Option Investor
Index Wrap

OCTOBER MADNESS

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THE BOTTOM LINE:
If the Market managed to squeak past the Sept 'curse', a month where the major indexes have been down most years in the past decade, it has not shaken the October tendency for sharp sell-offs and mad rides on an up-down roller coaster.

I was bullish coming into last week, as prices had held the low end of broad uptrend channels in the indices and the market looked like it was going to at least re-test the prior highs. WRONG! Market psychology seemed to shift on a dime.

Oil prices were backing off and all, but the Fed put out the WORD that they were definitely not done raising rates. And, guess what (!), higher short-term rates are finally pushing mortgage rates high enough to scare off some would-be buyers of million dollar 'cottages' in California.

The sole technical aspect that has made me uneasy about being long calls, even when buying at the lower-risk low end of the price range, has been the level of bullish sentiment. Market 'sentiment', as I measure it, just hasn't gotten to any kind of a bearish extreme over the past month, not even this past week. In fact Thursday's reading showed more 'bullishness' than was the case on Wednesday and the market was down the most on Thursday.

The prevailing attitude appears to be that corrections are buying opportunities within a bull market. I prefer situations where trader sentiment gets MORE, not less, bearish on declines; these situations are where we tend to see more sustained rallies. Where traders arent as fearless in buying calls due to a balanced perception of market RISK and realism re downside possibilities.

On the bullish side, the recent 'spike' low in the S&P 500 (SPX) equaled the spike low of early-July. Prices rebounded strongly from that low also. Stops run and then some, then a bounce back.

The Nasdaq Composite (COMP) didn't quite get to the 'line' of support implied by the cluster of early-July lows around 2050. All the major indices finally reached 'oversold' extremes and prices reached the lower (moving average) envelope lines that suggest an 'oversold' condition in price terms. See the charts.

On balance, I can't get too bearish at this juncture either. Not that I want to jump back into index calls. I don't think there is a lot of short-term risk of another sizable fall, but prices may just drift sideways for some time, not the best outlook for time-eroding premiums. I am taking profits on some NDX puts; the Nas 100 made the most obvious top, a double top in the area of the mid-Sept peak and most apparent on hourly charts dating to early-Sept.

MIDWEEK UPDATES:
Of related interest to my market outlook and this column is my Wednesday OI Newsletter 'Trader's Corner' article. This past week on use of HOURLY charts as best showing recent significant tops. 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:

Once near-support in the 1220 area, followed by a break of 1213 at the up trendline in the S&P 500 (SPX), the fall was steep; more than I would have imagined. One more fall did put SPX down to its oversold zone, according to the RSI indicator. Prior 1220 support has become the nearby resistance.

I think the market is going to be on the defensive here for a while. Option traders may not have quite the same caution, but institutional money managers were a bit shocked with losing so much market value so quickly. 1200 is a key area for support. If SPX trades down from there, a re-test of support at 1182-1185 becomes more likely. (A break of 1182-1185 sets up a target to as low as 1160.)

This last sell-off finally got the Index to an oversold 'extreme' on the RSI scale. I find these extremes increase the odds of being near a 'final' bottom of a move.

SPX did start back toward its prior highs around 1243-1245, but got stopped cold at 1233. An hourly chart, provided it goes back to at least early-September, is the most telling way to see this top set up. That chart is next.

S&P 500 (SPX); HOURLY CHART:

There is pattern we sometimes see reflected in the hourly chart below: two different types of resistance trendlines intersect. Once prices have extended in time to reach the end of such an intersection, the next part of the cycle is to fall off the cliff! The intersections are usually two trendlines that tend toward 45-degree angles.

The fall from 1446 to 1201 in August, was more than equaled by the recent decline from 1243 to 1182; and, then some, as the first drop of 45 points has been followed by another down leg of 61 pts to date. Sometimes the second leg is approximately equal (a 'measured move') to the first; sometimes it extends to 1.6 times (or more) of the first decline, which is realized at 1172.

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

The S&P 100 (OEX), with the sharp break of this past week, is now seen as in a downtrend channel with my new chart markings on the chart below. When the pivotal 560 level and prior key support, gave way so easily, prices fell all the way to what would the logical low end of a downtrend channel. The low end of the channel and, very importantly, the area of the April lows around 545, looks to be pretty significant if not major support.

Per my comments from last week, the key bullish confirming 'signal' for a next leg up and re-test of prior highs was missing, given the failure to go above and beyond the key 21-day moving average. My exiting stop order this past week on recommended calls (bought in the 560 area), was at 559.

A next rally, assuming one develops from the low we've seen already or from another dip to 545-550 support, would hit key overhead resistance at 560. A close over 560, not reversed the next day, is what's needed to turn the chart bullish again.

If I wanted to be in index options, I'd buy calls on dips, but am also waiting for any 1-day confirming extreme in the my Call-Put 'sentiment' indicator. But assuming a call buy around 545, risk to 542 is 3 pts, versus upside back up to 559-560. Ratio is good.

The oversold RSI reading suggests some reason to look for a low at the level already reached or a bit lower. Oversold lows in the past half year have tended to be either these short-lived 1-day downward spikes; or, a sideways move with lows establishing some 'line' of support. After this most recent break I anticipate a sideways price trend ahead, especially in the next 1-2 weeks.

My bullish 'sentiment' indicator (lowermost indicator above) never got to even near a 'typical oversold' reading at the lower line (1.2 or under). The last time this indicator reached at least a 1-day bearish 'sentiment' extreme, was ahead of the late-Aug. bottom. Often a 'final' low is made only after a HIGH level of bearishness, even if only one-day. A question is whether there's going to be a bottom without this extreme again.

DOW 30 AVERAGE (INDU); DAILY CHART:

Near support at 10200 in the Dow 30 (INDU) is revised downward quite substantially given last week's break from prior 'near' resistance at 10600. Near resistance is now prior support at 10350, with next resistance above that starting at 10500.

The low end of the new projected downtrend channel intersects around 10200-10175; this is also the area of the early-July low.

Expected in the next few days, given the new realities: sideways in a range from 10350 10200. A close over 10350, not reversed the next day, suggests the low has been seen already.

What we've been seeing in recent months are downside corrections ending with a sharp final 'thrust', where the lows are well below the prior day's. This pattern has been followed pretty quickly by a good-sized rebound. But, as the brokers say, 'future performance is not indicative of past performance'. If the trend is shifting to more mixed, prices will be sideways to lower.

A sideways to lower drift over this coming week will put the 21-day stochastic down at the lower 'oversold' line and create a greater likelihood for a next sustained rally attempt.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Near support seen in the 2100 area in the Nasdaq Composite (COMP) Index gave way some in the sharp retreat from the 2160 peak at the down trendline that occurred this past week. That pattern of retreat from this trendline, followed by piercing the 21-day moving average was the technical tip off for the trend reversal.

2080 looks to be near support, with major COMP support around 2060. The Composite is in a downtrend pattern now that we've seen the THIRD lower rally high. If the 2050 level gives way in a further future decline, we should start to suspect the overall trend as having gone from up to down. A prior high is more likely to be exceeded later if a major prior low is NOT, so the prior lows formed in the 2050 area is an important benchmark.

My stance was that the key technical level was up at the prior 2185 high and trade in THIS area would be the defining or predictive event ... WRONG! The key technical sign of a top was the rapid retreat after the move to the upper end of its downtrend channel. This down trendline was defined by 3 prior highs; 3 points makes the initial definition of a trendline. The U-turn at the line was highly predictive (for a rally failure).

Speaking of trendlines; for now, have my lower downtrend channel like rather 'loosely' drawn as an internal trendline connecting the most number of lows and cutting through Thursday's price range; it has the low end of the downtrend channel intersecting around 2080 and I think this is where the support will be found.

NASDAQ 100 (NDX); DAILY CHART:

Opps! As I define them, the short-term uptrend we had coming into this past week, ended for the Nasdaq 100 (NDX) index when it quickly fell back under its 21-day moving average at 1589; no 'traction' to/for the rally. NDX got to the pivotal area of the last high around 1619. The most recent rally peaked at 1618; this as core resistance was suggested by HOURLY highs in this area.

My comment last week was that only a break of 1550 would call into question the staying power of the major (up) trend. The area around 1550 did turn out to be the area where selling dried up finally and enough buying came in to provide a support floor.

Near resistance is at 1580. Significant technical support lies at 1540. Trading stance: I'm out of this one. Will buy calls on a further 'test' of 1540.

I was out any remaining NDX Index calls on this past week's break of 1560. I exited some on my closest suggested sell stop at 1585.
GOOD TRADE to have bought NDX puts as soon as the rally stalled at double trendline (and the prior top) resistance on the hourly chart at 1618. Exit around 1540.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Key support remains for the Nasdaq 100 (QQQQ) tracking stock to be around 38.0. Actually hourly support was found at 38.3. The break causes my 'major support' estimate to fall to 37.0-36.75.

Major resistance turned out to be the prior top at 39.9; a flurry of selling came in this area as soon as buyers didn't keep bidding the stock up. Double tops are potent patterns, with a tendency for sharp shakeouts after they form. 37.75 is key technical resistance, extending up to the 39 area by week's end.

By the end of the (coming) week, QQQQ would have to close at or above 39 to turn the intermediate-term trend back up. Absent that I anticipate that prices will dip to the 38 area again.

After a double top pattern like last week's, a soon to eventual, further sharp dip, such as to the low end of my newly-drawn downtrend channel (around 37-36.75), can't be ruled out. Not the most likely, but within the range of expectations.

As said last time, the '39.9 40.1 zone is the key resistance that must be overcome if the Q's are to make a run higher...'
Sure was!! Opps, did I forget to say to short a rally failure there?? Of course, this is basic trading principle and, hopefully, you become better at this stuff than me!

The biggest jump in daily volume came on Thursday's sharp fall and was either part of a bottoming process or suggests that there is another down 'leg' coming. Right now the whole price and volume pattern suggests more bearish elements than bullish.

** SUBSCRIBER MAIL **
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Good Trading Success!
 

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