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Index Wrap

BULLS SURRENDER! MARKET BOTTOMS

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THE BOTTOM LINE:
Well, this headline is in my mind only and was not carried anywhere else! The missing ingredient that we tend to see at tradable bottoms showed up last week with (finally) a 1-day extreme reading in my call-put trader 'sentiment' indicator. A bearish market view took hold on Thursday. This could have been the 'capitulation' moment or phase, which is a usual prerequisite to market turning points.

On declines, 'capitulation' is when a significant number of market participants get bearish and finally throw in the towel and dump stock. On rallies, it is when bullish 'sentiment' so predominates that there are few new buyers coming in to continue to bid stocks up.

I said last week that big corrections tend to run their course only after "trader sentiment gets MORE, not less, bearish on declines ... where traders arent fearless in buying calls due to a balanced perception of market RISK and realism re downside possibilities."

The S&P 100 (OEX) made a possible DOUBLE-BOTTOM low relative to its April low. At potential double bottoms, especially in an oversold market, call purchases can be favorable IF risk is held to just under the prior low, which makes for a close-by stop. Assuming even a moderate rebound, this risk relative to the reward potential is a reasonable speculation. Last week's OEX suggestion to buy calls at 545 assumed an exiting stop at 542.

In the other major indices, the amount retraced of the April August advance, was MORE than is typically seen. Sometimes (just enough so as to fake us out once in a while) retracements equal as much as 75% of the prior major price swing WITHOUT prices going all the way back to the starting point of that prior move.

I often favor buying retracements of as much as 62-66%, but buying retracements of 3/4ths (75%) is a bigger risk, as prices often are headed to a 100 percent retracement of ALL of the prior move; e.g., Thursday's OEX low.

I tend toward pre-set objectives and suggested exiting index puts at 1540 in the Nasdaq 100 (NDX); the final low was 1520; lows in this area were pretty short-lived however and the index closed the week at 1544. Exiting at 1540 was relative to put purchases made after a double top formed at 1618.

MIDWEEK UPDATES:
Of related interest to my market outlook and this column is my Wednesday OI Newsletter 'Trader's Corner' article. This past week was on the tendency for 'V'-bottoms or short-lived 1-2 day 'spike' lows, followed by rapid rebounds; this contrasts with the tendency for tops to build over time. This article can be seen 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:
I suggested that a break of 1182-1185 would set up a target to as low as 1160 but the S&P 500 (SPX) got to around 1177 before it rebounded to close at 1186 and back above prior support. The percentage retracement was between 2/3rds (66%) and 3/4ths (75%), which is a deep retracement. I take a major clue about the potential for a bottom in SPX from the S&P 100, as the OEX Index achieved a potential double bottom low.

Key or pivotal resistance is at 1200-1205. A close over this area and not reversed the next day, would tend to 'confirm' that the (downside) correction had run its course.

Once some final key levels were pierced in SPX, stops were 'run' (especially in the S&P 500 futures), many prior bulls threw in the towel ('capitulated') and, as many sellers had sold already and were out of the market, the stage was set for a rebound.

The SPX Index got even more oversold this past week, according to the RSI. The Relative Strength Index certainly got low enough to suggest that there could be a 'final' bottom for this 2-month decline consisting of two down swings; a down-up-down or 'ABC' correction. The low looks to be in place for the second down leg.

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

FROM LAST WEEK -
"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."

A 1-day bearish 'extreme' in sentiment occurred on Thursday and prices dipped under 545 on the same day. 10/13 CBOE equity volume figures were apparent late in the day off the (CBOE) web site cumulative tally, and certainly at day's end. The 10/13 low was 543.8, so a 542 exiting stop was not violated.

A 1-day call-put reading at or below the extreme, as indicated by that (lowermost) indicator on the chart below, was a related suggested trade 'trigger'. S&P 100 (OEX) call entry (based on the suggestion about entry at 545 AND there being a bearish sentiment extreme) was also warranted on Friday's opening around 548. For call purchases made in the 545-548 zone, a 542 exiting stop is still the suggestion.

What was uncharacteristic in the apparent late-September bottom, as noted by the circled up arrow in the OEX chart below, was that there was not ALSO the higher level of bearishness I've come to expect. There were a number of lows made at support implied by the low end of the Index's uptrend channel. I was fooled! No matter how many times I've see the dynamic that trader sentiment will most of the time get to a bearish extreme BEFORE a sustained rally, I still can believe that THIS time may be different.

Price patterns are still the lead or primary technical/chart consideration and there's a potential double bottom low that has formed in the OEX. 555 is near resistance, then 558. Closes over 558 suggests that the (downside) correction has run its course.

EXTREMES IN SENTIMENT:
Extreme bearishness is defined when there is any one day when the ratio of CBOE total equities (excludes INDEX volumes) call volume to that day's put volume, is 1.2 or less. For example, per the CBOE web site, Thursday's 10/13 equities call volume was 919,301 versus daily equities put volume of 819,150. 919301 divided by 819150 equals a call to put ratio of 1.12; readings at or below 1.2 tend to precede bottoms. At tops, equities call volume will tend toward 1.95 to 2 times (or more) total put volume.

Look for a tradable bottom or top to form within 1-5 days AFTER these kinds of extremes. This indicator is a big help, but it's also necessary to then look for OTHER signs of trend reversals; e.g., a double top/bottom, a move to the low/high end of a trend channel, a key upside reversal (sharp new low, followed by a close above the prior day's high), etc.

I could be giving away my best "secret", in the call to put ratio read, but most traders will not 'believe' this technique anyway. Lows are made when traders mostly get bearish!? Isn't this a natural result of bearish market conditions!?

Yes, but certain extremes do tend to flash advance reversal 'signals' which can be used to profitable results in index options. As I said, such simple techniques tend not to be believed (I don't believe em sometimes!); but then it's not entirely 'simple' either, since major market extremes also typically require a WAIT for the combination of (a bottoming or topping) PATTERN, an OVERBOUGHT/OVERSOLD condition, related extremes in SENTIMENT and, sometimes, extremes in VOLUME.

DOW 30 AVERAGE (INDU); DAILY CHART:
I figured last week that support at 10200 might hold in the Dow 30 (INDU) and the retracement stopped, so far, at least, at 75 per cent of the April to July advance. The low end of my projected downtrend channel intersected around 10200-10175 and was also the area of the early-July low. The potential double bottom low of the S&P 100 has been so far 'confirmed' by the action of the Dow 30.

Double bottoms are only 'potential' ones soon after they're made, as the sell off could continue later on and take the index to a lower low. So far, given the whole picture provided by the chart pattern and my key indicators, I'm back to employing options to play the upside INDU potential.

10350 is a pivotal resistance. A close over 10350 that is maintained the next day will be a confirming sign that a low for the 2-month correction may have been reached.

The slow stochastic and I favor a 21-day 'length' for the Dow; the stochastic being one of the overbought/oversold 'oscillators with the RSI indicator being another, has tipped up in a bullish crossover from an oversold extreme. While there may be some re-testing of the bottom area, I think that it's time to play the upside again.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
I thought major support in the Nasdaq Composite Index (COMP) would be found around 2060. WRONG! COMP fell to nearly 2025. When these sell offs or waterfall declines gain enough momentum they go where they want to. In this case however, the decline stopped just short of equaling a 'Fibonacci' 61.8% (62) correction, then rebounded to back above the prior 'line' of support seen in the June to early-July period in the 2050-2053 area.

While I think that COMP probably made a final low and has formed the 'V'-shape so typical of bottoms (as discussed in my past week's, 10/12, Trader's Corner column), the Index now needs to get back above 2080-2100 resistance to probably again gain traction on the upside. Stay tuned on that.

The 2000-2005 area remains pivotal major support. A weekly close under 2000 would suggest that the major up trend has reversed.

I've redrawn the possible low end of the downtrend channel according to the 'angle' intersecting with the lows on the decline of August. It is amazing how later trends see prices back at prior rates of decline (prior trendlines), even when steep.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index rebounded from a level representing 75% or 3/4ths of the June to July advance. This was a retracement that legendary historic trader WD Gann thought 'valid'; i.e., it could define support and the end of a correction. Downside corrections don't often go this much, without later falling back to the rally starting point. Time will tell on this.

I view this recent low as typical of the pattern of 'V' bottoms and upside reversals. If this assessment is valid, a clue to it is for NDX to hold at or above 1529-1530. If NDX starts slipping below it's prior intraday 1525 low, some support should develop around 1500-1505, with an ultimate downside target to as low as 1485.

Several hourly lows formed in the 1520 area. If you covered puts and even bought calls on this pattern, both actions look favorable currently. I would initially risk to 1515 on NDX calls.

Key overhead resistance is in the 1560-1564 area; above this, resistance looks to be at 1575-1580. I should also mention the pivotal resistance role that the 21-day moving average might play, with the average currently at 1568. A close over the 21-day average would be a bullish plus, assuming a close was maintained over this key average the next couple of days as well.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Support is estimated in the Nasdaq 100 QQQQ tracking stock to be in the 37.40 area, around recent lows and representing a 75 percent retracement of the prior advance. A deep retracement but it may hold. A close under the recent 37.33 intraday low suggests that the stock could drop back again to the early-July bottom at 36.75.

Near resistance looks to be around 38.30; if this initial resistance is overcome, more substantial selling pressure should come into play on any rally back to 38.9 39.

A related bullish indicator was the mid-week upturn in the On Balance Volume Indicator or OBV. I'm not playing the stock, but would lean toward being long, provided the recent 37.33 low was not pierced.

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