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Index Wrap

What would be a break-out; or, breakdown

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When I did my last column (7/2), I didn't go into much about what would constitute a 'breakout' technically to the upside; or, conversely, more about the key support trendlines here. I also noted that I was predominately bearish, not allowing the possibilities of another strong rally attempt, such as we had at the beginning of the market week, yesterday (Tuesday) in the shortened trading July 4th week. Whenever I don't describe what would constitute a breakout to the upside, I know I am 'too' bearish. There is the question of where to exit puts; what would be evidence that the correction had run its course and the strong prior up trend resuming?

The opinion I have of the weak underpinnings of this most recent rally technically is that there is more bullishness reflected in what option traders are doing (in relation to call versus put daily volume totals), than is typically seen at what I would call a 'solid' or final short-term bottom.

So, as to NOT fall into the trap I describe with not always being ready to be wrong with the market, here is a bit more about upside possibilities. Don't get me wrong, as I would still rather short the market/buy puts on rallies as I said, but it also must be acknowledged that the Tues rally was impressive, as it came from lows that rebounded from some key trendlines, especially in the S&P 500 (SPX). However, today's market action (Wed) shows how short-lived rallies can be in this market.

Another note is about the 21-day average; A break below it, such as we saw in late-June, followed by the market's subsequent inability in the major indices to get back above the 21-day average is significant. One day rallies where the close is a rebound back above this average is not conclusive; if there is a lack of follow through the next day.

There needs to be this follow through; otherwise, it usually is a short-covering phenomena. With the lack of follow through today (Wed) and some major indexes retracing much or most of the broad (price) range of Tuesday, suggests that the next 'leg' in the market will be down. Stay tuned on that!


S&P 500 (SPX), Daily chart:

Key resistance that must be overcome by the bulls remains as 1205 in the S&P 500(SPX). A couple of closes over 1205 are needed to break the overall still-downward momentum.

Near support in the index is apparent at 1190. Rallies have been stymied when they've gotten up to the 1200-1205 area. Major resistance is up around 1220 currently.

Chart support is at 1190 and is the key near support. A close under 1190 is suggesting my 1180 target will be next.

If 1205 is pierced first, bearish bets are off. If so, 1220 is key resistance. I would buy puts in the area of first resistance on rallies over 2000, especially close to 2005, with an exit at 1210 if the trade can be entered; I'll look to re-short/buy puts in the 1220 area if 1210 is exceeded.

1162, at the major up trendline, is the area that must be held to suggest SPX is still in overall uptrend.

The fat dark magenta moving average is the 200-day, now at 1176.
Always one to watch, as it attracts institutional (fund, trading) interest.

SPX is not oversold yet by oscillator type indicators like the RSI above.

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

Key resistance is 563-564. A move above 565-566 would suggest upside potential to the prior 570 'breakdown' point with significant resistance or selling pressure coming in at, and above, 570, especially up to 573-574.

565-566 is where the 21-day moving average is hovering. A couple of closes above the 21-day would suggest that the trend was turning up again; and that the first fall to key trendline support around 557 had marked the low. I'm not convinced that that trendline won't be broken soon. But stay tuned!

A break of 557 pierces the bullish up trendline, suggesting downside potential to the 550 area next; and, an area where I would cover any remaining put options held.

Bullish sentiment finally jumped to a level that tends to precede significant corrections, usually with 1 to 5 trading days.

DOW 30 (INDU) Average, Daily chart:

10600 is key resistance in the Dow (INDU) 30 average, this at the declining bearish trendline at the red (down) arrow. 10230 is the current intersection of the rising bullish up trendline. The breakout above or below this type of triangle should tell us the next major trend direction in INDU.

Having the Dow 30 (INDU) trading under both its 50 and 200-day moving averages is bearish. INDU is looking vulnerable to a fall, after this most recent rally failed to achieve upside follow through.

I suggested last time buying puts on a rally; you got one!

This average is oversold by conventional indicators that measure 'overbought/oversold'. I look at the patterns in indicators, just as I do with price charts.

The pattern with this stochastic model, as seen above, is that its rarely the first time that this indicator get oversold that marks an intermediate bottom. However, its really more with whether the trendline is broken. If so, this indicator will be consistent as it will register even more 'oversold' then now.

Nasdaq 100 (NDX), Daily chart:

1517-1520 key resistance remains intact. The rally in the Nasdaq 100 (NDX) index up toward this area followed by a reversal is suggesting that selling is still more potent than buying interest.

A close over 1517 would say I was WRONG! in looking for a move FIRST to at least 1480, support implied by my lower downtrend channel line; at least according to this tentative way I have drawn a downtrend channel. A move to the 1460 area is my target if 1480 gives way.

Conversely, a close (without a reversal of this the next day) above 1517 would suggest upside potential to 1533, the current intersection of my upper channel line in NDX.

The Nasdaq 100 tracking stock, QQQQ: Daily chart:

Still the same ideas and targets. $36 is my objective on the downside; 35.5 is then possibly within reach also. QQQQ was unable in its most recent rally attempt to pierce the resistance I pegged at 37.40 (extending to 37.6).

My suggestion to short the stock on rallies and I mentioned a 'for instance' at 37.60; not quite seen on this recent rebound. Now QQQQ is back UNDER its 21-day moving average. Not a good sign for the bulls.

The lower trendline around 36.70 still looks key to me; if this trendline is pierced or 'broken', I think we'll see the Q's reach my lower current objective at 36-35.75 next.

I still am interested in looking at doing some buying around 35.50, if reached. We could see it if and when.

I don't have today's volume number yet 'read in' to my database, but the On Balance Volume (OBV) line has been mostly falling during this most recent decline of the Nas 100 tracking stock, especially after QQQQ broke below its 200-day moving average (at the first down arrow above).

Good Trading Success!

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!

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