Option Investor
Index Wrap


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Upside momentum was strong for the month of July, driven onomic growth figures. The bulls are running and investors happy to have some place to stash money other than in meager money markets, high-priced real estate, or under the matress. The Index Option trader can't quite join the party, as the mighty market MO (momentum) slowed considerably in the past week and a sideways drift offers limited trading prospects.

The S&P 100 (OEX) had a second lower weekly close, although it was off only a couple of points; the Dow 30 (INDU) was down about 10 points. The broader S&P 500 (SPX) was up a fraction of a point; the Russell 2000 (RUT) was up a couple. Technology heavy Nasdaq eked out a gain of about 5 points in the Composite (COMP), with the Nasdaq 100 (NDX) up a little less than 5.

This slowing of upside momentum does not mean that I want to load up on puts. In this kind of market, with such prior strong momentum, the indexes can 'hang' up here for some time and mostly drift sideways for a while.

The last correction was sharp and quick but came after several such weeks of a basically sideways move. Although the late-June pullback retraced about 50% of the prior run up, this correction was short-lived. You had to be nimble to make money on puts and be quick to reverse positions into calls. Best results were seen by picking the one-half/50% retracement as a buy point.

In a strong up (or down) 'leg', corrections are often sideways moves or corrections in "time", rather than so much in 'price'. To make money on the put side in this kind of situation, requires excellent timing; getting in too soon sees the continued erosion of put premiums. The next price break may be closer to the next expiration.

For now, my trading stance is 'neutral'. Last week I suggested taking profits on index calls and I now wait to see if new 12-month highs will also be achieved (in addition to SPX and RUT)in OEX, COMP and NDX. New highs first, or a correction first? A sideways consolidation, then a push higher; or, a pullback to lower supports before an assault on those highs? These are the questions.

Technical analysis works with probabilities and on that side, we can say that being this close to prior index highs, makes for obvious targets; those prior highs tend to be a 'pull' and make for probable objectives. When, is the question... Right now the market is acting 'toppy'. Stay tuned on this. I'm not in a hurry to take much risk in this market phase.

Rising and resilient oil prices may continue to act as a spoiler or rain on the bullish parade. This seems the main economic negative out there. Except perhaps, a possible real estate 'bubble', complacency about our massive deficit red ink and huge imbalance of trade; but these are longer-range problems.

I took a look at what the oil price chart would look like if I plotted the last several crude oil futures contracts, which makes for a kind of 'continuation' chart in the nearby (oil futures) contract. This chart is bullish in its pattern, with upside price potential to the $70 area:

A slide back to implied support in the $53 area at the lower end of the broad uptrend channel can't be ruled out. A key determining trend factor will be whether the prior closing high at $62 is pierced; or, if the recent $57 low close is exceeded. Any further supply disruptions makes for a volatile price situation in this increasingly volatile commodity.


S&P 500 (SPX), Daily chart:
While the S&P 500 (SPX) daily highs continued to advance and hug the resistance trendline at the top end of the uptrend channel, Thursday's closing high just over this line seemed to signal a correction to follow. It's fairly common for a final spurt to a new high, especially after a prolonged move, that marks a top.

It remains to be seen ahead how much of a pullback occurs. I'm assuming that there will be some further decline, as the close pierced the hourly up trendline (not shown); downside potential looks to be at least back into the 1220-1225 support zone. A close under 1220, not reversed the next day, would suggest a further slide.

Substantial support is implied at the low end of the uptrend channel at 1205-1200. Overhead resistance is at the recent high at 1245; expect further resistance at 1250.

SPX, for the period shown at least, has tended to reach at least a temporary top when the RSI has risen to the 68-70 level as was the case recently. How soon a correction comes isn't precise, but such extremes suggest higher RISK for a pullback; or, at least a sideways move, which is more the case in the very strong trends.

S&P 100 (OEX) Index - Daily chart:
The fact that the RSI (Relative Strength Index) indicator, applied to the S&P 100 (OEX) chart, registered a lower high than seen previously, unlike the price pattern, created a bearish price/RSI divergence. It was not surprising then to see Friday downside reversal, which I consider the likely start of a correction.

Important near support is at 571, the low end of the past 2-week trading range. 570 is support implied by the 21-day moving average. 571-570 is a 'pivotal' area; if broken, further downside objectives are at least to 566, then 563. Below these possible targets, significant technical support lies at 557-558.

Resistance is at recent highs at 577-578, with next resistance up around 580, at the upper trendline. The prior intraday high near 587 is the 'ultimate' potential resistance for this move.

Bullish 'sentiment' is finally falling off the peak seen in mid-July. The sideways trend has tempered the bullishness of options traders, which is the basis for my (sentiment) indicator. An extreme in bullishness usually precedes any significant top.

[My indicator is most significant when it's not more than 5-6 days ahead of a (chart) reversal pattern; the lag time was longer here.]

DOW 30 (INDU) Average, Daily chart:
Pegging Dow 30 (INDU) resistance at 10700 turned out to be right. The one-day close over this level did not lead to a next upswing. I often say (like a broken record I'm afraid!) that a close over resistance (or, a close under key support) should be watched the next day for signs of a reversal; especially when the market has had a prolonged move and is at an extreme in the overbought/oversold indicators like RSI or Stochastics.

Friday's price action has on the tentative look of a possible reversal. It remains to be seen whether support implied by the low end of the recent trading range, at 10575 is pierced; this is a pivotal level. I've marked next lower support at 10540, an even more key level technically. A close under 10500-10540 is bearish for the trend in the Dow.

The laggard INDU has to date, not retraced more than about 2/3rds of its prior decline, so has yet to 'prove' that it's in a renewed uptrend; two consecutive daily closes over 10700 is needed to signal this.

NASDAQ Composite (COMP) Index, Daily chart:
In at least a short-term telling move, the Nasdaq Composite index (COMP) failed to stay above its prior 2190 high. Key resistance is at 2190-2200. A close over 2200 is needed to suggest that COMP is in a new bull market phase.

2145 is key near support. 2110, down to 2100 is the support implied by the lower trend channel boundary. Absent a close under 2100, COMP will remain in a bullish trend. 2050 is major support.

The Composite is retreating again from the 'overbought' zone. This may be the beginning of a correction, after repeated overbought readings. More market action is needed to suggest that COMP is still anything but in a very strong rollaway upside move.

I don't see suggestions of an amazing up trend in the big-cap Nasdaq stocks, with the exception of Amazon (AMZN). I notice especially that Google (GOOG) is breaking down.

Nasdaq 100 (NDX), Daily chart:
The NDX chart pattern still is bullish but Friday's close at the intraday low could be the start of a correction; the key sign of that would be IF there was a break of 1590, the well-defined low end of the recent price range. Conversely, a close over 1620 keeps the strong July trend on track, with a next objective to 1630-1635, in a re-test of the area where the market topped in December.

When repeated lows of a consolidation after a spurt higher, look like they were drawn with a straight edge, this level becomes a key one to watch. It shows that recent buyers were being very consistent in supporting the index in this area. A break of this level (1590) should then lead to significant further selling, as traders throw in the towel for the time being anyway.

1560 is next lower support in my estimation; a move to this level would 'fill in' the upside gap from earlier in the month (July) and is a natural support point technically and fundamentally. 1540 is next lower support.

The Nasdaq 100 tracking stock, QQQQ: Daily chart:
The $40 area still looks like potent resistance for the Nasdaq 100/QQQQ tracking stock. 40.3 is the prior high that remains to be re-tested. 39.2 is key near support and the level to watch in the coming few days. I peg next support at around 38.5.

I rate the odds for a move back down at least to more of a mid-point in the broad uptrend channel as substantial. The question is going to be whether QQQQ is going to get this close to that prior high and not challenge it.

The On Balance Volume (OBV) indicator has flattened out and daily volume has been relatively low on this last spurt up. Volume patterns are not suggesting that the Q's are about to launch into a strong new and further up 'leg'.

Resistance around 40 looks pretty formidable. Major support is in the 36.75-37.25 area and this area is the lowest objective I currently see, assuming a more than a shallow pullback.

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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