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Index Wrap


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My commentary picks up from my midweek update (7/6); which you may not have seen, as it got posted online after that day's OI (e-mail) Newsletter went out. This most recent prior commentary can be viewed by clicking here.

A strong 2-day index rebound was led by key stocks like Intel (INTC) and by GE's rebound to back above critical support at 34.50. After holding at or above key supports last week, there were bullish upside technical breakouts in all the major indices; the ones (indices) with charts below.

My recent (7/6) update had what I thought would be index levels that, if breached, would figure as upside 'breakouts'; by a move through and above an area of resistance. I haven't changed the charts you will see much in terms of emphasizing anything new.

I was on balance bearish coming into this last rally, whereas trader 'sentiment' has been significantly more bullish and consistently so. Did I forget to mention that 'sometimes all the people (traders) are right some of the time'? The thing with certain extremes in my 'sentiment' (above 2), is that the market can get pretty volatile and have some wild twists and turns after that.

The end of the week (Thurs-Fri) rally was impressive and there was a strong surge in daily upside volume, showing buyer willingness to pay 'up' for stocks. When a market is really moving, buyers are willing to buy more as prices tick higher. This all suggests that this latest surge could be an up 'leg' or an advance that is above-average strong. You know, one of those rallies that, by the time you make up your mind that we're back in a bull move, the indexes have surged so much that you think it's too late! (to buy).

This most recent price surge looks like a rally that ought to have staying power in the S&P, with some substantial upside potential yet as I'll go into with the individual indices. A pullback early in the coming week looks like a call buying opportunity, as long as a decline is not part of any panic environment.

For those who bought Nasdaq 100 (NDX) calls, as the (Nasdaq) Composite again held its 2050 'line' of support and NDX stayed above its main technical support in the 1480 area, the appropriate stop or exit point at the start of the coming week looks like 1502, at least through Tuesday.

From mid-July on I anticipate being able to update my Index Trader column midweek (e.g., Wednesdays) on a more regular basis as needed, especially when there's significant additional analysis worth adding to my Weekend commentary. In fact, my prior Index Trader update (7/6/05) was a mid-week one.

In my Wednesday Trader's Corner article appearing in the e-mailed Option Investor (OI) Newsletter, I sometimes, to frequently, have updated analysis for 1-2 of the major trading index options, especially in response to an OI Subscriber e-mail.


S&P 500 (SPX), Daily chart:

The key resistance that needed to be overcome or pierced by a buying surge, was 1205 and the S&P 500(SPX) sliced through it on Friday. That signaled to me the reversal of the trend from sideway/corrective to strongly up.

SPX ended up 'holding' the low end of its trading range since the day after (May 19) a major 4-day rally took the index from 1146 up to 1185. That rally was 40 points in 4 days in the index.

What can be anticipated in this kind of cycle would be for the next rally will to again at least hit 1220; from there, a move up to 1230, perhaps to 1235. The most significant technical resistance is 1220 or so, at prior peak levels.

A close above 1220, not reversed the next day, suggests upside potential then to 1228-1233.

SPX never achieved a real 'oversold' reading in the RSI but rallied strongly anyway. Indicators are sometimes not especially significant at 'signaling' the next market turning point.

Sometimes 'midrange' RSI readings at the point of a strong rally, are associated with a surge to a new high, but with a substantial decline after that. Stay tuned on that one: the bulls appear in charge now.

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

The break of the trendline came (at around 557), but it didn't lead to a break to quite as far as 550-552, the area where I suggested to exit the balance of any OEX puts held.

The strong Thursday rebound after the sharp fall under the trendline, followed by a close back above it (see chart), was a strong signal to buy OEX calls on the following opening (Friday). It's highly significant for a big trend change, when there's a 'spike' to well below a significant up trendline (or to a significant new low for the move), followed by a strong rebound within the same day. There are names for this like a 'bear trap' reversal, etc.

Key resistance was 563-564. The move above here, followed by the close back above the 21-day moving average, now suggests upside potential to at least the prior 570 'breakdown' point. Above 570, look for significant resistance or selling pressure coming in at 573-574. If the OEX closes above 565 again on Monday, a rally to 573-574 area becomes an objective.

Key support that the bulls must 'hold' is 560. A fall through 560 again suggests that upside momentum has disappeared as quickly as it began.

Bullish sentiment went finally to 'over the top' extremes on Friday, so suggests that a next correction is anywhere from 1-5 days away. If any such pullback decline is brief, only a day or two, it suggests the market is in an up 'leg'(a strong, more prolonged advance), not just a more typical price swing.

DOW 30 (INDU) Average, Daily chart:

The Dow (INDU), unlike the S&P indices, traced out a symmetrical triangle, as outlined below by the downward and upward sloping trendlines that are converging out in the future. The lower trendline suggested that key support was around 10230. Overall the triangle pattern suggests that the next major move would be 'signaled' by the DIRECTION of a breakout above OR below the lower or upper trendline.

Highly significant was that INDU held the low end of this triangle by rebounding strongly back above the lower upward sloping trendline; after seemingly being in free fall. The subsequent rally the next day took the Dow all the way back up to the key 200-day moving average. The point to buy calls/exit puts was at the Friday opening after the strong Thursday turnaround.

Since the Dow is the most widely followed index by investors and the 200-day average is the most widely followed 'institutional' average, keeping the INDU close above this average is important for the bulls in order to gain traction.

10600 remains key resistance in the Dow 30 average (INDU), at the declining bearish trendline as highlighted by the red (down) arrow. A move back to the 10600 area is my upside objective. After that, all bets are off! A close above 10650, not reversed the next day, suggests a new up 'leg' was underway; e.g., of the magnitude of a challenge to highs made just under 11,000.

When the 21-day slow stochastic indicator gets down so far into 'oversold' territory, it suggests that a good trading rally for indexes is coming; it's just hard to pinpoint the important WHEN!

An oversold condition such as seen before this last rally, has best use as an additional 'confirming' element for a major reversal when a strong rally starts from key chart or trendline points like discussed here for INDU.

NASDAQ Composite (COMP) Index, Daily chart:

The Nasdaq Composite index (COMP) held in textbook fashion at the low end of its multiweek trading range and rallied; and rallied STRONGLY the following day (Friday), in a very bullish close above the TOP end of the aforementioned trading range. Hey, when tech moves it really MOVES! No wonder this market, is the darling of volatility traders and others just trading direction.

With the apparent reversal, 2100 assumes a key support that must hold. Look for rally attempts from the 2100 area or slightly below it. However, the closes this coming week should be mostly above 2100, otherwise the staying power of this advance is in question.

With COMP, big moves are possible when it looks like the index is undervalued, as based on earnings trends or perceptions of the earnings trends. As we know, earnings surprises can be quite pleasant or very UNpleasant!

How about 2150-2165 as my next target zone! I'm slow but I'm catching on here. No, the key was really building this 'line' of support. Every time the Index dropped into this area, it starting another rally toward 2100. When in a 2-day jump, COMP is above the high end of the prior month trade, that's impressive. Bears beware!

The Composite stayed comfortably above its 200-day moving average which certainly showed strength. Maybe tech is really back.

2032 was the level of the 200-day moving average at midweek last, and its only at 2036 at the end, even after the + 37 points tacked on Friday. The fact that COMP held so easily above it was significant; as would be a future close under this widely-watched street indicator.

Nasdaq 100 (NDX), Daily chart:

The decline in the Nasdaq 100 (NDX) index ended around the low end of the downtrend channel I outline and after retracing approximately half or 50% of the prior advance, low to high. Dow's rule of thumb was that markets tended to retrace about half of a prior move.

Confirming a possible trend-change (to bullish) in my analysis was the move above resistance at 1517, above the level line I put there in the chart below; 1480 held as support as implied by the lower (downtrend) channel line.

No reversal to close back below this line, below 1517, should happen if this recent run up is really the start of a major summer rally, with solid buying coming in besides and after short-covering. Expect near support to be at 1525 however.

My NDX target, assuming no close under 1525 (or, not reversed the next day), is to 1546-1549; if this level is exceeded, a next target is back to the old high around 1568.

The Nasdaq 100 tracking stock, QQQQ: Daily chart:

Rather than reaching my projected $36 objective in the Nasdaq 100 Tracking stock (QQQQ), held its ground in the vicinity of the up trendline of the green (up) arrow. I was, let's see, WRONG! The breakout above 37.50 trendline resistance is bullish. Something is afoot (Dr. Watson!)!

38-38.25 resistance needs to be overcome next to keep the bullish stampede going here. QQQQ could be stuck in a 38 - 37.75 price range for a bit. If upcoming daily lows are at 37.50 and above, the trend strength looks capable of a decisive move above 38.

A close under 37.35 would a 'warning' about slowing momentum, and a close under 36.80 would suggest a trend that was reversing again down.

Daily volume jumped on the rally and supports or mirrors price action, which is a little added confirmation for the advance. By Thursday's (7/7) close, the On Balance Volume (OBV) line turned up, just ahead or abreast of the rally.

Thursday's close above the 21-day average, saved it from being the 2nd consecutive close under it. It was a reasonable speculation to buy on the next day's opening (at 37.08), after the stock showed such buoyancy relative to the key 21-day average.

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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