Option Investor
Index Wrap

BUY CALLS

HAVING TROUBLE PRINTING?
Printer friendly version
THE BOTTOM LINE:
I am a buyer of S&P 100 (OEX) and Nasdaq 100 (NDX) calls based on OEX holding 560 at its up trendline and the double bottom low made in NDX around 1550. The Dow 30 (INDU) also made a double bottom low around 10350 and buying Dow Index (DJX) calls also looks favorable. The Nas 100 tracking stock, QQQQ, made a double bottom low at 38.25, and based on that the stock also looks like a buy; a lower risk way to way the upside, assuming a (sell) stop at 38.00 and an eventual objective to the 41.5 area, maybe 42.

There should be a Rita-relief rally early in the week, followed by some backing and filling after that. I suggest buying calls on dips, especially down toward recent lows. If already long calls around recent lows at technical support it's ok to add on dips. I looks to be, more or less, up into the next expiration.

So far, the S&P 500 (SPX) has held at its long-term weekly up trendline intersecting at 1205 currently. SPX did have a 1-day penetration of its up trendline on the daily chart, but it reversed to close above it on the following two days. I often say that it's not a single 1-day penetration of a trendline that is definitive if this action is not upheld the next day.

I said last week that I would exit calls with a close under the 21-day averages and that: "I don't like shorting or buying puts around the low end of the price channels, so would only wait and watch to see if the prior recent (down) swing lows get tested and hold at, near or above those prior lows." They got tested and held in the key trading options: OEX, DJX and NDX.

Exit points on calls are now 'defined' by getting out if there's a decisive break of those prior lows (more than 1 percent), especially on a closing basis; that is, by a drop below 560 in OEX, 103.5 in DJX and 1550 in NDX.

The Russell 2000 (RUT) also appears to have made a double bottom; at the 645 weekly low. I also figure that Oil has had its run for now and will pull back in price over the next few weeks. The CBOE Oil Index (OIX) had a weekly downside reversal and could drop back to the 500 area (close = 564.9).

Gold has also probably finished its run (if so, sorry gold bugs!) and the Gold and Silver Index (XAU) looks like it has once again topped out in the 111-113 death zone; close = 109.4, after hitting 113.2 this past week. I shouldn't make 'fun' of the gold bulls; they are so earnest, such 'true believers' in the yellow metal. Excuse me.

MIDWEEK UPDATES:
Of related interest to this column is my Wednesday 'Trader's Corner' article for the OI Newsletter. This past Wednesday I looked at some of the current trendline analysis on the indexes and covered some trendline 'principles'; see this 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:

So far, the S&P 500 (SPX) has held above its prior low at 1200.
SPX held at its daily up trendline, since only one close dipped under it. Trendlines, as I noted in my Trader's Corner article this past Wednesday, show a predominate rate of (price) change on the upside or downside, depending on the slope up or down.

Since trendlines show the angle of its approximate trend direction, give leeway to minor dips below (or above) a well-defined trendline; i.e., 'well-defined' is having at LEAST 3 points that can be connected in a straight line. No wavy drunk lines please, although I've drawn many on the back of cocktail napkins! Matchbooks are ok too.

The chart not seen here is the weekly chart; it's mostly of interest for the fact that its long-term up trendline intersects right where SPX got to at its low this past week at 1205.

Key or pivotal support is at 1200. Near resistance can be assumed to be in the area of the 21-day moving average, currently at 1224; figure near resistance at 1224-1225.

I wouldn't be surprised to see another dip to around 1205; or to the 1200 area. In which case I'll be re-drawing my trendlines which are also on the chart (T2 and 'T3') below.

SPX didn't get fully oversold and continues the pattern of not getting quite to oversold, or overbought, extremes at important turning points. Would I rather see it get lower on the RSI to have more confidence that we've seen a bottom in SPX? YAAAH!

Lastly, I'm back to trading off the S&P 100 (OEX) chart, as it has the clearer technical pattern currently.

S&P 100 (OEX) INDEX; DAILY CHART:

I have to repeat what I said last week about the S&P 100 (OEX) remaining in a bullish uptrend pattern, as long as its lows hold at the April Sept. up trendline and the low end of its uptrend channel. It's looking like 560 will hold. Next lower support looks like 555 with fairly major support around 550.

As with SPX and the other major indexes, I peg near resistance as being around the 21-day average, at 566.5 currently. There is a downtrend line that comes in at 572 and this level looks even more key as resistance. A close above this trendline would suggest that decent upside momentum had developed.

As I said in my 'bottom line' comments at the beginning, I favor OEX calls bought down near trendline support. I like the trade on a risk to reward basis; it's why I so like buying 'extremes' as I got a close-by point to risk to. Typically I will set a stop either equal to a close under the trendline (560) or intraday, if I can't keep tabs on the market during the day (often), a stop equal to 1 percent under the trendline; i.e., currently, at 554.4.

Of course a stop is RELATIVE to my objective and I don't want to 'risk' (lose) more than one third (or one half) of what I could hope to gain if right on future trend direction. In this case, assuming 555 holds as a low, I calculate upside potential to at least 572, and more likely back up to at least 575 again.

OEX didn't get 'fully' oversold, but it doesn't always do that. Another dip would do so however, especially to the 555 area.

My bullish 'sentiment' is neutral, neither showing a bullis or bearish extreme. Sometimes, people get overly excited about the market prospects, sometimes not. There ARE a lot of cross currents and of course technical indicators will reflect what is in the market fundamentally.

DDOW 30 AVERAGE (INDU); DAILY CHART:

Near support in the Dow 30 (INDU) is 10550, then around 10265.
I favor buying calls on dips. A close under 10265 would turn be bearish or cautious however, at least short-term as it would suggest that at a minimum there was going to be more 'backing and filling' or basing action.

Near resistance is 10500, with key pivotal resistance at 10700. A close over 10500 and ability to 'hold' this area as support would be a bullish pattern.

As with the S&P indices, INDU hasn't gotten completely oversold, so we should not be surprised if there is another dip. The stochastic model will tend to fall further even if the trend ahead drifts sideways. I rate it somewhat less likely that we'll see an immediate SUSTAINED rally because of this consideration.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Key near support is at 2100. This is an important support area, with next lower support around 2070 to 2050. Near resistance is at 2150, but even more pivotal and key resistance is the prior recent high at 2185.

On a recovery rally to the extent it develops in COMP, the broader composite looks like it will fall 'behind' the bigger cap Nas 100 (NDX). Investors maybe have decided to stop buying ever little tech stock that looks 'undervalued' versus buying 'sexy' story stocks like Google, Apple (hey, the 'Nano' looks cool!) and the like.

As I said last time, it takes a recovery firing on all cylinders to get the majority of tech stocks back into solid uptrends. The lower tier smaller stocks in many tech sectors can tend to lag the big-cap stocks when earnings expectations start getting a little shaky, as they have recently related to high energy prices.

NASDAQ 100 (NDX); DAILY CHART:

I exited Nasdaq 100 (NDX) calls owned at 1555-1560, once prices fell under its 21-day average by this past Tuesday's close at 1578. Tuesday and Thursday are the most common reversal days anyway; notice the low was made Thursday.

When I saw that 1550 was going to hold as a low, I got interested in calls again. I like the long side near the low end of a trend channel. I re-drew my lower channel line and show a 'tentative' new up trendline on the daily chart below. I'd like better 'definition' (more points along it) of that line, so await further trading this week.

I think there'll be some up and downs in the near-term. The market tends not to like 'shocks'; and, the Fed on its relentless, even though gradual/slow, tightening.

Near resistance is at 1585-1585. Key or pivotal resistance then is the prior recent peak at 1619; then, there is the 12-month high at 1630 to contend with. I think another rally will develop that will again take NDX back up toward the upper end of the channel; and, to new eventual new highs.

It will be important for 1550 to hold to maintain a bullish stance and to suggest that a next attempt to take out the prior highs will be sooner, rather than later. NDX could have another dip to the 1500 area, so I am also cautious about over-staying in calls. I'll exit at 1545.

Notice that NDX had an RSI reading a bit more toward 'oversold' than last time. Notice also how the prior rally (late-August) was relatively short-lived when NDX didn't get quite oversold.

The more sustained rallies tend to come after a major index like NDX reaches a more 'fully' oversold condition. At a 38.4 reading the index got about as oversold as it did in late-June however.

Tech tends to not get quite as extreme on the downside, when the market cycle has technology companies in favor again. Venture capital is again flowing into the latest techno new-thing. Hey, where else can you put money if you want the potential for an above-average return, at least in equities.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I favor purchases in the Nasdaq 100 (QQQQ) tracking stock. I'm making an assumption that 38.25 has set up as a significant double bottom. But, we can't rule out another leg down to 37, so am not risking much; e.g., to 38.0. If 39 even is seen, the Q's will likely go lower still. This is a hunch based on the tendency for offers (stock for sale) to get lifted as an even number is approached. If there is a lack of buying interest at 38 even the stock will likely fall further. If it drops under 37.75, 37 becomes a next potential target.

39 is near-resistance. The 39.9 40.1 zone is the key and pivotal resistance area. If 40.1 is exceeded, I think prices could again work to the upper end of its uptrend channel. Stay tuned on that.

The jump in daily QQQQ volume around the lows last week makes it look like a bottom could have been made, especially since it was at the lows seen in late-August. Volume events never happen in isolation. On balance volume (OBV) turned up also.

Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] 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!
 

Index Wrap Archives