Option Investor
Index Wrap

MARKET WALKS THE LINE

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THE BOTTOM LINE:
The major indexes continued to work higher, climbing along, even above, the indexes' upper envelope lines as seen in the charts further on. On balance, the S&P and Dow will tend to trade, both on the upside and downside, within 3 percent of their 21-day moving averages; the Nasdaq price swings at the extremes will tend toward 3.5-4% above or below the 21-day average.

Due to the narrowed volatility this year, the downside percent was, at its maximum, around 2.5% in the S&P (a little less in the Dow) and around 3.5% in the Nasdaq Composite (COMP). But, 'As Above, So Below' and vice versa. Both the S&P indices (SPX + OEX) and the Nasdaq (COMP + NDX) have for the first time this year traded at a greater price extreme (in terms of percent envelopes I use as a yardstick), on the upside than on the downside.

It may be that the market is at 'extremes' in terms of a typical trading pattern, but we also saw new 4-year highs in the S&P 500 and the Nasdaq Composite and Nasdaq 100. Take notice! Not so yet in the Dow, the narrower big-cap S&P 100, or in the Russell 2000 (RUT). A lot of stocks are in play, not just the typical institutional favorites. Are OEX, INDU and RUT going to follow SPX, COMP and NDX to new multiyear highs?

Hard to say on that question: I myself don't do as well in projecting how far price swings in 'runaway' trends will carry, than in more typical market cycles. However, there is often at least one measuring technique that projects the minimum length or duration of a move, which I'll discuss further on.

It is only occasionally that the indexes don't trade back and forth in their more predictable and tradable ranges. This recent accelerated non-stop advance was one of the few where a buy and hold strategy produced more gains to date than trading in and out, even if trading infrequently and aiming to participate in the bigger price swings. This market over the last steep run up was not easily 'traded'. Better, was a buy (calls) and hold strategy or to fearlessly buy any minor dips.

The market currently is showing, these 3 indices I mention with prior important highs to clear, waning upside momentum as I measure it, high 'overbought' extremes and an unsustainable extreme in bullishness. However, this is not to say that an emotional, pull out all the stops, kind of move won't continue; remember "irrational 'exuberance'"!

And, of course, this recent market is not like the end of the 90's. There is only a few story stocks soaring like Google and Apple. This market is similar to last year in fact, when there was a very strong run up in November, followed by an even stronger rally in December. Stay tuned on December!

So, it's hang on your hats if there is NO pause, a brief pause only, or merely a sideways to slightly lower correction, followed by a further strong upside run. Given the nature of the current market cycle, with its rising tide of trend followers following the trend no matter whether seemingly overdone or not, I suggest not bucking this trend by taking out Index puts, unless hedging.

The tendency for the last two years of strong December advances? It wasn't until the first quarter or the end of Q1 that there where substantial two-sided tradable price swings. Buy calls on any sort of dips? Overbought markets can keep going higher of course, but it does tell you that its HIGH risk in case of some unexpected negative. Worth considering is buying index calls if there's a correction of 25 to 35%, as long as the primary up trend is not violated as seen by key prior lows or trendlines.

MIDWEEK UPDATES VIA MY WEDNESDAY OIN 'TRADER'S CORNER' ARTICLES:
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 some of the major index charts coupled with an update, if any, of my trend outlook.

This past Wednesday (11/23) I discussed:
1.) 'Runaway' type moves and the related 'runaway' price gaps
2.) Measuring price targets for strong second index 'legs'.
3.) Trend following strategy versus trading typical price ranges

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:
'Around and around she goes, where she stops nobody knows'... just came to mind. Mid-2001 in the S&P 500 (SPX) saw a top in the 1300 area, which might be a target for this current move.

The SPX advance is pretty 'extended' currently and the relative steepness of the up trendline from the late-October low suggests that the current advance is doing something out of the ordinary. (Yeah, severely punishing the bears!) The first sign that the trend momentum is slowing down would be if SPX pierced this trendline at 1250-1255; 1250 on the hourly chart (not shown).

1240 is next lower support at the prior previously broken trendline, which may still come into play again as technical support. 1230 bears watching too, if there's a pullback to as far as the 21-day average, often a support in strong rallies.

On balance, 1300 is a quite possible upside target, but there's also no way to predict if it might be a next stop, or possibly be reached later.

The RSI peaked at 78 in November last year, which was the most extreme it's gotten to since. An RSI reading on Friday of 76 is approaching a similar kind of overbought situation, 'characteristic' of an up leg; a term suggesting a move of above average strength and duration.

S&P 100 (OEX) INDEX; DAILY CHART:

As usual, the S&P 100 (OEX) tells us the most of the S&P indices. The prior OEX highs around 575, then 577.5, were pierced. There is one important prior peak to be beaten at 584.4, the closing high of March; 587 was a prior intraday high back in March.

A 'measured move' objective, where the two up legs, and more apparent on the hourly chart as shown in my recent Trader's Corner article (see URL reference above), is to 585. OEX has gotten nearly there. Watch for the Index's ability to clear 585 intraday and 584.4 on a closing basis. If OEX can do this and provided there is not a downside reversal the following day, a next objective on the upside is to 590.

The late-2001 advance into early-2002 advance ended after a series of highs between 600 and 593.5. We have to figure that 600 is major resistance. Actually, there is a price point I would consider puts at, with 605 as a risk point (exit at 605), with a target of at least 15 points on even a modest correction.

I estimate support, at the steep trendline at 575; with next support at 565-566.

Yeah, OEX is very overbought, as measured by the RSI, but only a pause and brief sideways type move, will cause this indicator to drop back and ready to rally again perhaps.

OEX TRADE TALK:
The high recent readings (two days above '2') in my sentiment indicator, coupled with the overbought condition suggested by the Relative Strength Index PLUS any suggestion of a DOUBLE TOP around 584-585 (relative to March), would suggest at least an interim top.

Risk tolerant traders could take a shot in puts; an 'appropriate' stop is only 2-3 points above 585 at 587-588 with downside potential to 570-571.

Those more risk adverse should wait and see how steep any downside correction is and continue to trade WITH the trend; for example if there's a pullback to 570 area, it may well take off again from there. I'm inclined to buy such a pullback risking to 567, with an objective to the 600 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Its possible that the Dow 30 Industrials (INDU) may be at some resistance currently, at the top end of its trend channel again as noted on the daily chart below at the red (down) arrow. A prior high 12-month close was at 10940, an a (next day) intraday high at 10985 is the level that traders will be watching. 11k (11,000) is the big enchilada level. The even-1000 levels are usually. Any big portfolio managers looking to book some profits will likely find this area attractive to sell into.

10,800, or prior 'resistance' now is seen a near support, with next support in the 10700 area and is especially apparent on the hourly charts. Important it is, says Yoda, to watch an hourly chart in a power move like this. The trendlines and clusters of prior lows are most apparent on the 60-minute charts.

The slow 21-day Dow stochastic has been going sideways in
'overbought' territory, which it will always do absent a correction or price dip of some degree. The length of time momentum indicators like this stay 'overbought' doesn't matter; what does is that the longer it goes on, the more risk there is of a sharp shakeout.

December doesn't appear to be the timeframe for this but you can't be sure. Only surety is that they have not suspended the laws of gravity.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
After some highs made in the 2232 to 2242 area in May-June 2001, there was one week with a brief spike up to 2328; after that, 2264 was seen briefly in the Nasdaq Composite (COMP). Another 40-70 points above the 2263 weekly close is certainly possible.

Potential support is easier to figure: at the prior 2220 high first, then in the 2200 to 2180 zone. 2182 is the level of the 21-day moving average, another 'benchmark' on pullbacks.

Piercing 2250, especially on a closing basis, suggests that COMP's upside momentum is waning some. 2220 is an important point if prices start to slip; any index is in a stronger technical position if it holds above a high it has knifed through already.

Often you see the true strength of an Index on pullbacks. It is like when Jesse Livermore was given a bullish stock tip and the first thing he did was sell some of it to check the level of buying interest!

A CHART AND PATTERN FOR THE LONG TERM; COMP DAILY CHART AGAIN:
In a series of highs and lows that have 5 legs or segments (ending at points 1 5) tracing out a triangle like the one below and where '2' is the end point of an advance or up leg, the typical 'resolution' of the overall triangle formation will be a breakout above the upper line (forming the triangle).

Keeping track of and stock in this interpretation would have given me higher objectives than I had back a couple of weeks ago. Of course, the bigger upside price target was only implied, not 'signaled', until COMP pierced 2230.

COMP's 'wave' analysis above, doesn't tell us how high the advance beginning at point 5 will ultimately carry; it could be to 2350 or so. At the end of this advance the start of a major correction may get underway however.

NASDAQ 100 (NDX); DAILY CHART:
If I thought last week that the Nasdaq 100 (NDX) index was acting a bit toppy', it looks more so now as it is danger of slipping below this very steep trendline on the charts; intersecting at 1690 currently. Next support is at 1560 1650. A close under 1640 would suggest more downside potential to come.

Above 1734, the Nas 100 would climb above a weekly high made in Dec. 2002. NDX has already far and away made a new 4-year closing weekly high (prior 4-year closing high Jan '02 was 1675).

The first upside 'gap' in the daily chart for the Nasdaq 100 (NDX) below, occurred between the Friday 10/28 NDX high at 1157.5 and the following week's low on (Mon) 10/31 at 1559.8; about 2 points. Nothing dramatic, a subtle change, but one showing that buying interest was increasing.

This gap was a 'breakaway' gap. The bull had started into a trot. It went into a gallop between on 1601-1611 gap; the distance between that one-day's high and the next session's low had increased to 10 points in a 'runaway' type gap.

The first segment of the move was around 86 points (from 1515 to 1601). From the gap area at the high end at 1611, we can add 86 points to get a target implied by the halfway 'measuring gap' to be 1696, a 'minimum' upside objective. By one measure of it, NDX has reached an upside target, which is not to imply that NDX won't go substantially higher still.

NDX is as overbought as we've seen since fall (Sept) of two years ago; following that extreme, there was a shallow dip followed by a rally of a few more points, then a correction of 85 points. All within the context of a strong overall advance.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:
The Nasdaq 100 (QQQQ) tracking stock has reached any objectives I had for it. In late '02-early '03, there were highs made in the 42.75-43.25 area before the stock came down by any appreciable amount. This area is going to be referenced by traders. I wouldn't be surprising to see this area, if reached, be a place where profit-taking selling comes in.

A drop under 41.6 starts to penetrate the very steep up trendline. Next chart support comes in at 41.25, then around 40.75. 40.35 however, looks like next support, and (a decline to) 39.50 looks like a buy, at support implied by the low end of the upside gap from early in the month.

QQQQ's On Balance Volume (OBV) started to 'flatten' by Friday. The drop in daily volume that day is to be expected and that is another thing. However, if OBV continues lower it will suggest possible price weakness ahead.

RUSSELL 2000 (RUT) INDEX; DAILY BAR CHART:
The Russell 2000 (RUT) finally lagged it's way to the top of its trading range of recent months. 688.5 is a very key number as both its intraday and prior closing high. RUT looks like it is poised to challenge this number. RUT is at an all-time high around current and recent highs so there is not prior bench mark to look at as a possible area that might trigger technical selling. Based on the weekly uptrend channel (not shown), I can't measure any technical resistance until around 715-717.

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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