Option Investor
Index Wrap


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Upside momentum is faltering and the major indexes continue to move in a sideways fashion, giving an increasing impression of topping patterns. If they can't take em up, they may take em down! A sideways move can of course also be a consolidation before a breakout above the top of the recent trading range. Since corrections are more often in 'price' (a deeper pullback than seen to date), rather than 'time'(i.e., sideways), I'm starting to look at index put possibilities.

In the case of the S&P 100 (OEX) and the Dow 30 (INDU) the formations are those of possible 'double tops', as they have been unable to break out to new highs relative to their March price peaks.

The S&P 500 (SPX) has had now 3 intraday highs at the same level and the Nasdaq Composite (COMP) about double that number in the same general area. The Nasdaq 100 (NDX), unlike the others, has now closed under its pivotal 21-day moving average, showing this loss of upside momentum. The Russell 2000 (RUT) Index has hit resistance and turned back multiple times from the 693 area.

Although we can always make an argument that an expiration such as this past week, has skewed the numbers up or down, I tend to discount this perhaps more than others. It may be that investors are not going to chase stocks higher and put a whole lot more money to work until they see Q1 earnings.

Traders however seem to be believing that there will be the typical strength into at least the end of the year. This past week saw the highest bullish 'sentiment' reading in my indicator of all year. This alone makes me uncomfortable in Index calls as I don't usually like banking on such strong 'mob' psychology.

Buying puts is starting to look like a reasonable speculation given such a defined 'line' of resistance as has developed, allowing stops to be placed just above recent highs. Given that such an exit point is not far from current levels or from around the highs that might be seen on further rally attempts, risk is perhaps a third of 'reward' potential in puts if there's a even a nominal or 'normal' price correction/pullback.

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.

Of related interest to this weekend column is my regular Wednesday 'Trader's Corner' article in the Option Investor (e-mailed) Newsletter (OIN) by me, Leigh Stevens, which typically also shows some of the major index charts, updating my outlook.

In my most recent Wednesday (12/14) Trader's Corner I went into a question on the formula for calculating the Nasdaq 100 Tracking Stock (QQQQ) price from the Nas 100 Index and other ways to look at the relationship, including the value of doing SEPARATE analysis of each. Also in response to a OIN Subscriber question, I discussed what traders might perceive to be the relative advance of trading the S&P 100 (OEX) versus S&P 500 (SPX) options.

My MEA CULPA or "WHAT WERE YOU THINKING!?" correction to my last (12/14) Trader's Corner article: I noted that SPX options are more pricey, making the OEX cheaper to trade. SPX is currently at 1267 and OEX at 577 and the 'multiplier' determining underlying contract value is $100 times the numeric value of BOTH indexes. Since SPX might move 10 points and OEX only 5, this explains the difference in option values and NOT because the SPX 'multiplier' is $500 times the Index which I said in error. [The S&P 500 Index FUTURES contract 'multiplier' is $250; this used to be $500.]

My Trader's Corner article can be seen in your Wed. 12/14 Option Investor e-mailed market letter OR online by clicking here.

Leigh Stevens' past Trader's Corner articles: select any prior WEDNESDAY in your saved OI Newsletters or on the OIN website.


1275 is the 'line' of pivotal and key resistance, the level which the bulls could not push the S&P 500 Index (SPX) through on multiple attempts this past week. 1265 (trendline support) and 1260 (21-day moving average) form a key near-term support zone.

1250 is the important prior (down) swing low and also support suggested by the weekly chart (not shown). If 1250 is penetrated, especially on a closing basis and not reversed the following day(s), SPX could be headed toward the 1230-1235 area again.
A move to 1235 would be a 'fibonacci' 38% retracement of the previous Oct-Dec advance, a fairly nominal/minimal retracement.

Conversely, a decisive upside penetration of 1275 would suggest a possible next target to around 1300.

These recent highs have not been 'confirmed' by a similar more to new highs in the Relative Strength Index (RSI) indicator. Such a 'non-confirmation' is often a bearish sign of a top. This kind of bearish price/RSI divergence, when seen on the daily charts, is often suggestive of declining internal or 'relative' strength.

What a difference 400 more stocks makes. The biggest cap stocks of the S&P, the S&P 100 (OEX), has not only a possible top formation, but a possible 'DOUBLE TOP'. When an Index tops twice, especially some weeks or months apart, this pattern should be considered, as it is so often a technical signal for a significant trading opportunity in index puts. If for no other reason than the risk to reward potential is favorable.

In such trades there is a defined risk point, which is to exit on a breakout just above the prior top. 'Reward' or profit potential on even a nominal pullback, relative to the loss on such an exit, is often 3-4 to 1; i.e., for every dollar 'risked', profit potential is 3-4 bucks. And, in an 'overbought' market major surprises are not as likely to come on the upside.

Bullish: a close above 584-585, which then more or less holds as support on subsequent pullbacks, would negate the bearish implications and suggest upside potential to the 600 area.

If 575 is pierced, then 572, downside potential looks to be to the 565.5-561 zone. 563 would represent a 50% retracement of the prior advance. A more nominal 38% retracement is to 568.

As with SPX, the RSI indicator suggests declining relative strength. My 'sentiment' indicator, the ratio of CBOE daily equities call volume relative to puts, spiked up to 2.4 on Thursday. Some of the heavy volume related no doubt to unwinding of positions just ahead of expiration, but the ratio between call and put volumes suggests a pretty heavy bullish bias.

Such extreme sentiment readings often suggest that the risk of a correction has grown significantly. The 'imbalance' is that traders lose sight of market risk; in this case, of a correction after such a prolonged advance.

The Dow 30 Industrials (INDU) has the same potential double top pattern as the OEX. On the bullish side, INDU did rally back above its 21-day moving average, which suggests that buying interest is still there on pullbacks. However, the longer that the bulls can't take INDU back above the line of multiple highs, the more risk that buyers will step away for awhile. Conversely, a close above 10940 suggests that 11,000 will be tested at least.

On the downside, I'm watching the 10800 level with interest, at the steep upper trendline. Below 10800 is the pivotal prior swing low at 10730; a break of this low would suggest possible downside to 10650, a 38% retracement, or to the 10560 area, a one-half 50% retracement of the prior advance.

As noted on the chart above, the 'major' up trendline projected currently suggests significant support at 10515; a number which rises with the trendline over time of course.

The 21-day (slow) Stochastic indicator continues to show downward momentum on balance, but also is suggesting that this sideways move is 'throwing off' its overbought condition. As always in pauses in strong markets, a sideways trend and a minimal price dip, can point to consolidation ahead of a new up 'leg'. Stay tuned on this, but January can bring in some cold downdrafts!

The Nasdaq Composite (COMP) continues to be unable to pierce highs that have been made numerous times at or just under the 2274-2275. If there this area is pierced, and the prior highs become subsequent intraday lows on any subsequent dips, a next upside target looks to be 2300-2315.

On the downside, first or near-support is 2250, then around 2215 at the fairly steep up trendline. It's always a question as to how long a stock or an index will continue to rise at such a strong rate. 2190 looks like 'must hold' support on the weekly chart (not shown), as a move below it would drop back under the line of prior weekly highs that was the breakout point for COMP's latest spurt higher.

2181 would represent a 38% retracement and a fairly minimal one, while 2151 would be a 50% retracement and take the Index back down into support implied by the (upside) gap area that occurred during the strong advance after the reversal at the October low.

The same declining trend in the RSI Indicator, while prices trend strictly sideways, is a bearish divergence. However, until or unless COMP falls under its prior lows in the 2233-2230 area, this 'divergence' is only a warning to be watchful for a deeper correction ahead.

I've noted again the same 'line' of resistance on the Nasdaq 100 (NDX) chart at 1705-1710. The longer this goes on...well, two things: it makes a move above this area more significant and would suggest a possible strong further advance OR the more likely that NDX is building a top. The top scenario is the more common resolution of this pattern. However, it wouldn't be the market unless there was the OTHER possible ('breakout') outcome!

On the upside, a decisive upside penetration of 1705-1710 and not reversed the next day or so, would suggest a next upside target to 1735 or higher. What happens on the downside looks dependent on NDX's ability to hold the low end of its recent trading range, around 1675. NDX has slipped under the pivotal 21-day average important for trading the indexes. 1643 is support implied by the current intersection of the up trendline shown on the daily chart below.

As I noted last week, the Nas 100 Index would have to fall to 1639 before it even retraced 38% of the last advance; 38 percent being a common first benchmark retracement amount. 1615 would represent a 50% retracement of the advance from the Oct. lows and would also put NDX back close to major support implied by the early-November 1611-1601 price 'gap'.

Every thing said about NDX above applies to the Nasdaq 100 (QQQQ) tracking stock of course. QQQQ continues it's sideways trend and relatively narrow trading range, as it fluctuates between the 42-42.25 area on the upside and 41.20-41.30 area on the downside.

A close above the upper band of resistance would suggest 43-43.25 as a next price target. On the downside, a decline under 41.30, especially on a closing basis, would suggest a possible test of trendline support, currently around 40.5.

40.4 represents potential support implied by the fibonacci 38% retracement; a decline to 39.8 would retrace half or 50% of the last advance. Major support is implied by the upside chart gap from early-Nov., which would be closed or 'filled' at 39.46.

The RSI indicator as noted with other indices, continues to fall, while prices trend sideways. This can be viewed in both a bullish and bearish way. Bullish: the sideways move is 'throwing off' the prior overbought condition. The bearish implication is that the declining RSI also suggests declining 'relative' strength and suggests that prices could follow RSI lower ahead.

On Balance Volume (OBV) is not showing anything significant as the direction of the line is sideways, tracking the (price) trend. If the OBV line was falling it would suggest 'distribution' going or ongoing liquidation.

Good Trading Success!

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!

Chart markings and commentary are presented as follows:
1. Technical support/areas of likely buying interest are typically shown by green up arrows on the charts.
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, adopting other bearish option strategies).

Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry 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.

Index Wrap Archives