Option Investor
Index Wrap

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THE BOTTOM LINE:
As anticipated the uptrend continued and strongly, this past week. The Index option player has a different challenge than the holders of stocks, especially if long index calls from significantly lower levels like 545 in the S&P 100 (OEX) and around 1525 in the Nasdaq 100 (NDX), which is where I tried to guide index traders into calls. Hopefully you bought when few were taking a chance in buying calls (e.g., all the trend 'followers') based on the signs of basing action, 'oversold' extremes (at or very near) and after extremes in bearish 'sentiment'.

After such a strong run up the indexes are looking vulnerable to a correction ahead in the near-term; at what price levels and just when is hard to predict. Still, it looks it's time to take some if not all profits on calls.

Once a correction starts index options prices deflate in terms of fatter premiums. Greater success tends to come in trading index options based on skilled 'anticipation' rather than REACTION, which is the way that many if not most non-professional traders trade.

We wait for things to happen; some news, some event, etc. Due to my lack of success in trading, which was first in commodities, then stock index futures when they started up, based on this approach, based on 'fundamentals', I started the study of technical analysis. This accelerated when I heard legendary institutional analyst George Lindsey in early 1982 predict the start of a MONSTER multiyear bull market to the month, but 6 months before it started.

Not that I or anyone I know of could ever do that kind of predicting again, but it showed me that it was possible to anticipate trends. That was the key discover, anticipation. Hey, Carley Simon did all right with the song too.

I digress. Some measurements of possible technical resistance lie just overhead in the S&P, Dow and Nasdaq; e.g., prior highs and some trendlines. Moreover, these indices have finally gotten to a fully overbought extreme. Lastly, in what I judge important, Friday saw a second reading of extreme bullishness and there are rarely two such readings not followed within a day or few days, before a correction sets in.

Could current upside momentum just power up through prior highs, down trendlines, cause traders to get even more bullish? Of course! Would I go the other way and buy puts? No. I respect the trend and don't want to go AGAINST it. The trend is one thing, option trading strategy is another. I don't ever feel that I have to stay in the final fifth of a move, if that's where we are. This is hard to know or predict. What we can know is when the probabilities of a correction start to run high. When the further upside potential of a move is not more than the downside potential of even an modest pullback.

Specifics on the charts and indicators are in the Major Stock Index Technical Commentary section below.

[New to the Index Trader? if so, the bottommost section is of interest, a description of my method of providing index trading guidelines and suggestions.] Please E-MAIL me with any questions or requests for clarifications per the instruction, also near the bottom of this column.

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 (11/9) I discussed:
1.) What trading volume can tell us in terms of 'confirming' the direction of a price trend, as well as the use of the On Balance Volume (OBV) indicator AND
2.) More on trading implications of 'extremes' in bullish or bearish trader sentiment; i.e., when the outlook for prices continuing higher or lower gets to certain measurable extremes based on my call/put Indicator. How I calculate this ratio was described and is quite simple to do yourself by looking at the CBOE web site daily.

To see the article, look at this past Wednesday's OI Newsletter 'Trader's Corner'; or, see it 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) overcame resistance in the 1227-1228 area, implied by the previously broken April September up trendline.
A more important technical test lies just overhead at the down trendline intersecting in the 1237-1238. If SPX climbs above this area and above 1240, the really key test is whether the Index will pierce the old highs in the 1245 area.

An advance above 1245 doesn't set up a specific further target. The Index will go where it wants to go. If 1245 is exceeded, it will be important for the index to stay above this level, with possible 1-day exceptions, to maintain a bullish chart and the suggestion that there's a new up leg underway; this is not the most likely scenario given the overbought condition. At least a sideways move seems more likely.

First pivotal technical support looks to be at 1215, with even more significant support in the 1200 area.

We never can rule out another substantial further rise after an overbought extreme is reached in conventional measures of it like the RSI. Witness the late-June peak, followed by a quick, but not overly deep pullback. Even in this instance, there was a correction of 25 points or so once the RSI ('length' = 13) hit a reading around 68-69.

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

An important and immediate overhead resistance in the S&P 100 (OEX) Index is at 570; the trendline was re-draw a bit from a week ago. If OEX climbs above 570, especially on a closing basis, the odds increase substantially for a test of prior highs at 575 and 578.

In the 578 area, should the Index falter there, be alert to the possibility of a double top. If so, that is a situation where I would consider purchase of OEX puts. At that level, an exit/stop point can be set 581, with downside/profit potential back to 570 easily or to around 565.

Near support is at 565; then, at 560 which is key must-hold area for the chart pattern to remain bullish short-term.

As I noted already, there was another 1-day extreme seen in my call/put 'sentiment', even though it was on the light volume Friday session. One peak reading in the 'overbought' zone in this indicator often signals a correction within 1-5 days, but two such extremes are an even greater warning that the market is getting overdone on the upside. Most of the potential buyers may be in the market already, making the Index more vulnerable to some negative news.

I don't use this indicator just by itself as a sell 'signal', but am much more alert to a confirming sign of a reversal in the price action or pattern; e.g., a double top, etc.

HOURLY

The hourly chart picture doesn't add a lot that is new or different in the S&P 100 (OEX) pattern. The hourly chart is included more to show the strong continued bullish upside follow through from the bullish rounding or 'saucer' bottom pattern. Have you seen this 'pattern' reads the most-wanted poster!

When you see this formation at bottoms or at tops, pay attention whether on an hourly, daily or weekly basis, including and (even especially) on individual stocks...

The 21-hour RSI is about as extreme as it gets without at least a sideways correction that pulls this indicator back from the extreme for at least a few days typically.

DOW 30 AVERAGE (INDU); DAILY CHART:

Above 10700-10720, there is only 'air' overhead in the Dow 30 (INDU) Average; no particular resistance or a next upside target projected, except the generalization that this index is extended in how far prices are above the key 21-day moving average. The prior high is the key test ahead.

It has taken months for INDU to get back up into this area after a top built over several weeks back in June, so I consider it to be a important area. A move above the old high that reversed to back below 10700 soon thereafter would be short-term bearish and might signal an intermediate top again.

Key near support now is at 10520-10500. Major support is at 10400.

The slow 21-day Dow stochastic suggests that INDU is in 'overbought' territory. We can assume that a correction will come, but tops can take some time to build, so stay tuned on when!

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

A solid extension of the prior week advance as more Nasdaq stocks developed rallies. 2220 is the key level in the Nasdaq Composite (COMP), at the prior high. The upside gap proved telling for the strong upside follow through that has happened. I have no particular target above 2220.

The 2220-2224 area has proven to be to be very important, as the Composite has made major tops in this area since the first one in early-2004. Before then, we have to go back and look at prior weekly highs made in mid-2001 in the 2250 to 2310 area, as a possible next upside objective and potential area of resistance.

At this point it's easier to project lower support areas; first, at 2145, then more major support at the up trendline around 2075.

Currently, COMP is getting into overbought territory, but this by itself only suggests that the Index is vulnerable to a correction, not that it will have one in a particular time frame.

COMP is going up along my upper trading envelope line, which is a moving average envelope line set to 3.5% ABOVE the pivotal 21-day moving average. As you can see in the past recent history of the upper envelope line, it may continue higher along this line for a while, but not usually for more than 2-3 weeks in total.

NASDAQ 100 (NDX); DAILY CHART:

1660 is the maximum immediate upside target I had for the Nasdaq 100 (NDX) index, once it got above the prior high at 1628. NDX is getting increasingly vulnerable to a correction. The profit taking suggestion for index calls held from lower levels is based on 'normal' trading parameters and an assessment of the further upside (profit) potential versus the risk of a pullback at least equal to that.

There is a key prior high from late-2001/early-2002 at 1700 that should be noted as a possible objective also. Prior highs, as well as prior lows, are sometimes the only benchmark levels we have; especially here once a multi-year high is made.

Pivotal or key technical support is at 1600, at the low end of the upside price gap from 11/2-11-3. 1570 is a major support currently.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:

The Nasdaq 100 (QQQQ) tracking stock cleared the key $40 level, and got nearly to 41, before succumbing to profit taking ahead of the weekend. Now that the Q's have cleared the prior high, look for it to provide support on pullbacks. If it doesn't, watch for next support to develop around 39.5. I see 38 as major support currently, at its major up trendline.

The one thing that I find on the Nasdaq charts suggesting resistance, is with the Q's line chart, which follows.

The low-volume nature of this most recent rally extension gives me pause about staying long this stock much or any longer, since it doesn't look like a lot of new buyers are coming in and willing to pay up for the stock.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY LINE CHART:

QQQQ has returned to resistance implied by the 'kiss of death' trendline; or, to be less descriptively dramatic, resistance implied by the previously broken up trendline based on the close-only 'line' chart. I look for a pullback from this recent closing peak.

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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