Option Investor
Index Wrap

STRONG ECONOMY, WHIP-SAW MARKET

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THE BOTTOM LINE:
While the economy is whipping along, the market is 'whippy'. The inability to get a sustained rally going, the sharp up and down price swings, is good for the nimble index option trader, not so hot for the same person's 401k or long-term stock account. Unless you have been a very good individual stock picker; if in funds, furgettaboutit!

I'm struck by the narrowing in of the price swings on the weekly charts. Most often this pattern leads to an eventual breakout, but who knows when. The other possibility is that the market is looking at something some months down the road that spells trouble for stocks in general; e.g., economic slowdown due to consumer retrenchment, high energy prices, etc.

Meanwhile long-term up trendlines remain intact, so I've favored buying Index calls on the pullbacks that took the S&P 100 (OEX) to the 545 area 3 times and the Nasdaq 100 (NDX) to the 1520 area once; or, back to its up trendline, which you'll see later on. I'm just beginning to wonder if November options are going to allow enough time for a sustained rally to get going. The other thing that puts (no pun!) me on edge is the lack of a clear cut breakout above down trendlines in all but (just barely) in the S&P 500 (SPX), which I'll show also.

THE BIG PICTURE
It's been more of a struggle to make much in a long-term investment account in the past couple of years, especially holding S&P big cap stocks. Profits in the indexes were dependent on how much was bought at the low end of the trading range; and also if you took some profits near the high end of the range. There is still a pattern of progressively higher lows, but an uptrend is also defined by higher highs as well.

The difference between the 'line' of resistance or the top end of the S&P 100 (OEX) trading range, around 580, and the various lows seen in 2004-2005 has been narrowing. This has made it tougher to make money in stocks and, somewhat, in index options; at least there haven't been as many big price swings. Jack or Jill be nimble, Jack or Jill be quick!

The Nasdaq Composite has climbed higher in a more steady fashion as far as its pattern of rising lows, but it has the same pattern of tops forming in the same area repeatedly.

Short-term specifics on the stock indices follow in the 'Major Stock Index Technical Commentaries' below.

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

Trading suggestions are based on index levels: not a specific option (month and strike price) and price for that option. My outlook focuses on 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 guideline for trade entry choice. I attempt to pick only what I consider to be high-potential trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.

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. Exit or 'stop' points, as well as projected profitable index price targets, are based on my technical analysis of the indexes.

MIDWEEK UPDATES IN MY WEDNESDAY 'TRADER'S CORNER':
Of related interest to this weekend column is my Wednesday 'Trader's Corner' article in the OI (e-mailed) Newsletter, where I utilize updates of index charts and a midweek trend outlook. This past Wednesday (10/26) I discussed 1.) emerging up trendlines in the S&P and the Nasdaq indexes as well as 2.) still stubborn down trendlines apparent on the hourly charts. To review this article, look in your past Wednesday's OI Newsletter or view it 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 & HOURLY CHARTS:
The chart is no longer as mixed in its outlook, as the trend continues to work higher, although the daily price range has widened considerably recently and makes picking your buy/sell points even more important.

A 'V' bottom in the S&P 500 (SPX) is intact, but prices are nearing key overhead resistance just over 1200 in the S&P 500 (SPX), as noted with the red down arrow just over the daily chart down trendline. A close over 1200-1203, not reversed the next day, is needed to achieve a bullish upside breakout above the downtrend price channel in effect since early-August.

The next important resistance comes in around the previously broken up trendline (support, once broken, 'becoming' resistance later on) and the upper (red) moving average 'envelope' line, around 1225.

Near support is in the 1180 area. Next support comes in around 1170-1173. A close under 1170, not reversed the next day, would be a major bearish development.

The SPX Index got to a fully oversold reading at the 10/13 closing low. I've noted the tendency in the past two years for a 1-time oversold extreme in the 13-day Relative Strength Index or RSI (at the lower green level line) to be at or near intermediate bottoms in SPX. Second time oversold readings also happen some.

The hourly chart below shows the two 'opposing' trendlines, one down the other up. The down trendline has been in effect longer and makes it the most important in terms of signaling the direction of the next price swing.

SPX needs to achieve a decisive upside penetration of the downtrend line to suggest that the intermediate multiweek trend has reversed to the upside. Above 1200, the prior high at 1204 is important. A 1205 close would be bullish; with lows in subsequent days not under 1200 again.


S&P 100 (OEX) INDEX; DAILY & HOURLY CHARTS:
Recent rally attempts, which really haven't gone very far in the S&P 100 (OEX) index, have nonetheless gotten my trader 'sentiment' indicator up to at least a recent 1-day extreme. This was followed by a sharp pullback of 10 points. When bullishness keeps increasing, without much upside follow through, it gets me cautious. There's a possible disconnect here between what people THINK about the prospects for the market near-term and there being enough buying to really lift stocks.

The technical outlook is determined by what happens with OEX at first/near resistance at 555; above this, at resistance at the down trendline around 560-561. To turn the chart bullish, a close over 555 is needed, then and especially over 560, coupled with the ability to find support in this area subsequently.

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 1.9 to 2 times (or more) total put volume.

There is often a tradable bottom OR top that forms within 1-5 days AFTER these kinds of extremes. 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.

Key or pivotal support is apparent on the hourly chart in the 545 area, given the multiple lows in this area. The hourly chart has a 'classic' rounding bottom, which is bullish. As is the hourly close above the down trendline; but, there also needs to be continued upside follow through above 555; 560 is next resistance
Significant resistance around 565 is apparent on the hour chart.

I am holding calls bought when OEX has dipped to the 545 area, but now want to raise my exiting stop to 547 or around breakeven. I don't want to keep riding this index up, then back down. If this recent rally doesn't gain traction, we could be looking at another down 'leg' at some point; and would be suggested by a daily close under 545.

DOW 30 AVERAGE (INDU); DAILY & HOURLY CHARTS:
Resistance in the Dow 30 (INDU) Average is suggested at the previously broken April Sept up trendline. Early in the coming week, watch 10,450; INDU needs to climb above it to pierce this pivotal resistance. Next daily chart resistance begins at 10480, at the down trendline and extends up to 10500.

The slow 21-day Dow stochastic indicator is reflecting faltering momentum, which is also seen in the sideways price drift.

The HOURLY chart below shows two things: the down trendline, showing the importance of immediate overhead resistance at 10400. This chart also shows the 'V'-bottom. But, we've seen this before in INDU, and apparent bottoms are followed by rallies that top out and were followed by lower rally peaks.

The hourly INDU chart above suggests the importance of climbing above 10400, then eventually the ability to clear 10550, resistance implied by the cluster of highs that formed there on prior to the last big downswing.

NASDAQ COMPOSITE (COMP) INDEX; DAILY & HOURLY CHARTS:
A bottom may have been reached at the 10/13 low and when the retracement (of the April July) advance got close to a 'fibonacci' 62%, but the Nasdaq Composite (COMP) still has to climb above key near resistance at 2100. The rally has stopped short of the pivotal 21-day moving average also.

A significant bearish problem in the tech-heavy COMP is the recent weakness in the (semiconductor) chip stocks. Nasdaq was leading the market in the rebound off the mid-Oct lows, but leadership reverted to the S&P this past week.

My initial construction of the high end of COMP's downtrend channel on the daily chart above, suggests next resistance coming in around 2117. The hourly chart below has the best 'defined' trendlines for a further take on resistance and support.

COMP got to a fully oversold RSI reading and such extremes have a fair record of being associated with significant bottoms, but sometimes a second extreme reading is seen; e.g., as in April.

Switching to the hourly chart view, the pivotal resistance trendline intersects currently around 2140; this trendline of course declines over the days ahead; by the end of the coming week, the up trendline is pierced around 2135. A daily close over 2135-2140 this week is bullish.

Trendline support in the Composite is at 2070-2171. Even more pivotal COMP support is at the recent hourly lows at 2064-2065.

NASDAQ 100 (NDX); DAILY & HOURLY CHARTS:
The Nasdaq 100 (NDX) index is barely maintaining an up trendline, but it is doing so. A break of 1540 would be bearish at this point, especially if the hourly, then the daily, closes were under this level.

Pivotal resistance is estimated at 1580. An advance above 1580 is bullish, and the trend reverses higher on a close over the cluster of recent hourly highs at 1590-1592.

I wrote before on a retracement of 75% of the major advance being unusual, without prices falling back to its prior low; i.e., at 1485. I mention this again as adding to the importance technically of NDX holding above its prior swing low at 1526; and, above its lows in the 1520 area (the absolute low was 1515).

Above 1590-1592, Nas 100 (NDX) chart resistance is suggested at 1600 at the top end of the hourly uptrend channel below. We're a long way from that. Key near support, implied by the internal up trendline is in the area of 1547 near-term. It will be key for NDX to hold above recent hourly lows in the 1539-1543 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY & HOURLY CHARTS:
The Nasdaq 100 (QQQQ) tracking stock has daily chart resistance estimated at 39.15, extending down to 39. A close at or above 39.25 and not reversed the next day, puts the Q's back into an uptrend pattern.

Key near support is in the 38 area. A close below 38.0 turns the chart bearish again. The trend is down still yes, but the chart pattern suggests some bullish possibilities or potential. Stay tuned on that!

Volume continues to expand on DOWN days and that is consistent with the trend, which is still down as long as we don't see a higher rally high. Its one thing for an index low that's followed by pullbacks above the down swing lows before it, but a bullish turnaround requires an advance at some point that takes prices higher than its prior rally peak.

The HOURLY chart below shows in more detail a possible emerging uptrend price channel. And, suggests near key support at 38.15 and resistance implied by the upper channel boundary at 39.5.


Please send any technical and Index-related questions to me at Contact Support 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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