Option Investor
Index Wrap

FURTHER SPURT HIGHER INTO EXPIRATION

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THE BOTTOM LINE:
The indexes spurted higher this past week into expiration.
The OEX (S&P 100) index closed just under the even 575 strike, SPX close to 1250 and NDX (Nasdaq 100) just a hair's breathe under the even 1680 strike. (Rather than at OEX 572.5 and NDX 1672.5: imagine that!) I neglected to include this fairly real possibility in my prior commentary. WRONG!

I was cautious last week based mostly on a further risk- to-reward basis (further upside potential versus possible downside), in terms of continuing to hold calls from significantly lower levels; especially from 545 in the S&P 100 (OEX) and the 1525 area in the Nasdaq 100 (NDX), when I first suggested the low risk I perceived in getting into November index calls. Rather than roll into December, I took profits. I always bail out/exit calls or puts in what I perceive to be the final fifth of a move. But, I buy em when no one else wants em and often sell em 'too soon'. Not a trend 'follower' me.

So, what is my crystal ball showing me now. Nothing specific, but the S&P 500 (SPX) did get to a new 2005 closing high; as did the Dow 30 (INDU), thereby joining the hot Nasdaq 100 (NDX) in new high ground.

Continuing to keep me cautious about overstaying in calls, are the usual suspects:

1. The indexes registering 'overbought' extremes on indicators like the RSI (Relative Strength Index).

2. High bullish sentiment, also suggesting an 'overbought' market in the contrarian sense. Friday saw brought the most bullish reading in my equities call to put ratio (2.18) in a long while.

3. Measures of NYSE (New York Stock Exchange) and Nasdaq total UP Volume on a 10-day moving average basis (often provides a good indication of how much new buying is driving stocks higher) is trending down and may be providing an early warning of a correction; one is due.

4. In a related sign of the market being at an extreme, I note and you will see on the OEX chart further on, that the leading Nas 100 (NDX) Indx has climbed up along ('hugging') my upper trading envelope 'band' (a line set to equal 3.5% above the 21-day moving average) for 11 sessions now. Two prior powerful uptrends (May and in late-July) did the same and each rally had 10-11 days of hugging this upper trading envelope line before a substantial correction set in.

5. Normal bellwether or benchmark sectors, indexes and stocks like the Russell 2000 (RUT), the Semiconductor index (SOX) and individual stocks like GE, Cisco Systems, etc. are lagging the major indices. This related action makes also makes me cautious a this juncture.

By the way, I wrote about the topic of 'bellwether' sectors, indexes and stocks in my most recent TRADER'S CORNER (Wed, 11/16) article. To review this article, you can look at this past Wednesday's OI Newsletter 'Trader's Corner' assuming you save them (of course you do!); or, see it on the OI website by clicking here.

Since I mention bellwethers and was asked by a subscriber to include more commentary on the bellwether Russell 2000 Index, I include the chart here, with some comments on it:

A noteworthy aspect of the Russell 2000 (RUT) daily chart is Friday's close being at 'double' trendline resistance. First is the down trendline drawn through the July-August highs and intersecting in the area of Friday's high. The obvious trendline.

A not so obvious trendline, also implying possible resistance at Friday's intraday peak, is the previously broken up (support) up trendline of May - Sept. This was not a major trendline like the lower up trendline that highlighted the area of buying interest (support) from early-Oct. However, this previously broken up trendline may have 'become' or defined some current resistance.

The two trendlines both showing up in the same area in the chart above makes them doubly interesting. If RUT manages to close above 573 and this is not reversed the next day, a move to the prior high at 683, then 688, is a definite possibility.

If on the other hand RUT starts declining from this recent high, the Index could fall to the first apparent technical support in the 650 area. Major support is not seen before about 625.

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) shot above its old high close at 1245, making for a bullish outcome to the question of whether this move going to see a new high close; the definition of an uptrend as far as closes.

SPX saw a new closing weekly high (1248) for the rally that began in late-2002/early-2003; it beat the old weekly close at 1241.5.

We have to go back to mid-2001 to get an estimate of next possible major resistance in the 1300 area. However it also should be noted that an immediate reversal or failure to exceed Friday's peak, still sets up the possibility of an approximate double top.

The current move now a bit more than a month old, is probably part of a 'leg', an upside or downside price swing that is a larger move; a larger order of magnitude than the prior rally that preceded this one. It pays to take an attitude that the market is never completely simple to figure. If it was it wouldn't be 'THE' market and we'd all have double 6's most of the time. There is always an attitude of 'apprehension' by the best traders.

A reliable forecast we can make her is that like all overbought markets, this will have a substantial correction at some point; this could be in price or 'time', which would a sideways move. The point when a reversal begins can't be pinned down to the day or week, but it's due. Soon. Trading is a game of probabilities. Support is at 1245, then 1227 and very key major support around 1215.

SPX is touching an overbought reading of the level that was associated with the prior peaks in the daily chart shown above which goes back to April of this year.

The most common outcome to overbought situations is a downside reversal of tradable interest when the RSI reaches a reoccurring peak to the 'recent' past. The less common outcome is that the Index goes higher and new highs in the RSI occur.

If we go back to November of last year, the RSI peaked at 78 and this kind of action is also characteristic of a 'leg'; i.e., a higher order of price and indicator movement than occurred in the more recent (8 -10 month) past.

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

WEEKLY
The S&P 100 (OEX) Index tends to make spike or 'V' bottoms and rounding or 'saucer' tops. This is the nature of stock selling and buying. A panic selling is more or less a one or two-decision thing. Characteristic of major lows are, individuals mostly, dumping all or most of their equity holdings.

However, at tops, there is continued piecemeal buying on pullbacks. It takes a considerable time to build a top because bullish fund managers and individuals are taught to buy dips in stocks they like and its not apparent for a while that the emperor has no clothes; which in this case is that there are too many willing sellers (and too few buyers) to keep the bull move or market going. It's also why so many people get stuck at tops and then ride the market back down so far.

Anyway, OEX has broken out above the circular arc drawing made on the weekly chart below, suggesting the outlines of prior and the most recent weekly rounding top pattern. The next significant price level becomes the 583.2 weekly close. Note the bullish double bottom in the 540 region and the move cutting through minor resistance implied by the prior up trendline.

Still to come is a move to a new high, without which we can't yet say that OEX is continuing its uptrend interrupted with the rally pause early this year. The pattern of higher lows is intact. A higher high still has to come at some point. Stay tuned!

DAILY:

As usual, OEX tells us the most of the S&P indices, as it's so widely traded. Of course it is going to tell the most in its technical and chart aspects. 575 is clearly the next level to beat; then, the 577.5 prior daily close needs to be overcome to finally break out to a higher high after a multi-month correction. Well, there has been a lot to ponder and get concerned about in these past few months!

Key support in my estimation is at 565, then at 560. A close under 560 would be bearish and suggest still more downside to come.

Prices may not yet have achieved a decisive upside breakout, but the RSI has surged to a new level of 'overboughtness' so to speak (simply, a higher high). Of as great or greater interest is the spike up in my call-put indicator, which is putting it up toward the peak readings seen back in July, at the most significant top in this year anyway.

10,800 to 11,000 will be seen now as potential major resistance, as that was the peak for the rally that began in early-2003. By the way, the average bull market tends to be years longer than the average bear market, a fact that also has the same underlying dynamic of the differing nature of buying and selling that I discussed above.

We can still point to the importance of support around 10520-10500. Major support is still at 10400.

The slow 21-day Dow stochastic continues to mark more days in overbought territory. An overbought period can stretch out for weeks. Which is why not to make trading decisions just based on these type indicators.

The longer such extremes go on the more closely should price and volume action be watched for signs of a reversal. The Index Option trader almost always is concerned about a possible sideways or lower correction after a strong first run up. I myself hate to be proven right on the long-term trend, but not before the premium I paid as my bet on the further upside, runs down to nothing. [If I want to buy and hold, I will tend to stay in an index stock; e.g., the QQQQ's.]


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) cleared its prior 2218 closing high. COMP is extended on the upside. The bears keep having to run for cover and buy back their short positions. This can go on longer, and COMP maybe reach 2250 before a tradable correction sets up.
The Index has made a new 3-year high. Nothing to ignore: be a bull and your pockets will be full.

As far as major new objectives that come into view, we need look back to the '01 peaks made in the 2275-2325 area.

As I often say, upside price 'gaps' like seen in early-November are quite bullish and could be 'measuring' about half way in a move. If so, it could be another way of implying that the current advance could carry to the 2300 area. Stay tuned. I don't want to get too far out a bullish limb.

Support in the 2145 are, at the low end of the aforementioned gap is the important lower, and key or pivotal, projected technical support. Gaps, meaning the low end of price gaps, are typically areas of strong buying interest.

COMP has yet to see the kind of overbought RSI reading that were part and parcel of the 'pause' or sideways correction (a good example of a 'time' correction) and the final, til now, price peak. If there's a quiet week in the upcoming holiday shortened week ahead, the following week could see still another spurt higher with the RSI staying in overbought territory.

We also got the possibility of the 'Santa Claus rally' that is a feature of December frequently, as was definitely the case last year; then, after a monster prior advance, COMP climbed another 90 some points after December 1.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index, as is often the case, was the hot index last week with another strong spurt higher. It's looking a bit 'toppy' on the charts, but nothing concrete yet.

A typically quiet week likes ahead. I would not be surprised to see a pause and sideways move, or a shallow correction, followed by another move higher in December. It fits the pattern of what we saw last year in the fourth quarter, the Oct to Dec period.

The weekly highs back late 2001-early 2002 were in the in the 1707 - 1735 area. A move to 1700 or better is certainly possible. Also quite possible is a pullback to the 1625 area, even 1600. Any such move(s) would still be quite 'normal' corrections within a longer-term uptrend.

The overbought reading is always cause to be alert to a correction. If you stayed in November calls until expiration, way to go. If you also rolled some positions into the December option, be watchful. A close under 1600 would be cause to exit; wider leeway would be only to exit if there was break of the uptrend currently intersecting at 1590.

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

Not much more to be added on the Nasdaq 100 (QQQQ) tracking stock, relative to my NDX commentary above. QQQQ took out or pierced any resistance I was looking at on the charts.

Corrections? A correction that took QQQQ price back to the 40 area keeps the chart looking still quite bullish. 39.50 is an important support also.

On the upside, 42.75 to 43 looks like it could be intermediate resistance. If there is move above 43, you could project this stock as going to 50 at some point in the coming months.

Unless 38 is pierced, I don't see why the Q's wouldn't or couldn't work substantially higher. A concern for too much complacency on that view is the pattern, at least for the prior 3-year period, is a tendency for a peak late in the year and a declining trend in the first quarter and beyond.

On Balance Volume (OBV) continues to show a steady 'accumulation' type picture. This market is overbought like the others. That fact and a subway token will get you on the NYC subway.

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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