Option Investor
Index Wrap

S&P PAUSES, TECH CHARGES AHEAD

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THE BOTTOM LINE:

As long as the tech sectors continue to provide overall market leadership, there is no reason to believe that the S&P 500 (SPX), 100 (OEX) and the Dow 30 will not also break out to a new highs such as was seen this past week in the Nasdaq Composite (COMP) and Nas 100 (NDX). Especially so with key 'bellwether' indices in strong [Semiconductor Index (SOX), the Dow Transports (TRAN)] or renewed uptrends [The Russell 2000 Index (RUT].

One indicator I follow, that of a 10-day average of total daily Up Volume in both the Nasdaq and NYSE markets, was suggesting a correction was coming, as did the 'overbought' RSI and some extreme bullish 'sentiment' readings. However, given the strong seasonal tendency for a drive still higher in December, it was not surprising to see such a short-lived correction, as least so far. In very strong markets, I have tended toward a rule of thumb of buying the 3rd down day.

I wrote on my key indicators that normally, and eventually, tend to forecast significant tops or bottoms in my past week (11/30) Trader's Corner article in the e-mailed OIN market letter; and, which can be seen online by clicking here.

The concept of bellwether indices and bellwether stocks, that are good 'forecasters' of the market, was covered in one of my last month's (Wednesday) Trader's Corner articles. See it online here.

A look at the charts of some key forecaster (bellwether) indices is of interest:

If Tech leads the market sometimes, sometimes the mid-cap heavy Russell 2000 stock index (RUT) sometimes leads the tech sectors. This has not been the case on the most Nasdaq advance, as RUT has been lagging some, but this index put in a very good performance this past week. The weekly close at the high for the week and the fact that this was a new high bodes well for the overall market. Stocks in this index tend to be especially in favor by individual investors.

I see no reason why the Russell won't get back up to the upper end of its weekly uptrend channel and achieve an objective in the 720-725 area. Rut's ability to close in this coming week at or above this past week (690.5) maintains a bullish chart.

There is one bellwether SECTOR that I look at frequently, that of the semiconductors as measured by the Philly Semiconductor Index (symbol: SOX). If the tech sector is seeing a pick up in earnings and the future prospects for technology is bullish, it must also be seen in the semiconductor chip companies. If the key chip components are not selling well, Nasdaq rallies will tend to be limited. SOX has a very bullish week.

In a bullish chart picture, first came a weekly chart 'breakout' above the '02-'04-'05 down trendline as seen on the chart below. This past weeks pullback to this previously pierced trendline, followed by a very strong rebound, was quite bullish. Prior highs, once penetrated, often 'become' support on subsequent pullbacks. The same bullish note is true of prior resistance (down) trendlines, becoming support. Provided that SOX doesn't sink back below 466-470, a target to the 557-560 area seems likely, which would offer a re-test of the highs of a year ago.

One of the 'granddaddies' of bellwether indexes is the role that the Dow Transportation Average (symbol: TRAN) sometimes plays a forecaster of the closely related (in Dow 'Theory') Dow 30 Industrials (INDU).

Charles Dow used to look for a possible future earnings recovery or pick up in industrial/economy activity when shipping stocks got into a strong uptrend; this because it suggested that production was picking up, but not quite reflected yet in INDU stock earnings.

TRAN has been in a very strong up trend, whereas INDU has been languishing as seen in the comparison TRAN/INDU weekly line (close-only) below:

This move in TRAN is partly explained by the ever-growing internet economy, as you'll see if you look at the component stocks. This strong performance of the overall average is coming even with the drag of the Airlines. Given the decisive upside penetration of the all-time (1999) high by the Transports, it seems quite possible that INDU will also eventually make a new closing high above 11723 in coming months.

However, if INDU does NOT follow suit by also making a new high, Dow theory suggests that this 'non-confirmation' (by the Dow 30) suggests that the market and the economy may have some difficulties ahead, such as in 2006-2007.

All of this may seem to be of little interest to the Index Option trader, but the strong TRAN uptrend is significant perhaps as to whether DJX options will tack on further gains by the underlying INDU breaking out to a new high; it seems more likely then not. Right now, a possible double top in the Dow 30 remains a possibility unless and until such an upside breakout occurs.

As a final graph here before moving on, you can see what I think are the effects of the continued strong growth in online shopping by what is happening in the lead stocks in the Dow Transportation (TRAN) average; see the stocks comprising TRAN below:

I myself am used to seeing the delivery guys coming to my house along the Pacific, but am a rabid web browser and shopper. There is almost nothing that I can't find online these days. And, hey, it all comes in one of those of brown (UPS) or more colorful FedEx trucks. The long-haul truckers seem to be also seeing a lot of business coming their way too.

Lastly, you see the Airlines way down at the bottom in the Transport stocks listing above in terms of their prices. Remember that unlike the capitalization-weighted indexes, the Dow AVERAGES ('averages', not 'indexes') are PRICE-weighted; i.e., the higher price stocks move the average more, the cheaper stocks, less.

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.

By the way, there's a link above (the first one) to my most recent (11/30) Trader's Corner.

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:
I'll start by mentioning again a prior high of significance in the S&P 500 (SPX), above the recent peak in the 1270 area, which is the mid-2001 top around 1300 area; a possible target for this current move.

Near resistance is in the 1270 area. Failure to pierce this level would suggest a continued correction however, perhaps one taking SPX back to 1250 or even trendline support around 1242.

The RSI has pulled back of course with the market. The RSI is still high relative to a typical 'trading range' market, but has fallen back to below the level I have labeled as 'overbought' in the chart above. A further sideways to lower, even if only slightly lower, will cause the RSI to fall still further, and more toward a more 'neutral' reading.

In very strong trends, I more take note of the RSI as presenting higher than average risk (of a correction), rather than anticipating a trend reversal sooner rather than later.

S&P 100 (OEX) INDEX; DAILY CHART:
I label the S&P 100 (OEX) chart as a "'possible' double top", as this chart pattern is an alive possibility. While theoretically it seems that the S&P chart analysis should or could be independent of the Nasdaq, it is almost unfathomable that the Nasdaq will continue to move higher in line with its very STRONG trend, without pulling the S&P and Dow along with it; at least to a nominal new high. Stay tuned on that.

Possible double tops always bear watching as to the resolution of the pattern; i.e., either more trade at and under the prior high OR a move to a new high, especially on a closing basis. Although the other major market sectors may be very strong, the lagging indexes sometimes is a forewarning of an upcoming top/downside reversal in the leading indices.

Such divergences can be the thing that ends up saving significant profits in calls held in the still-strong sectors. This has been the occasional 'trigger' that got me out of tech when I got overly caught up in a bullish trading stance. I notice that traders, myself included, can become too enamored with the high-beta tech stocks because they really can move.

As anticipated, support developed in the 575 are on this recent decline. 570-572 is another important near support area in my estimation, extending to about 567 at the previously broken up trendline; which I think my again be 'significance' (as a key support trendline).

587 was a prior intraday high back in March in OEX and 600 looks to be major resistance. I mentioned last week that I would be buyer of OEX puts at 600 and I will still take a look at this strategy if the index gets there; if 600 was seen, just a nominal correction from there could be 15 points so an exit (stop) at 605 would appear to have a favorable risk to reward.

DOW 30 (INDU) AVERAGE; DAILY CHART:

There is little to no change in my view from last week with the 30 Industrials (INDU) appearing to be hitting some recent resistance at the top end of its trend channel and at the prior high close (10940). As with the OEX, INDU could be forming a possible double top. More price action is needed to see how this plays out.

As noted a week ago, prior resistance at 10800 'became' a first layer of support on the recent correction. 10750, at the current intersection of the 21-day moving average is another possible support.

On the upside, expect 11000 to bring in some selling, but if INDU clears the prior highs in the 10950 area, I don't think 11000 is going to offer major resistance. However, this is where the upper trend channel is intersecting; if this trendline is showing rising resistance coming into play here, the further rise in the Dow may be gradual and relatively minor.

The slow 21-day Dow stochastic is showing just what the price chart is, a stalled or sideways momentum at least for now.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
In a picture perfect technical action, the Nasdaq Composite (COMP) pulled back to the trendline that it broke out above. Resistance once broken became support later on.

Major support is around 2150 currently. It's hard to measure any 'major' resistance, but a prior cluster of lows and highs from 2001 (not shown) suggests possible upside objectives (and potential resistance) anywhere from 2315 on up to 2350-2360.

NASDAQ 100 (NDX); DAILY CHART:

There was a slip below the very steep Nasdaq 100 (NDX) up trendline and a correction back to the 1670 area. However, not untypical of a very strong runaway type trends, the correction did not last longer than 3 days before the trend strongly resumed. The new daily and weekly high keeps the chart quite bullish.

A move to the 1720-1725 price zone now seems to easily be a next target. NDX would climb above a weekly high made in Dec. 2002 by a move to above 1734.

To stay on a maximum bullish course, NDX should trade above 1700 to 1703. NDX has reached already the technical objectives I had for the index. Where it goes next can't be easily forecasted, which is always the case on strong moves into new high ground. If long NDX calls, signs of a downside reversal need to be watched closely. The next correction may not snap back as quickly as the first; they usually don't.

I would note again the strong tendency for a rally into year end as investors put money to work before the end of the current tax year and money managers before the end of the fourth quarter.

NDX is at least out of the overbought extreme zone, but the recent high is also NOT confirmed by a similar new high in the RSI; this DIVERGENCE does also create a bearish alert. Stay tuned on that.

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

The Nasdaq 100 (QQQQ) tracking stock continues to advance in a very steep uptrend channel. An objective to 43 can be projected.

Near support is at 41.25, then around 40.75. If the stock started trading under 40.50, there's danger of the Q's slipping another buck, to 39.50, which would fill in the gap. I would be a buyer again in this area, risking to 39.

A longer-term objective, based on a move to the upper end of the currently weekly uptrend channel (not shown) looks to be 46. Since we can more easily adopt a buy and hold strategy for NDX by holding the QQQQ tracking stock, I am working with a longer-range objective of 46 and then possibly on up to the 50-51 area.

The slight drop of volume on Friday's move to a new high probably was reflective of caution about taking new long positions ahead of the weekend, with the stock in new high ground. On Balance Volume (OBV) is again trending higher, consistent with rebounding prices.

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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