Option Investor
Index Wrap

A MIXED PICTURE

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THE BOTTOM LINE:
While it looked to me last week and I wrote that the market was going to move UP into the expiration (and those following my work hopefully weren't tempted to play the put side just yet), it doesn't mean that I'm overly bullish at this later rally phase. I anticipated that the next best NEW trade, from a risk to reward basis, will be in puts.

The rally last week broadened out into the cyclical stocks (e.g., steels, paper, chemicals), pulling up the "old economy" broad-based S&P 500 (SPX) index. SPX has finally broken out above its long-term weekly down trendline dating from the 2000 top. Kind of impressive, but hey, this is five, count em, five years later!

The question is, what's going to propel the market higher in its 'second act'. I'm not sure. There ain't going to be no more tax cut stimulus. Moderate Republicans have said enough and the Dems are united against it. The Fed may stop pushing rates higher after possibly a final quarter point cut, but this is not certain.

But keeping rates level from here will do what? As far as years more of the consumer propping up the economy, based on a housing boom continuing forever, along with concomitant borrowing against inflated home equities (in order to send more dollars to China), it's an uncertain picture.

But, growth is decent; maybe job growth leaves something to be desired. But, earnings are steady and growing on balance. We're aways from heavy Q2 earnings announcements to say for sure what the latest trend is, although Morgan Stanley reports next week.

BTW, my favorite 'cuddly he's not' CEO, Morgan Stanley's Philip Purcel, announced this past week that he's stepping down finally. He used to head Dean Witter, where I saw new Managers coming up with the same hard-nosed attitude and which sent me packing. Seems that super tough-guy CEO's (e.g. Purcell, Jack Welch, and Carly Fiorina) are not the CEO flavor of the month in an era where the grunts talk back to Don Rumsfeld.

Anyway, I digress. What is not happening in the market and that makes me treat this rally as, at most, an SPX double top that hasn't happened yet, is the fact that the S&P 100 (OEX) is lagging and still unable to get back up into its weekly uptrend channel. OEX, at the Friday close had retraced 2/3rds of the last decline, putting the most recent close at a key juncture; ditto for the Dow 30 (INDU), lagging SPX even a bit more than OEX.

What's really lagging (although up on the week), is the tech heavy Nasdaq Composite and the select Nasdaq 100 (NDX). Being a 'new economy' guy myself, I find it hard to get too bullish with technology stocks that are still languishing; and, with oil headed to what looks like 60 bucks a barrel next.

Now, on one hand it's impressive that the market is 'climbing a wall of worry' so to speak, rallying in the face of ever rising oil prices, but on the other hand, GET REAL! Are we going to manage if oil goes to 70, then 80, even a hundred bucks a barrel? Well, I'm looking out too many years no doubt, but long-range projections look to me like $100 is a potential target.

Enough of the fundamental, and on to the technical, picture. You all know I'm a technical trader type anyway. You may even have suspected it when I wrote my one claim to fame on the Amazon book shelves: 'Essential Technical Analysis'.

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 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 appearing in the e-mailed OI NEWSLETTER, I often have an updated analysis of the mid-week chart picture, at least for 1-2 of the major trading index options. Usually in response to an OI Subscriber e-mail. So, keep those cards and letters coming folks!

MAJOR STOCK INDEX TECHNICAL COMMENTARIES AND CHARTS:

S&P 500 (SPX), Weekly and Daily charts:


The upside penetration of the weekly down trendline in the S&P 500 (SPX), dating from the 2000 tops I mentioned, is seen on the weekly bar chart below.

Piercing this resistance trendline is a bullish sign for the prospects for the longer-range trend. However, it says nothing about whether this most recent multiweek advance will accelerate to the upside. The market's gains have been modest since early-2004; e.g., around 60 points (5%).

You can also see from the 13-week Relative Strength Index (RSI) indicator above, that on a weekly chart basis, the market is only approaching an overbought reading; it could get to say 1250 before this indicator would be at such an extreme.

Friday's high hit resistance, and backed off from, at the upper trend channel line. Key technical resistance in the S&P 500 (SPX) looks like 1220 - 1225. 1220 is at the upper trendline and 1225 is the prior high close. 1225 is also where the upper envelope line is showing potential resistance in the sense that 95 percent of trading in SPX as been WITHIN the 2% envelope lines for the period shown in the daily chart below.

1213 is near support; key technical support then comes in at 1200, at the up trendline and 21-day moving average. The surest sign that this rally was likely to continue higher was, in my mind, the ability for SPX to stay ABOVE the 21-day average after falling back from the area of the upper (2%) trading band.

An intraday break of 1213, certainly a close below this level, would suggest some market weakness developing; a close under 1200, an indication that a push to a new high (above 1225-1229) was at risk.

Speaking of risk: an advance in SPX to the 1225-1230 area, with the Index unable to gain further traction in this area, would suggest that the risk to reward in entry into SPX puts was favorable; i.e., exit (risk to) at 1233. Reward (downside) potential would look like at least 1195 at that point.

S&P 100 (OEX) Index - DAILY and Hourly charts:

573-574, at the previous (March - Oct) up trendline, remains as key resistance in the S&P 100 (OEX). This was again the stopping point to Friday's rally as the close at 572 represents the index backing off from this area; not surprising on a triple witch expiration and ahead of the weekend. A close over 575 at this point is what I would consider a possible start to a new up 'leg' or second phase to a rally to challenge the prior (early-March) top in the 585 area.

Good detail for near support areas, as well as showing the hourly channel definition, will be seen in the hourly chart that follows the daily OEX chart below.

Major support comes in the 558-557 area, at the up trendline. The Index is just getting to an overbought extreme, according to the RSI indicator. Another push higher will suggest an increasing risk to a sharp shakeout.

Bullish sentiment has moderated in the past week in the face of the move still higher. This could be a 'buy the rumor, sell the fact' sort of thing. The expectations were bullish, but once the OEX got back up into resistance, a number of bulls turned sellers. I keep looking back at how bullish sentiment played out on the rally to the last top.

This indicator tends to peak sometimes well ahead of final tops. Based on this indicator alone I am not ruling out a challenge to the prior high from earlier in the year. When a reading or two is reached in the 'overbought/too-bullish' zone, that is NOT followed by a top within a few days, I've found that I can't rely on this indicator quite as much; there will be a longer lag than 'usual' before a top is made.

HOURLY OEX

The S&P 100 (OEX) achieved a bullish upside breakout of the sideways trading range or 'rectangle' pattern, suggesting more upside potential ahead. Any resistance implied by the upper trend channel line is not apparent before about 581. 571, at the hourly chart 'breakout' point, becomes key support that should be held if there is going to be a push higher toward the upper channel line. Stay tuned!

An hourly close below 570 puts OEX back into it prior sideways range. Key support, at the low end of this range, is at 564, with trendline support at 563; this trendline is a moving target, being a rising line of course. All in all currently, this is a bullish chart, especially if 570-571 is not pierced.

DOW 30 (INDU) Average, Daily chart:

The Dow 30 (INDU) average surpassed resistance in the 10550-10570 area and went on to touch key trendline resistance at 10653, representing a 2/3rds retracement of the March-April decline. As always, my rule of thumb on retracements is that once prices have recovered MORE than 2/3rds (66%) of the prior decline, the odds increase that index is headed back to a retest of the prior top.

Bottom line on INDU: a close over 10,660, coupled with the ability to hold this area on subsequent pullbacks (with one-day exceptions, not two consecutive days), suggests that there will be a push in this summer rally toward the prior peak just under the 11,000 mark.

Support is at 10,535-10,550; below this area, support implied by the 200-day moving average is around 10,440. The institutions won't consider the market to be in 'trouble' again unless the Dow starts closing below its 200-day average.

The 21-day stochastic extreme keeps me on alert to a significant top after a next up 'leg', especially if an exact or approximate 'double top' is made.

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

Key resistance in the Nasdaq Composite (COMP) remains as 2095-2105. NO change there. A close over 2100 is bullish. Near support is at 2060, then 2050.

I said last week that if support at 2050 was not pierced, you could expect another rally, which was how it went. Now, my crystal ball gets hazy.

Above 2105, the chart pattern suggests being bullish, anticipating upside potential to the 2150 area.

You'll note form the well-defined hourly chart trading range, the so-called 'rectangle' pattern, has still not been exceeded by COMP piercing the upper end. After more than 2-3 attempts to pierce the upper line, a breakout or downturn takes on more significance usually.

A breakout after the lengthily sideways trend has upside potential of more then 10-15 points; more like 50. A decline from the upper end of the above hourly range suggests a pullback to at least the lowest low after the sideways move began; to around 2040 at a minimum.

Nasdaq 100 (NDX), Daily chart:

1550 is near resistance, with 1560 looking to be key technical resistance in the Nasdaq 100 (NDX); 1510-1515 is key support.

Most traders are going to respect the fact that after a very steep advance off the late-April low, up to the 1569 peak, the pullback was not deep (to 1510) and was followed by another strong rally attempt. Volume has not been correspondingly strong however; this most recent may have had most to do with short-covering and the related strength in the S&P.

The sharp rebound from Wednesday's intraday low in NDX, lasted until Friday, with the rally then faltering at the prior support trendline now seeming to act as resistance; interesting how those trendlines come back into play!

I don't have a strong feeling about what the next move is for NDX. It is lagging the S&P. A strong further advance in SPX or some good news related to tech, energy or the economy might take the Index through 1560 resistance and the prior high at 1569. If so, a next objective is to the 1620 area.

Failure to get above 1550 however, would suggest that at a minimum NDX consolidates longer between 1515 and 1550 in a continued sideways move or trading range.


The Nasdaq 100 tracking stock, QQQQ: Daily chart:

The Friday high in QQQQ further defined its down trendline, with resistance noted at the red (down) arrow around 38.25-38.20. The prior intraday high in the Q's just under 38.70, is of course the next assumed, and key, technical resistance.

Near support is at 37.55-37.50, then at 37.00, at the low end of the projected uptrend channel.

The chart picture would 'support' upside potential to the 39.00 area. I myself was not leaning to buying the relatively shallow dip into the beginning of this past week; rather, have been content to wait and see if an opportunity developed to short the stock in the 39-39.50 area; or, back at the old highs, as I would speculate on a double top if such a re-test developed.

For those who bought the recent dip under 37.50, I suggest sell stops at 36.90. For those short the stock at or above 38.50, my suggestion on an exiting stop is 38.30. As I said last week, while I'm not overly bullish here, it also seems that those short are still vulnerable. Trends tend to go on, especially on the upside, as most market participants are oriented only to buying, not shorting.

I was a happy holder of QQQQ when it dipped to under 35, and seemed to offer low risk. I was also quite content to exit on the move above 38, as it got risky again (for a correction). Around present levels I'm not keen to play the stock myself.

SUBSCRIBER MAIL -
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Good Trading Success!
 

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