Option Investor
Index Wrap

CONTINUED STRONG UPTRENDS

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THE BOTTOM LINE:
The major market indices, especially those of the Nasdaq, put in a very strong week. There was even a new 12-month closing high in the Nasdaq 100 (NDX).

While it's a nice 'problem' to have, this phase of these uptrends become tricky for the holder of long (November) index calls bought when the S&P 100 (OEX) was all the way back down in the 545 area or when NDX was in the 1520-1525 zone.

When I see an unrealized gain of this much, I start looking very closely at when I'm going to TAKE it and sell most if not all my options. After an Index gain of 100 points in NDX, I don't much care about hanging in there hoping to get another 10. Let others slug it out for that much more.

On the other hand, I don't like to exit a position when I'm still on the right side of the trend. What do to do? As I said, it's a nice problem that we should have 3-4 times a year! I just leave the summary view at that, go to the specifics below and say it's time to very alert to possible correction/pullbacks setting in soon.

MIDWEEK UPDATES IN MY WEDNESDAY OIN 'TRADER'S CORNER' ARTICLE:
Of related interest to this weekend column is my Wednesday 'Trader's Corner' article in the OI (e-mailed) Newsletter, where I typically ALSO utilize updates of index charts coupled with an update, if any, of my trend outlook.

This past Wednesday (11/2) I discussed:
1.) the current chart outlook; i.e., bullish, but also estimating the key areas of overhead resistance still to be overcome in the S&P and the Nasdaq indexes AND
2.) when a high level or 'extreme' in bullish or bearish 'sentiment' (the predominant outlook for prices going up or down), tends to signal that the indices are susceptible to TREND REVERSALS. To see article, look in your past Wednesday's OI Newsletter or see it online on the OI website 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:

The S&P 500 (SPX) achieved a bullish upside penetration of its down trendline. Next overhead resistance looks to me to be 1227-1228, at the previously broken April September UP trendline. Key up trendlines, (just like prior support areas), once broken, often show up later as later resistance.

The absolute critical points are the prior rally highs, first around 1233, then at 1245. An uptrend is not an uptrend until and unless is pierces and goes above previous highs. I remain overall bullish until SPX shows that it just can't get above these key price points mentioned.

As well, I would turn initially bearish if SPX started breaking support: first at 1212-1210; then, at 1200. A daily close under 1200 would not reverse this emerging uptrend (a close under 1180 would), but it would make it more difficult to maintain a bullish outlook and expect that SPX was going to on to new 12-month highs.

You'll notice on the RSI chart, that this indicator is getting up toward its typical 'overbought' reading again. In fact, it's just about as high as it got at the early-September peak. What this is telling me is not that SPX can't and won't go higher still, but the risk of a correction grows.

S&P 100 (OEX) INDEX; DAILY & HOURLY CHARTS:

There was the same bullish breakout above the down trendline in the S&P 100 (OEX) Index. Immediate overhead resistance in OEX looks to be, as with SPX, at the previous up trendline and that is where you see my first down red arrow. That line intersects currently at approximately 564.

The next significant technical resistance at 567-568, resistance implied by the tops made at the last rally peak.

Near support is at 560; below 560, look for next support in the 554 area; I won't remain long OEX calls if this level was pierced.

I've been noting the recent peak 1-day readings in my call/put 'sentiment' indicator as being in the 'overbought' area. The most recent extreme, as well as the 5-day moving average getting close to this area as well, makes it increasing likely that there'll be a correction not too far off.

Maybe OEX will get back up the 575-577 prior highs (or higher) first, before much of a correction sets in. My view is that OEX is unlikely to reach a new high above 575-577 without a substantial correction beforehand; e.g., of 10 points or more in terms of price and of 10-days or more in terms of time/duration.

Regarding my "CPRATIO" Indicator, an OIN Subscriber e-mailed and asked: "Would you share exactly how you obtain the put to call ratio? How exactly do I calculate this?"

CALCULATING EXTREMES IN SENTIMENT:

BULLISHNESS:
I define bullishness as getting extreme when any ONE day's CBOE equity options call volume is 1.9 to 2 times or more the total put volume (the figures I use exclude INDEX options volumes).

For example, on a day that 1 million equities options traded on the CBOE and 500,000 puts changed hands. Divide 1,000,000 by 500,000. The result is a call to put ratio of 2.0. The call volume is divided by put volume each day. Quite simple.

BEARISHNESS:
I define bearishness as being or getting 'extreme' when there is any one day when the daily ratio of CBOE total equities call volume to that day's put volume is 1.2 or less.

For example, a day when daily equities call volume equaled 919,301 and daily equities put volume was 819,150. 919301 divided by 819150 equaled a call/put figure (a ratio) of 1.1. Readings at or below 1.2 tend to precede bottoms, often within 1-5 trading days.

RULE OF THUMB ON USING THIS SENTIMENT INDICATOR:
My rule of thumb is to look for a tradable top OR tradable bottom to be reached within 1-5 trading days AFTER either 'extremes' (1.9-2.0 or more and 1.1 or less) are reached. T

This call-put 'sentiment' indicator, a model passed on from my trading mentor, has been a great tool over the years. It should be noted that a good top or bottom 'signal' is not seen by only using this indicator; 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.

The OEX HOURLY chart below shows an unusually 'symmetrical' rounding bottom pattern. Based on this bullish formation it was not surprising to see another consolidation around 560, followed by what was looking like another breakout for a spurt still higher.

Upside follow through from the 560 area would keep the shorter-term hourly chart looking quite bullish; a move to 567 can be projected.

DOW 30 AVERAGE (INDU); DAILY CHART:
The Dow 30 (INDU) Average cleared trendline resistance on Thursday and looks set to challenge further resistance at 10570, on up to just over 10600. Major resistance is apparent in the 10700 area.

Near must-hold support is at 10400. A close under 10400 would suggest that INDU was vulnerable to falling back another 100 points from there, to 10300, support implied by the up trendline that's formed since the early-Oct. bottom.

The slow 21-day Dow stochastic indicator again shows solid upside momentum. It also shows that the Dow is getting closer to an overbought situation. I wonder is the Dow (and S&P indexes) going to remain in a broad trading range for still more months? Or, will it eventually break out to new highs like the related Dow Transportation (TRAN) Average has already done.

The extent of the next correction ought to be telling. A sideways drift and consolidation above 10400 would be a plus to 'set up' another up 'leg'.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

We've now seen two bullish upside price gaps in the Nasdaq Composite (COMP), and it looks headed to a test of the prior high at 2185. If this last gap was a 'measuring' gap, occurring at about half way in a move, COMP's rally can carry to 2220 or higher.

Major resistance is implied at 2220 at the early-August high. I myself don't see currently what developments are going to carry an extension of this rally to this prior peak or above, but stay tuned on that.

Look for near support to be found around 2143, at the low end of the last upside price gap. Pivotal next support then comes in at 2100.

This current rally is pretty 'extended'. My benchmark on this is that COMP has hit my upper trading envelope line; i.e., the moving average envelope line that is a price equal to 3.5% above the pivotal 21-day moving average.

NASDAQ 100 (NDX); DAILY CHART:
Touchdown! The Nasdaq 100 (NDX) index shot up this past week like gangbusters and has reached a new closing high.

Pivotal support is the low end of NDX's recent upside price gap, at 1600. If an extension of the recent rally can't get beyond t Friday's high, it would make for a possible double top. Absent that and any break under 1600, a next target in NDX could be to 1655.

Support under 1600 is at 1570, then 1560. 1560 is key support in NDX implied by the current intersection of its up trendline.

NDX is also approaching an overbought reading, but it's not there yet. It will be with one more spurt higher.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 (QQQQ) tracking stock's key level now is $40. If the rally were to stall here, the Q's have a potential double top. Above 40, a next higher objective is to 40.5.

Near support is at 39.5; then, at 38.7, extending down to 38.5, at the must-hold up trendline.

Volume or the level of trading activity has not quite 'matched' the robust price gains. On Balance Volume (OBV) turned up substantially however matching the most recent spurt higher.

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!

INDEX TRADER 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.

Good Trading Success!
 

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