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Index Wrap

SLIPPERY ORDERLY SLIDE

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THE BOTTOM LINE:
SOS (Slippery Orderly Slide) signals were again being sent by the market indices last week. The decline has not been sharp and steep as is the frequent tendency in declines coming after very strong and prolonged advances. But the market can't seem to gain traction. When it does, it doesn't maintain it and slips back; but it's an 'orderly' decline, it seemed more due to bids being pulled rather than major selling. What's going on? I mostly look at the technical perspective.

Technically, what I notice is that the S&P 500 (SPX) got up to a price level just shy of what would be a 62% retracement of the (Mch) 2000 - (Oct) 2002 decline. Retracements of prior market moves tend to be around 50 to 62, sometimes 66% (2/3rds).

If a recovery rally, in the case of an upside retracement, regains MORE than 2/3rds of the prior decline, there is some likelihood that the rally will go (all the way) back to the prior top. The point here is that SPX was getting close to a key juncture at its recent 1246 high. Upside potential may not be more than 1250 for SPX, or not more than 1285, perhaps 1300.

A very long-term big-picture view doesn't much matter to index option traders, except that it may be best to not get too bullish by assuming that we're back in a major bull market. Time will tell on that. Trader 'sentiment' as I measure it, is pretty unrelentingly bullish. But the earnings picture is still somewhat mixed. There are some not so strong sectors or sectors with potential problems ahead. Oil and housing are not one of them right now! However, say with housing, there are markets or geographic areas, where the boom has cooled. I'm in one of them right now, Denver. Getting away from my coastal California home lends some perspective.

As for the Nasdaq, there is an even more clear cut benchmark in that the Composite (COMP) and the Nasdaq 100 (NDX) have failed to get, or stay, above their early-year highs. We could be looking at a double top there. Retracements are one thing. A rally that stops at a 50%, or 62% retracement gives some yardstick measure, but it's not a specific definite event like stopping at a prior high; i.e., a prior index level where buying power could not overcome willing sellers (resistance).

So, we have a 'potential' double top in NDX and more like a potential triple top in COMP; i.e., COMP has failed now 3 times (Jan '04, Jan '05 & recently) to close above 2150-2200. Triple tops are not all that common in the indices. Often there will be an eventual breakout after a THIRD time major rally to the same area. Stay tuned on that.

I will be looking at retracements in my specific index comments below, as possible benchmarks, all shown on the HOURLY charts. I am anticipating where a next rally could start from; one that will be sustained. I lean to the view that there's a good trade coming up in Index calls. I didn't especially want to sweat out owning puts, as I still see more of a propensity to rally than not. There is a lot of potential bucks out there available to buy stocks as long as this recovery looks to be on track and not spoiled by Fed tightening, inflationary energy prices and the like.

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.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) does seem to be holding support at the level I figured for key near support, at 1220. And Thursday's low around 1216 was getting quite close to support implied by its up trendline. 1215 is where the current (early-week) intersection is of this trendline forming the low end of its present uptrend channel. The fact that SPX remains in this channel maintains a bullish chart picture.

The hourly chart further down shows the retracement levels. 1215 represents a one-half or 50% retracement. Strong uptrends rarely retrace more than about half of a prior upswing, suggesting that some (initial) call purchases could be considered around 1215, but risking only 3-5 points.

Resistance on the daily chart looks like 1230; above 1230, 1240 is key resistance. I close over 1240, not reversed the next day suggests resumption of the uptrend; with a possible target to around 1260, although prior highs in the 1245 area would still would have to be overcome.

I would like to see SPX reach a more fully 'oversold' condition for a bit more of a comfort level in getting long, but this may not happen. A pullback in a strong trend doesn't always reach an oversold and I am placing more weight on the probability that the up trendline will remain intact. If 1215 gives way, SPX should find support in the 1205 area, where I will again have some buying interest on the call side.

S&P 500 (SPX); HOURLY CHART:
1207 to 1204 is the zone where the S&P 500 (SPX) would achieve the 62-66% retracements. I place a relatively low likelihood for a retreat to the even-1200 level, or to under it. Next support under 1200 is in the 1190 area. An hourly close over trendline resistance (red arrow) at 1225 suggests that SPX was gaining some upside momentum.

One more shot down would get the hourly oscillator (RSI) into an oversold area. The intermittent rallies have kept the Relative Strength Index from reaching an oversold level, which I've taken as a sign of a still-bullish trend.

S&P 100 (OEX) INDEX; DAILY CHART:
Near support in the S&P 100 (OEX) still looks like it could be found around 565, but key technical support lies at the low end of the downtrend channel at 561 currently, as noted at the green (up) arrow. I view OEX call purchases as favorable in this area. A close under 555 would turn the chart bearish in its pattern however.

Immediate overhead resistance is now 568/570 to 572. A daily close over 570, not reversed the next day, would suggest upside potential back up to 578 at the 'line' of recent highs. If 578 was exceeded, next resistance (implied by the upper end of OEX's uptrend channel) is around 582.

An interesting an telling dynamic about this slide in the S&P is that bullish sentiment remains quite high. I would usually rather be on the OPPOSITE side of the prevailing sentiment. For me there looks to too much 'complacency' about the market and too little consideration of risk. One more sell off might create at least a single day reading that dropped closer to the low end of my indicator. It does appear that OEX is headed lower from the way the chart (pattern) looks. Stay tuned on the outcome!

S&P 100 (OEX) INDEX; HOURLY CHART:
At its recent intraday and hourly low, the OEX has to date retraced exactly half of the early to mid-July advance. For traders who stayed in calls after that initial sharp rally, the sideways trend after that resulted in a lot of lost profit. Old trader's saying: 'take quick profits'.

563-562, if seen, achieves a 62-66% retracement. Maybe the OEX won't get quite to 561, but there is often 'slippage' on a decline and I think the index will get at least close to the low end of its uptrend channel.

DOW 30 AVERAGE (INDU); DAILY CHART:
Stair-step resistance points in the Dow 30 (INDU) are at: 10600; then 10650; finally at 10700. A close over 10700, not reversed the next day, puts the chart back on a bullish footing and sets up a possible next advance to the 10800 area.

Near support is 10500 potentially, but with somewhat better technical support in the 10450 area, representing as it does a return to the previously broken up trendline. However, I continue to view the low end of uptrend channel I've outlined on the daily chart below as representing the key support at around 10300. 'Key' support to me is a level where, if pierced, would change the trend outlook on a near to intermediate-term basis.

I favor purchase of Dow Index (DJX) index calls in the 103.3-103.5 area.

DOW 30 AVERAGE (INDU); HOURLY CHART:
An move above 10600, especially on an hourly closing basis, is needed to turn the short-term trend back up. With the indices that lagged the rally like INDU (and the Nas 100, NDX), the 'minimal' 38% percentage retracement on this recent decline has been shallower than the other major indices. A downside retracement of only this amount in an uptrend and not more, suggests a fairly strong trend.

10450 represents the 50% retracement level, and 10350 a 2/3rds 66% give back; maybe we'll see the Dow retreat to this area, at lower trendline support.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite index (COMP) has fallen below the low end of the relatively narrow uptrend channel that it was in due to its very strong take-no-prisoners advance. This steep of an advance was not sustainable, so I don't place as much significance in COMP breaking the lower trendline. Near resistance is around 2145, with key resistance at 2170, at the recent rally high.

COMP could fall to the low-2100 area, such as to 2120-2110. Not so however, if the index climbs back above 2145-2150 near-term. IF 2100 penetrated, especially on a closing basis, my downside objective is to the 2075-2080 area.

Repeating my comments from last week more or less, an oversold reading again in the Composite would make Nasdaq call purchases more attractive, assuming COMP was in an area of likely chart support; e.g., in the low-2100 area.

NASDAQ COMPOSITE (COMP) INDEX; HOURLY CHART:
The Composite has retraced half of its July run up. A deeper retracement would put COMP back down closer to the 2110-2115 area. I close below 2107, would increase the chance that the index could make an ultimate round-trip return back to the rally starting point in the 2050 area.

The gradual measured decline in the Composite has meant that hourly RSI (above) has not yet reached an oversold condition, which sometimes happens in strong trends, versus my typical 'trading range' type markets.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) broke through near support at 1580 area and appears headed toward my long-time target to 1560. At least 1560 is a 'logical' area technically as a target, as it would 'fill in' the upside gap that occurred in the strong early-July run up. A 50% retracement would be completed at 1554.

I suggested last time that I would have call buying interest in this area. However, if NDX fell, and held, the low end of its uptrend channel, the index could yet reach the 1240 area. This would also be a 62% retracement of the prior advance. This consideration, this possibility, suggests holding off on any call purchases until there's further market action.

A rebound to back above 1590, then 1600, especially on a daily closing basis is needed to turn the trend back up. Currently NDX remains in a steady downtrend. Nothing dramatic of course, more like the drip principle.

NASDAQ 100 (NDX); HOURLY CHART:
A downside target to the 1540 area still looks like a possibility, but there is also 'basing' going on around recent lows in the 1573 area so the retracement action in NDX could still be shallow. A related bearish development was the Russell 2000 Index (RUT), closing this past week under its prior high (not shown). RUT had been leading the Nasdaq indices but this was a bit of a bearish omen for Nasdaq.

The sideways trend in the longer-term (21) hourly RSI in NDX, while NDX has fallen, provides a somewhat bullish divergence. Scale down buying is happening on the way back down and sellers have not been overly aggressive.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near support in the Nasdaq 100 (QQQQ) tracking stock remains as 38.40, then key support at the lower end of the uptrend channel is 37.75. I would be a buyer on a dip to the 38-37.75, but don't have any high degree of confidence that the stock will get there.

I will have an interest in seeing what develops if the Q's reach the 38.40 area; a reversal higher from this area, would suggest being long, but with a tight protective stop at 38.20. If 38.20 was seen I would want to wait to see price action around 38.0, if reached. My ultimate 'fantasy' buy remains for a test of the lower trend channel boundary and a purchase around 37.75; in that event I would set a sell stop or exit point at 37.40.

Daily volume levels have been moderate on the decline, so there is no bearish news in what volume is doing. As long as QQQQ remains in an uptrend, it would be expected that volume would jump on any good-sized rally, which has been the case.

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