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Index Wrap

Up or Down\?

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The recent sideways (S&P, Dow) to lower (Nasdaq) price action has the look of a consolidation that will lead to another shot up, before this market has a deeper correction. I believe that the market is being set up to rally into the June (triple option & index futures) expiration at the end of week ahead.

A sideways consolidation can evolve into a "rectangle" pattern, consisting of a 'line' of resistance at prior highs, and a 'line' of support at repeated lows that form in the same area.

Such a rectangle pattern can lead to a break above or below the top/bottom of the box. You know the direction definitely only when subsequent price action achieves a decisive upside, or downside, penetration.

However, here are some clues to another move up, perhaps re-testing the prior highs, at least in the S&P indices; e.g., in the 585 area in the S&P 100 (OEX). Such a rally might come after a pullback to 560-561 in the S&P 100 (OEX) and perhaps to 1500 in the Nasdaq 100 (NDX). I'm less sure of further specific pullback levels that might be seen. But, it smells like another shot up before this market is going to be ready to come down again.

What, besides just price action (since, it is more sideways than anything), suggests this?

1. Consolidation considerations: the S&P indices, plus the Dow, are holding the low end of well-defined trading ranges. The longer this goes on, the more likely that that the market will break out to the upside. There could be one break of lower support that fakes out the bears and that draws them into puts, before such a rally.

Sideways moves after an UP trend are assumed, absent a clearcut break of technical support, to be consolidations (not top building) ahead of a next rally. That the prior trend (up) will continue after the sideways move is over. S&P and Dow, plus 'bellwether' S&P stock General Electric (GE), continues to hold above the top end (at 36.5) of its very long prior trading range.

2. Volume considerations: my main volume indicator has been falling throughout this recent sideways move. The 10-day average of UpVolume has been declining toward levels, from which, rallies usually set up.

3. My bullish sentiment indicator is rising to an extreme on a 5-day moving average basis. One, or a couple of days, where bullish sentiment (as reflected in equity call/put option volume ratios) spikes up to a bullish extreme, tends to suggest impending tops. When there are REPEATED days of this AND the market RESISTS falling, there is often one more strong advance coming; e.g., as seen in February, ahead of the rally into the 3/7 top.

What would make this general hunch or forecast WRONG would be suggested by specifics on my analysis for each major index; e.g., if the S&P had a decisive downside penetration of the trading ranges you'll see on the charts.

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.

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

In my Wednesday Trader's Corner article appearing the (e-mailed) OI NEWSLETTER, I often have an analysis that reflects the mid-week chart picture, at least for 1-2 of the major trading index options. This, usually in response to an OI Subscriber e-mail.


S&P 500 (SPX), Daily chart:

Key resistance in the S&P 500 (SPX) comes at the previously broken up trendline, now acting as resistance as can be seen by the number of highs hitting this area and currently at the red down arrow.

This trendline implies resistance at 1208-1210 currently, an area that is ALSO resistance implied by the weekly down trendline (not shown again this week), so is doubly important. A daily close over 1210 would suggest that SPX could re-test its prior high close at 1225.

Key SPX support is at 1190, at the low end of the recent trading range and at the 21-day moving average. A close below 1190 would suggest downside potential to 1178. Main trendline support is at 1170, the low end of SPX's uptrend channel.

Volatility is low as seen by the VIX chart above. A price breakout, one way or the other, could see this picture change. I think we're somewhat due for that and we have an important expiration ahead this week.

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

572-573 is the key resistance in the S&P 100 (OEX), which would be a return to the October - March up trendline, and a stopper to recent rallies. This resistance trendline is also the top end of an uptrend channel.

564 remains important near-term support and is the intersection of the 21-day moving average. If 564 was pierced, 558 is potential next lower support, as it 'fills in' the upside gap of mid-May and is also the level of the important 200-day moving average.

The hourly chart (below) provides a more detailed look at the recent 3-week trading range.

Bullish sentiment remains quite resilient. Enough so that I look to a possible put play on a further rally, rather than trying to profit on calls here. I think that recent high bullishness is showing too much complacency in this market.

I started off this Index Trader noting the pattern of February - March, where the 5-day moving average of my equities call to put ratio got quite high. There was another shot up after this happened, but there was then another, more prolonged, decline that followed. We'll see if this pattern repeats itself. Sometimes high bullishness is right, for a time.

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

As I note in my 'bottom line' commentary above, the longer the sideways trend continues, with repeated highs and lows hitting the same areas, the more I suspect another rally to come.

Generally assume that surprises are more likely to come on the upside, once an uptrend is followed by a sideways move of 1-2 weeks or longer. Such rectangular patterns are more often consolidations to the prior trend, with the next move higher.

However, a fall under 560 calls the further bullish potential into doubt, with a break of the prior lows at 547-549 suggesting that the uptrend has been reversed.

A decisive upside penetration of OEX 570-571 or so, suggests further upside potential to 579-580.

DOW 30 (INDU) Average, Daily chart:

The Dow 30 (INDU) average has been tracing out a strong 'line' of resistance, by its repeated highs in this area, at 10550. A close above this area suggests upside potential to 10750.

Key support is at 10430 currently. Major support is at 10,175-10,200 currently. I would be an interested buyer of DJX calls on a fall back to the up trendline.

The 21-day stochastic has been a good indicator for showing when the market is vulnerable to a fall. However, this indicator has also been pretty consistent in 'hanging' up in the overbought zone for lengthily periods of time. At least one higher price peak often occurs once this indicator ('length' = 21) gets up in the 90 area.

Market bottoms tend to be made after oversold extremes are reached 1-2 times, which is NOT usually the case on the upside. Selling tends to occur more all at once and 'dries up' more suddenly.

NASDAQ Composite (COMP) Index, Daily and Hourly charts:

Key resistance in the Nasdaq Composite (COMP) remains as 2095-2105. Near support is at 2050, with important key support then around 2000. If support at 2050 is not pierced, look for another rally attempt.

If COMP gets back above 2100, especially on a closing basis, upside potential is probably to 2150 at the upper trading band or moving average envelope. (The percent 'envelopes' are relative to a 21-day moving average: the centered magenta line.)

The hourly chart suggests 2040 in COMP may be the low end of the trading range. If there is a one-day break of the key 21-day trading average at 2050, with a brief fall only to around 2040, quickly followed by a rebound, this could be another short-term bottom and start of another rally up toward fairly major resistance at 2100.

Nasdaq 100 (NDX), Daily chart:

The Nasdaq 100 (NDX) has now closed under its 21-day moving average, suggesting possible further weakness ahead. Downside potential may be to the 1500 area now unless there is rebound relatively soon. 1500 is key support suggested by an up trendline dating from late-April. [This trendline is an 'internal' trendline connecting the MOST number of lows, not just the extreme low(s).]

Near NDX resistance is 1560, with key resistance at 1575-1580. If NDX could rally back above 1560, then 1580, upside potential would be to 1600, at a minimum.

Nasdaq 100 (NDX), Hourly chart:

Redrawing the hourly Nasdaq 100 (NDX) uptrend price channel somewhat from last week, it may be that NDX has reached some minor support. Stay tuned on that!

1480 looks like a next lower support area; then, at 1460, based on these areas forming some prior hourly highs and assuming that resistance, once broken, will act as or 'become' support later on.

Near-term resistance is at 1580. The upper end of the price channel suggests key major resistance coming in at around 1600 currently; seemingly a long ways off right now!

The Nasdaq 100 tracking stock, QQQQ: Daily chart:

QQQQ has continued downside momentum and next likely support at 37.00/37.10 next; 37.10 being the 200-day moving average. Next support is around 36.75, at the up trendline.

Near resistance is to be found in the 38.00 area, with the most significant resistance likely at prior highs in the 38.70 area. then 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.

I rate the chance QQQQ being pushed under 37.00 for more than a day, as somewhat low. This recent decline looks like a 'normal' correction to a fairly steep prior advance. However, if the trendline is pierced on a closing basis, the chart turns bearish. If short, I would have (trailing) buy stops down to 38.07.

Volume is not showing us much here. This has been a fairly low volume decline, so volume considerations don't warrant getting overly bearish at this juncture.

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. Your emails are appreciated and where I learn what's on YOUR mind!

Good Trading Success!

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