Option Investor
Index Wrap

PAUSE IN A STILL STRONG TREND

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THE BOTTOM LINE:
The Indexes that showed leadership or the greatest relative strength in the strong Oct-Nov advance, the S&P 500 (SPX), the Nasdaq Composite (COMP) and the big-cap Nasdaq 100 (NDX), after trading mostly sideways for over two weeks now, are still holding above their 'pivotal' 21-day averages; pivotal for index traders that is. This recent pattern suggests a pause in the trend rather than a top.

I have also been making mention that the weaker lagging indices, the S&P 100 (OEX) and the Dow 30 (INDU) have possible double tops going. [The Russell 2000 (RUT) closed again above its early-August peak and is not presenting a possible double top.] A prior top in the same area is more noteworthy when it occurred at least several months in the past; in this case, it was back in March. By the way, tops are not 'confirmed' technically until the most recent significant downswing low is pierced and we're far from that.

My trading mentor used to say that corrections are of two types: price and 'time'. A PRICE correction is where prices of an index or a stock retrace or give back around a third to a half (even 2/3rds) of the prior move. The alternative, a TIME correction sees prices going basically sideways for some period and there is not much retracement of the prior advance or decline.

It is time to take note of the levels where key percentage corrections would be reached, especially in case SPX, COMP and NDX close under their 21-day averages, as the possibilities for more of a deeper 'price' correction then looms; I'll note key retracement price points in my index commentaries further on.

Usually, sideways corrections are pauses in a strong trend and has the same function of any 'consolidation'; buyers and sellers consolidate their holdings. Buyers have time to do some more accumulation of stocks when they see that prices are not going to come down much; sellers unload what else they want to. Everyone has time to trade without the pressure of a relentless advance or decline. There's that 'time' word again!

The other dynamic is that a sideways trend tends to 'throw off' or moderate a prior overbought or oversold extreme. When we look at momentum indicators like the RSI (Relative Strength Index) or Stochastics, we start to see more 'neutral' readings (i.e., closer to a mid-range 50) after 7-10-15 days of a sideways move.

In these instances these technical type statistical 'models' are simply showing that the market has reached a new equilibrium, at least for a time. Good traders can sense this without looking at these indicators. But it's also helpful for many to look at the models/indicators as references to other past periods for purposes of comparison. A picture/chart is worth a 1000 words!

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.

In my most recent Wednesday (12/7) Trader's Corner I took a look at the possible significance and some dynamics of the strong gold market, including a look at the XAU gold and silver index chart, a possible flip in the yield curve to 'inverted' and whether the recent market pullback was a downside reversal or key downside reversal as seen in technical (analysis) terms.

My Trader's Corner article can be seen in your Wed. 12/7 Option Investor e-mailed market letter or online 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:
Pivotal resistance is around 1270 currently. 1290 to 1300 is a possible eventual upside target if there's a close above 1270, not reversed the next day.

Near support is at 1250-1251. 1252 is where the 21-day moving average intersects currently. A close under this key trading average often signals some further weakness. However, next lower support I still make to be at the prior up trendline, not far below 1252 support, around 1245.

A close under SPX 1252, or 1245, would warrant a look at the 'fibonacci' 38% and 50% retracements (of the early-Oct to early-Dec advance), at 1233 and 1220 respectively.

These levels then become possible downside targets or downside objectives, as well as areas where buying calls may be of interest. In a strong trend retracements of as much as one-half are not seen as much. Major trendline support looks like 1225.

S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) 'possible double top' in the 584 area is noted below as this has to be viewed as a possibility. Working against this outcome is the unlikelihood that a major OEX top is brewing while SPX and the Nasdaq look like they remain in strong trends.
OEX has added another bearish wrinkle with this past week's action, closing under its 21-day moving average, showing its further loss of upside momentum. A move back above 578-580 maintains a bullish chart however.

Assuming more weakness develops in the coming week, support may come into play at the old trendline around 567. This trendline intersects currently also around the level of what would be a 38% retracement of the early-Oct to late-Nov upswing; 563 represents a 50% retracement. As it stands currently, I don't see OEX dropping below 560.

The RSI indicator is nearing 50 and a neutral reading, so it definitely out of the overbought situation it was in at the extreme at the recent top. Bullish sentiment has strictly moderated also. In a strong uptrend which the overall market still looks to be in, we won't see a lot of bearishness setting up, but will see bullishness tone down or dampen and that should set the stage for another advance.

DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) has this same potential double top pattern as in the OEX and has also dropped under its 21-day moving average. I've not more to say on this pattern than already discussed with the S&P 100 (OEX). If he Nasdaq starts falling then the Dow will have been a forewarning, but with business spending picking up as reflected in tech stocks, this seems less likely.

Support or buying interest should come into play at 10735, then around 10660. 10650 is the 38% retracement and often is turnaround point when the market is in a strong bullish phase. 10560 is the 50% retracement level. 10500 is major support.

The slow Stochastic indicator continues to fall and is close to being in a neutral range as far as 'overbought/oversold'.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
The Nasdaq Composite (COMP) has stalled in the 2270, which is near-term resistance. The 21-day moving average at 2236 defines near support in my view. 2232 is next support seen on the hourly chart (not shown). The prior 2218 high exceeded on the recent COMP rally is next likely support. The Composite has to slip to 2181 before it has even retraced a minimal 38% of the monster rally off the October low. Major support is in the 2150 area.

Above 2270 in COMP, a level which exceeded the 2004 and 2005 highs, it's a guess as to a next technical target. Somewhere around 2300 to 2330.

My outlook is for more upside potential still in the Nasdaq, even though COMP has already made a major advance; a pause here, rather than a deeper correction given the tendency for seasonal strength in December. If this view is correct, a next rally should get underway soon.

NASDAQ 100 (NDX); DAILY CHART:
I've noted the resistance on the Nasdaq 100 (NDX) chart around the 'line' of recent highs at 1705-1710. I also note how the two most recent intraday lows were right around support suggested at the 21-day moving average at 1681.

I'll pretty much repeat as unchanged my comments of last week: to stay on a maximum bullish course, NDX should trade above 1700 to 1705. If so my next objective would be to around 1750.

The Nas 100 reached minimum technical objectives I had. Still this recent sideways move has the feel of a set up ahead of a continued advance.

If there's a decline under 1680, especially on a closing basis, NDX could be signaling a further fall to the 1652 area. The Index would have to reach 1639 before the index would even retrace 38% of the last run up; 38 percent being a common first benchmark fibonacci retracement.

Often in a strong market, prices don't give back more than a third or so of prior gains before the rally resumes. 1615 is a one-half retracement for NDX; nothing unusual here, a retracement of 50% in a normal market considered a buying opportunity.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:
The Nasdaq 100 (QQQQ) tracking stock continues it's sideways trend on balance. 41.35 is important near support, at the 21-day average. 42-42.1 is key immediate overhead resistance.

What next? Any close under 41.15 may start a slide to still lower levels with a next stop around 40.35-40.40. A retracement of one-half or 50% of the last advance would put the Q's back at 39.80. 39.50 would fill in the upside price 'gap' from early-November and likely also offer major support. On the upside, a next objective to 43-43.15 is quite possible if QQQQ clears immediate overhead resistance at 42, then 42.30.

On Balance Volume (OBV) is trending down with prices of late. There is little that a study of volume is providing here that adds to or is different to what is apparent on the price chart.

Please send any technical and Index-related questions to me at 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!

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)
I write about:
3. Index price areas 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 often focuses on the intermediate-term trend (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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