Option Investor
Index Wrap

DIVERGENT MARKETS: Nasdaq vs. S&P indices

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THE BOTTOM LINE:
A funny thing happened at the apparent recent 'Market' bottom: we discovered again our TWO different markets and how they can diverge; the tech-heavy Nasdaq rebounded and the S&P index foundered.

I favored November at, or only slightly out, of the money call buys when the S&P 100 (OEX) got down into the 545 area and in the Nasdaq 100 (NDX) when it reached 1520. However, OEX calls bought when the Index traded at 545 are not profitable yet, whereas NDX calls bought when the Index traded at 1520 are substantially profitable given its weekly close at 1565.

The S&P 500 (SPX) looks like it could be forming a bottom (we're seeing slightly higher pullback lows), but it is bouncing around like a yo-yo and not gaining much traction. And, the S&P 100 (OEX) has been making a series of slightly lower lows.

On the other hand, the Nasdaq, lead by such stocks as Google (GOOG) and Apple (AAPL), has rebounded fairly steadily since the 2025 low in the Composite (COMP) and lows in the 1515-1520 area in the Nasdaq 100 (NDX).

It's unusual for there to be such deep retracements as we had in some of the major indices (e.g., around 75% or 3/4ths of the prior advance), without there being an eventual decline back to the prior low. The tendency for a lack of recent big money (i.e., institutional) buying interest in the S&P big cap stocks, to accompany a rally in the tech-heavy Nasdaq favored more by individual traders and investors, leaves myself and many traders cautious and without a lot of bullish conviction just yet.

It's helpful here to take a look at the long-term chart picture and see the big-picture trend. Technically, both the Nasdaq and S&P long-term uptrends are just barely intact. The weekly charts tell the story.

THE S&P WEEKLY CHARTS:
There is still a long-term up trendline that can be drawn, but only if recent lows are not pierced in both the S&P charts. The S&P 100 (OEX) chart looks especially like the long-term up trend may be losing momentum, given the series of declining weekly highs. An OEX downtrend could be said to begin if prior 543 low gives way; a downtrend being a series of lower lows. A long-term downtrend is 'confirmed' on a weekly close below 1136 in SPX.

Even if 543 gave way, OEX might still remain in a broad trading range market (a lengthily 'rectangle' formation) between 580 and 520; if so, this sideways trend will have gone on now for two full years. Rectangles can be top patterns or 'consolidations' prior to another up leg. Which outcome is hard to predict.

THE NASDAQ INDEXES:
The Nasdaq has somewhat better defined weekly up trendlines, in both the Composite Index (COMP) and the Nasdaq 100 (NDX) as there have been a few lows that define the rising trendlines. The more lows that can be connected using a straight line, the better defined is an uptrend.

As with the S&P indices however, recent lows are pivotal points; if these lows are exceeded, the Nasdaq uptrend starts to reverse. [Downtrends would be 'confirmed' after that if the spring lows were exceeded; at 1420 in NDX and 1890 in COMP.]

I don't think the charts tell us much that is new. The economy looks like it could go either way in the coming year and take the market with it. The charts just tell the story graphically and reflect the slow down or lessening of buying interest. That said,

I often have a more bullish conviction when the tech sectors are leading the overall market. I'm a 'techie', both practicing technical analysis and with a keen interest in technology.

For trading purposes in index options we don't have to right on anything but the short to intermediate-term trend. It's just that at this juncture the long-term trend is so near pivotal support trendlines so bears watching. I lean to bullish chart views: of the S&P in a bottoming process and the Nasdaq already having made a bottom. However, a rally needs to happen soon in the S&P; and of course the Nasdaq shouldn't break recent lows.

Specifics on the indexes follow in the 'Major Stock Index Technical Commentaries' below.

TRADING GUIDELINES and SUGGESTIONS
I suggest price levels or areas on the charts where I project:
1. Support or areas of likely buying interest (green up arrows)
2. Resistance/areas of likely selling interest (red down arrows)
3. Areas where I would also have a bullish bias or interest in buying index calls (or selling puts or other bullish strategies).
4. Areas where I have a bearish bias and interest in buying index puts (or, in selling calls or other bearish option strategies).

Specific index months and strike prices aren't usually suggested. My trading suggestions mostly are based on an outlook for the intermediate-term trend (the next few weeks), rather than the next several days of the short-term trend; having at least 3-4 weeks to expiration tends to be my trade entry choice. I favor trading less by picking ONLY high-potential trades.

I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM) strike prices in order not to 'overtrade' my account. I also favor adhering to exit or 'stop' points where the projected risk is one-third or less of profit potential on a trade, based on technical analysis of the charts.

MIDWEEK UPDATES:
Of related interest to my market outlook and this column is my Wednesday OI Newsletter 'Trader's Corner' article, where I often incorporate updates of index charts and my trend outlook. This past Wednesday (10/19) I discussed 1.) making trading projections and predictions based on the indexes themselves (leaving specific index option choices to the reader), as well as my risk/money management strategies; 2.) Trendlines and the concept of 'trend'. This article can be seen online by clicking here.

MARKET NEWS and INFLUENCES:
Closing index prices, a recap of market influences like company news and government releases, are covered in the e-mailed and online Option Investor Newsletter, in the 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:
A mixed chart/technical picture: on one hand, a 'V' bottom in the S&P 500 (SPX) could be shaping up IF prices hold steady and start to work higher; a near-term rally is needed. If SPX starts to fall again, and especially if the recent 1168 low is pierced, a next downside target could be to around 1160.

Resistance is at 1190, extending up to 1200. A close over 1200, not reversed the next day, is needed for the S&P 500 to get back into an uptrend. 1210, and 1222 are the next resistance points I've highlighted on the daily chart below.

I'm not in this one, but hold some calls in the S&P 100. This chart at least has somewhat better bullish possibilities for a bottom. The broader market is holding up a bit better than the big-caps.

If you hold calls, its an anxious next day or few days. With expiration out of the way, there could however be at least a sideways drift and a bottoming process that will continue. Can the news be any worse on energy, inflation and interest rates? My crystal ball is rusty.

The SPX Index got to a fully oversold reading at the recent closing low. There has been a tendency in the past two years for a 1-time oversold reading marking the approximate bottom in the S&P 500. Past performance, as they say, is not indicative of future performance, BUT it's something...


S&P 100 (OEX) INDEX; DAILY CHART:
The last low saw a relatively high bearish sentiment reading on my indicator and that keeps my bullish hopes alive. However, prices need to stop sliding and buying interest come in. I am maintaining an exiting stop at 542, so am within a hair's breath of exiting my S&P 100 (OEX) calls. A nail-biting Monday ahead.

I made a point on the chart of noting the recent low where there was a bullish 1-day call-put reading, according to the usual measures of this indicator. This situation was unlike what was seen late last month, when prices also looked like they could have been making a low at OEX's up trendline. What was the old saying? Trendlines are 'made' to be broken.

Friday's close was above the prior low, so am still viewing a possible bottom based on prices falling to the low end of its downtrend channel, accompanied by the aforementioned prior recent bullish call-put reading and an oversold Relative Strength Index or RSI.

As with the SPX index and based on the long-term weekly chart up trendline, as well as the ability to hold at the April low for a potential double bottom, OEX may trend higher from here. This certainly needs to happen to maintain a bullish chart. If not, a next downside target is to around 538, maybe to 535.

EXTREMES IN SENTIMENT:
Extreme bearishness is defined when there is any one day when the ratio of CBOE total equities (excluding INDEX volume) call volume to that day's put volume, is 1.2 or less. For example, the low point noted by the green up arrow on the "CPRATIO" chart above, saw daily equities call volume of 919,301; daily equities put volume was 819,150. 919301 divided by 819150 equaled a equities call to put volume 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. We're past that time frame now but occasionally this (number of days) stretches out some. Again, we're early this week seems to be the moment of truth on whether the S&P can also attract some buying interest.

The call-put 'sentiment' indicator has been a great tool over the years, 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.

DOW 30 AVERAGE (INDU); DAILY CHART:
Rallies often tend to fail or reverse at prior support, once that support is broken; so also with support (up) trendlines. This past week's rally failed at the approximate intersection of the previous up trendline in the Dow 30 (INDU); I sometimes use the term, the 'kiss of death' trendline' because of this tendency to rally back to such a trendline but where his line of prior support has 'become' current resistance.

Near support in INDU is in the 10170-10200 area, then at 10100. Near resistance looks to be at 10350, then around 10430-10450, with major resistance currently at 10500.

Just as the Dow sometimes leads the market up, it also sometimes like now, is the weakest of the major indices. Another down leg that would take INDU back toward major support at 10,000 could be 'signaled' if there is a decisive downside penetration of 10,200. Stay tuned on that!

The slow 21-day Dow stochastic is showing another shift to downward momentum, but we have to see what this week brings now that expiration is out of the way.


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
It looks like a bottom in the Nasdaq Composite (COMP) was made at the down trendline extended down through the intraday lows of August. I didn't expect that the fall would get back down to that extension, but the retracement was not quite 62% which is a common retracement of a prior advance; in this case a retracement of the April to late-July rally.

Near support is at 2060 and fairly important support at that. If this level was pierced COMP would be vulnerable to a further dip to 2042, or even back to the lows in the 2030 area.

The recent rally stopped at the 21-day moving average; to maintain bullish momentum COMP needs to get above this level, currently intersecting at 2094; 2100 is also significant as it was a prior low and may now bring in some selling.

More important as a level to watch and to be overcome, in my estimation, is the top end of the projected downtrend channel at 2130.

COMP got to a fully oversold reading and such extremes have a fairly good record of being associated with significant bottoms. Maybe there will be one further dip, but rally potential would look even better after that, as it was in April.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index, like the pattern on the Dow chart, stopped at its previously broken up trendline of August-September. Interesting. Because of this, I make 1580 as a key level to be overcome. Above this, 1600 looks like pivotal resistance.

Near-term support is at 1543; pivotal or key support comes in at 1530. As long as NDX doesn't dip under this level, especially on a closing basis, I'll maintain a bullish outlook and stay with calls bought on the dip to 1520. I DON'T want to ride this index back down, so will exit on a downside penetration of 1530.

As I said previously, it's unusual for a retracement of as much as 75% or 3/4ths of a prior advance followed by a strong rebound, but it does happen occasional, without prices falling back to the prior low; in this case to 1485.

As with the S&P and per the weekly Nasdaq charts I began with above, it's important for recent lows to be maintained to hold to a bullish outlook for the Nasdaq 100. Go Google I guess!

It wouldn't be surprising to see Nasdaq take a breather here and drift sideways to lower near-term and for the S&P to play some catch up.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 (QQQQ) tracking stock hit resistance seemingly at the prior up trendline, which may suggest a more of a struggele to keep trending higher ahead. The stock had a pretty good run from the lows and we have to see how things look now that we're past the October expiration.

A close over 38.75-38.8 would be bullish near-term. Next resistance is around 39.50.

Support levels are 38.0, then 37.70 and 37.40. The 38 area looks fairly key to me. If this recent uptrend is going to continue, I wouldn't expect much more than a dip to the 38 area, but not much under it. Stay tuned on that.

I favored buying the stock on the dip under 37.50, based on what the underlying (NDX) Index was doing. If long the stock, my sell stop would be up slightly, to 37.85.

Buying any further dips to the 38.00 area, assuming the Q's werent in free fall of course and using a tight stop, would have upside potential back up to perhaps 39.25; possibly from there back to resistance or selling that's come in over 39.75. I don't have an objective above what has been major resistance at 40.

Volume on this latest rally was not all that impressive and there was significant short covering involved most likely. I would say that I am cautiously bullish only.

** SUBSCRIBER MAIL **
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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