Option Investor
Index Wrap

NO SECOND CHANCE

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THE BOTTOM LINE:
Instead of a period where prices fell back toward recent lows, the upsurge in the major indices continued unabated in the past week. A second-chance opportunity to buy index calls after another re-test of the lows didn't happen. The market doesn't always make so easy!

We had our buying opportunity at key technical points in the S&P 500 (SPX) and the Nasdaq Composite (COMP), the 'lead' indexes in the prior broad-based rally; at the lows COMP fell back to 1212, equaling a 62 percent retracement; and to the 1204 area, which represented a 2/3rds_66% retracement of the prior SPX advance.

Retracements of around 62% to 2/3rds (66%) of a prior advance, in an ongoing longer-term uptrend, are about as much as will be seen, assuming the indices remain in an uptrend, which is how I've been seeing where the market was. Sometimes such lows get 're-tested', sometimes not.

I buy (index calls) on retracements of between 62 and 66 percent, in terms of the indexes that were leading an advance before a correction set in. I can then hold 'risk' to close below (e.g., 3 index points) the 66% retracement level. An explanation of gauging a 'stop' (loss) exit point at 1549-1550 for Nasdaq 100 NDX calls BASED on a 1203 stop (3 pts under a 66% retracement) in COMP, is in my Trader's Corner article of 9/7; see LINK below.

The narrower S&P 100 (OEX) gave back MORE than 2/3rds of ITS prior run up and came close to making a double bottom low; the Nasdaq 100 (NDX) gave up just one-half of its prior upswing. All are significant but I keyed off the S&P 500 and Nasdaq Composite.

I anticipate this rally extending into the coming week, especially with oil prices correcting/falling back. The key resistances are mostly the prior (up) swing highs; key near technical support levels are anticipated at the current 21-day moving average, then at prior lows and, at the low end of uptrend channels, as noted on the individual charts.

MIDWEEK INDEX TRADER UPDATES:
I update my column midweek when I can, which has been infrequent. Of related interest however, I write a Wednesday 'Trader's Corner' article for the OI Newsletter and most often I relate the topic and my subject matter to what the indexes are doing as of Wednesday afternoon.

My Wednesday (9/7) Trader's Corner column, responding to a Subscriber e-mail question, showed recent retracements in-depth on the hourly charts and discussed other aspects of retracements. You can go back to the 9/7 Newsletter or see it online by clicking here.

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:
As I noted, the S&P 500 (SPX) backed off from a decisive upside penetration of the 21-day moving average, but it was short-lived. After the long weekend, SPX took off, but gave one more excellent buying opportunity at the opening.

Key overhead resistance is at 1245, at the prior high, on up to around 1250, based on where SPX would start to be somewhat 'overbought' according to the upper moving average envelope line. Given the strong upward momentum, I anticipate the index making a new relative high (for this current move).

1263 is where I see technical resistance based on this being at the upper end of my projected trend channel. If 1260 is seen I suggest taking profits on calls (bought at 1220 and below).

Key support is 1220-1222. A close below 1222 is near-term bearish, with a downside penetration of the lower trend channel at 1208 more so.

S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) chart is bullish in its pattern and it looks like key resistance in the 577 area will be tested. There's a good chance OEX will have a move beyond this area, that is to new highs, maybe after some backing and filling before this.

Major technical resistance looks to me like 585 currently. I don't have higher objectives than to this area currently. As with SPX, my target on OEX calls is for a move to the upper end of my projected uptrend channel; but, of course, it has to get above the cluster of prior highs FIRST. Best technical strength would be shown if this area (around 577) than became, more or less, support on pullbacks; i.e., resistance, once pierced, should 'become' support subsequently.

Currently, 567 looks to be a likely lower support area, with major support coming in around 560.

My call-put 'sentiment' indicator, has resumed its march higher, but is not at an extreme, suggesting that (finally) assessment is ALSO being made of market risk also. Until this indicator gets into the 'overbought' zone, no major cautionary note is sounded for the bulls.

DOW 30 AVERAGE (INDU); DAILY CHART:
As is often the case, support in the Dow 30 (INDU) developed at its lower (up) trendline intersecting at 10350. I had thought that the Dow Index (DJX) might have a final dip to 102.8 - 103.3; but a main consideration was to see if the trendline held. It did, and DJX turned out to be a buy in the 103.6-103.8 area as the intraday lows held its support trendline over 3 days.

An excellent buying opportunity is when upside potential on a rebound is substantial, with small 'risk'. Small risk is when I can set a stop just under a well-defined up trendline. I ALWAYS set stops that I adhere to. While long options are 'defined' risk, they are not 'low' risk; IF you want to have a P&L at the end of the year, that has a substantial net gain!

The breakout back above 10500 was showing that any DJX calls bought on the dip under 104 were going to work out. Where to from here? 10700 at the prior highs, on up to 10740, is near INDU resistance; I see technical resistance than coming in around 10850 and this is my current 'maximum' upside objective.

10700 is a key area; the bulls want/need a close over it that's not reversed the next day. Assuming a move through 10700, bullish best is if 10700 then becomes 'support' for a rebound to 10800-10850; I'll be looking to take call profits in this area if reached.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
I anticipated Nasdaq Composite index (COMP) getting close to 2100 but that it would hold above this level. The lows came after an exact 'Fibonacci' retracement of 62%; at 2112.

On the apparent low and end to the correction, as suggested by the rebound back above the 21-day moving average, I re-drew my lower trend channel line. This is the only type 'trendline' that is tentatively established with a SINGLE low; i.e., established by drawing a parallel line to the upper (well-defined with 3 or more highs) trendline that intersects the (single) LOWEST low.

Time will tell if my lower trend channel 'line' defines potential future support on pullbacks. I've found that constructing a tentative such trendline often has often 'defined' support later on. So, near support looks to be in the 2150 area with key lower support at the prior 2112 intraday bottom. If COMP can't hold the 2150 area, which is also the area of the 21-day average, look for a possible sideways to lower drift ahead.

Key technical resistance is at 2220, the prior high; as noted by the lowermost (down) red arrow. Major resistance is projected at 2300, based on the upper trend channel boundary.

The COMP rebound was not quite as robust as seen in the S&P sector; individual buyers tend to drive the tech sector somewhat and individuals got a little more cautious about buying back in, after a steady decline of a month before this last low.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) held technical support around 1551, which formed an up trendline nicely with the April/early-July lows. I also wrote about this area needing to 'hold', if the correction was going to be a normal one staying within the overall multi-month uptrend.

NDX's correction turned out to offer a good call buying opportunity. The index showed relative strength (compared to the Composite), as the recent low retraced only one-half of ITS prior run-up. This was a case of remaining a bull and your pockets would be full! What next? The 1580 area of the 21-day moving average should hold as near support if NDX is going to continue to chug higher to a re-test of prior highs in the 1630 area.

1565 is the lower NDX trendline support; a close under 1550, not reversed the next day, turns the chart bearish. If NDX can pierce 1630 and 'hold' this area subsequently, it then suggests a target to around 1670.

I hold some Nasdaq 100 (Oct 1575) calls, but will exit if 1580 is breached on the close, perhaps waiting one more day if its close, but I don't want to risk back to 1565 even with some weeks to their expiration. [Per my usually strategy of attempting to be in larger price swings, I stayed out of the soon to expire September series.]

I'll also be quick to take profits on calls around 1630 in the NDX if buying interest falters in this area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near-term support for the Nasdaq 100 (QQQQ) tracking stock is now 39. Key support is implied by the prior low in the 38.25 area.

40.1, at the July intraday high is a key resistance. I suggested the possibility last week that the Q's could have one more downswing and re-test the prior 37 low. WRONG!

Keying off the underlying Nasdaq 100 index, the stock was a BUY at recent lows. Technical traders tend to always see 'one more' possible low even when bullish, maybe because of the love of buying double bottoms. BUT, the stock was nearly as 'oversold' as it's been getting in recent months before it was ready to rally per the RSI indicator.

Moreover, if one looked at a longer length HOURLY chart (always a good idea if your charting application will show you more than 10 days!), there were some bullish indications.

QQQQ HOURLY CHART: BULLISH SIGNS
#1, A double-bottom on that time-scale; i.e., hourly.
#2, QQQQ showed a propensity to rally after this double-bottom, completion of a 50% retracement and
#3, after 'filling in' the upside price gap of early-July.

Well, I bought the NDX calls instead, but buying the NDX Tracking stock at the 'line' of support seen on the hourly chart below, and risking to just under it, made for a very low risk trade; e.g., using an initial resting sell 'stop' order at 38.15.

The breakout move above the well-defined QQQQ down trendline as seen on the hourly chart above, with the subsequent consolidation ABOVE it (the trendline), showed that this was going to be a good trade. Live and learn! Use hourly charts to supplement the Daily.

** IMPORTANT NOTE ON SUBSCRIBER MAIL **
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!

Good Trading Success!
 

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