednesday) when such an update is possible for me to do, given my schedule, and if there's a significant change or adjustment needed to my Weekend commentary.

Also, in my Wednesday Trader's Corner article that appears in the E-MAIL OI Newsletter, I usually also write something by way of updating the mid-week chart picture for at least one of the major trading index options.

This past week, on Wed. 6/1, I started off writing on the key OEX resistance 'stopper' at 570, before going on to talk about the use of Weekly charts to assess the trend. This article can be seen online by clicking here.


MAJOR INDEX COMMENTARIES AND CHARTS:

S&P 500 (SPX), Daily chart:

The S&P 500 (SPX) trended a bit higher in the past week, with intraday tops hugging the top end of its price channel. The uppermost trendline now suggests resistance comes in at the 1205-1207 area. On the week, SPX was down slightly.

To date, the Index has retraced a little more than 2/3rds of prior decline, but only intraday. Buying interest has waned when SPX has gotten back above 1200. I don't see SPX getting above 1210, at least in the coming week.

If downside momentum starts to accelerate, look for a pullback in SPX next to the 1180-1178 area. A close under 1178 suggests that the index was headed toward the low end of its channel as highlighted on the daily chart above. Key lower support comes in at 1165, at the low end of the uptrend channel currently.

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

570-572 remains the key and crucial resistance in the S&P 100 (OEX), as seen at the red (down) arrow on the chart. 572 is the 66% or 2/3rds retracement of the last downswing. My rule of thumb is that once a recovery move exceeds a retracement of MORE than 2/3rds, it's likely to be headed back to re-test the previous peak.

If OEX starts dipping under its 21-day average, at 562.40 currently, then watch for a potential slide to the 558-555 area.

558 takes prices back to the prior upside gap. 555 is the low end of the present uptrend channel. I have Call buying interest again in the 555 area, down to 550.

The fact that my sentiment indicator has stayed up at levels indicating mostly a bullish market outlook, makes it more likely I think, that something is going to happen that causes some more selling ahead and achieves a more bearish outlook on at least one or two days. Stay tuned on that.

S&P 100 (OEX) Index, HOURLY chart:

What shows up on the hourly chart is a better detail of what looks to be a minor top building pattern. 575 is the upper end of the hourly channel and 557, the lower boundary.

The lower trend channel boundary is a parallel line relative to the well-defined uptrend line and one touching the lowest low for the period shown. This lower line then represents a guesstimate so to speak, for where lower technical support could lie. The 564 level is where buying interest showed up before and is a key area because of it.

I'd like to see the 21-hour RSI get down to an oversold reading around 30, to suggest another lower-risk (call) buying opportunity. I'm still waiting and watching.

I know that there are others of the same mind. Maybe, in its usual perversity, the index will tend to go more sideways than down very much. Either a sideways trend, or a decline in price, does the same thing: pulls RSI back toward an oversold reading again.

DOW 30 (INDU) Average, Daily chart:

Guess what? The Dow 30 (INDU) average, which sometimes traces out the clearest technical pattern (being only 30 stocks and not capitalization weighted), showed again the turning/stopping power of the 'line' of prior highs at 10550. You get enough days of the same highs and eventually the would-be buyers in that area get cold feet.

Key support I see as being in the 10400 - 10420 area. 10400 the level seen at previous highs and 10420 is where the 200-day moving average is currently. With INDU, the 200-day moving average is a key delineator followed by fund managers and other key market players. A daily close or two under this average tends to bring in more subsequent selling.

The 21-day stochastic has been a good indicator for showing when the market gets overbought or oversold. The high extremes suggest that the market is at least VULNERABLE to a short-term trend reversal. The Dow may be the canary in the mine that says danger here.

NASDAQ Composite (COMP) Index, Daily chart:

Key resistance in the Nasdaq Composite is 2100-2105. Support is at 2060, then 2042. The key (for trading) 21-day moving average stands at 2026, at the beginning of the week ahead. It's fairly common to get at least a pullback to the 21-day average after a move that takes the index up to my upper trading band as occurred recently.

Major support continues to look like it would be found in the 2004-2007 'gap' area. If this gap is tested, or gets "filled in", this price zone is where I would like to re-enter Nasdaq calls, such as in the Nasdaq 100 (NDX).


Nasdaq 100 (NDX), Daily & Hourly charts:

Resistance, as noted on the Daily chart in the Nasdaq 100 (NDX), is 1570-1575. A close above 1575 suggests that NDX could climb back to the old highs. Doubtful I think, without some corrective action first. The 1500 area is principal support and where I would again have call buying interest.

The hourly Nasdaq 100 chart above has traced out a well-defined uptrend channel, which amplifies the technical picture. 1580 is resistance implied by the upper end of the bullish channel.

The 1515 area is support implied by the low end of the channel. It may be doubtful whether NDX will retreat to the 1500 area again (too many buyers waiting there perhaps), but 1515 looks like a possible next downside target. Stay tuned on that.

The Nasdaq 100 tracking stock, QQQQ: Daily chart:

Resistance turned out to be higher than I thought, as QQQQ overshot what I had as an upside target for 38.15-38.25. The stock reached the 38.50-38.70 area, slightly above its Feb - Mch highs.

38.00 is near support, with key support being down at 37.00-37.05. I favor buying a fall back to this area, if reached. The question is whether the bulls are going to support minor pullbacks; or, whether some of recent negatives like the renewed surge in oil prices, will have an effect, causing would be buyers to step aside for a while.

The OBV (On Balance Volume) line started turning down recently, but is not yet a decisive trend. This recent rally was not been a big volume event, but OBV was going up steadily. We've got a little warning ahead, but nothing not also seen by the fact that the same highs were hit for 3 days running.

SUBSCRIBER MAIL -
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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