Option Investor
Index Wrap

SANTA CLAUS RALLY; BULLS HANG IN THERE

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THE BOTTOM LINE
I was leaning bearishly last week and still consider the risk of a sustained breakout to the upside to be less than a decent sized correction at some point; most likely once we're past the end of this quarter and into January. Risk on buying Index puts on rallies means placing a stop over the recent very defined 'line' of resistance, which would attempt holding to a small loss only.

That said, the indexes as shown in my individual commentaries, have held, or rebounded BACK ABOVE, important technical support at:
1. up trendlines; especially, the Nasdaq Composite (COMP)
2. the 21-day moving averages; especially the S&P indexes
3. prior downswing lows; especially the Nasdaq 100 (NDX)

In some case I've re-drawn up trendlines you'll see on the charts below, which is not fudging them so much as seeing that a revised trendline still makes sense as it connects the GREATEST number of lows (in the case of up trendlines).

The other point here is that the indices on balance are still churning higher and holding pretty steep rates of change or ascent. This is consistent with the tendency for seasonal strength into year-end especially as money is put to work for various reasons; 'window dressing', tax reasons, etc.

Since the sideways to slightly lower correction has also been
'throwing off' an overbought condition, the stage could be at least set for a push to nominal new highs. I don't presently think that there is a new up 'leg' ahead without a deeper correction beforehand; a new leg up such as if S&P 500 (SPX) goes to 1300 or above and the Nasdaq Composite (COMP) reaches 2300 or higher. However, I've been wrong in instances where 'irrational' exuberance takes hold.

The bulls would say that there are plenty of reasons while the market will go ever higher reflecting good or even accelerating economic growth. That may be, I just play the odds for/of a correction and look for trends to trade. Playing for a next move higher has been difficult as premiums erode while there's a sideways or lateral correction.

I myself like to be in calls once the indices get beaten down and tend not to play 'breakouts'; but, if that fits your trading style, it's clear where the breakouts will come due to the repeated highs in the same area. If you're a call buyer the premiums demanded by sellers will go up like gangbusters, once there's a breakout above such a well-defined line of prior highs but a subsequent move may be strong enough so it won't matter.

The worst case in buying calls on a breakout is if such new highs are followed (finally) by a downside reversal. I may sit this one out for anything heavy, taking out some puts around recent highs if possible, set my close-by stops and take a New Year's cruise.

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.

MIDWEEK UPDATES VIA MY WEDNESDAY OIN 'TRADER'S CORNER' ARTICLES:
Of related interest to this weekend column is the regular Wednesday Leigh Stevens 'Trader's Corner' article in the Option Investor (e-mailed) Newsletter (OIN), which typically also shows some of the major index charts, updating my outlook.

In my most recent Wednesday (12/21) Trader's Corner I examined the use of the MOVING AVERAGE ENVELOPE study and how I use its centered moving average, plus the moving average percent envelope lines, as a trading guideline or simply as 'benchmarks' regarding how extended an index might be on the upside or downside.

My Trader's Corner article can be seen in your Wed. 12/21 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.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:
1275 in the S&P 500 (SPX) remains the key or pivotal resistance which needs to be overcome, especially on a closing basis. If so, 1270-1275 ought to 'become' future support on any pullbacks and would be typical of another strong up leg; a target on such a rally is to the 1300 area.

The 1260-1265 area remains important near support. 1250 is 'must-hold' support for the bulls. A close under it would suggest a further 20-point downside potential, to around 1230.

I'm still of the mind that SPX is more likely building at least an interim top, rather than setting up for a move to substantial new highs. Tops tend to be made of repeated highs made in the same area, unlike the 'spike' lows of typical bottoms. However, as long as 1250 or the prior (down) swing low is not pierced, a top is not 'confirmed' either.

S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX), as is the case of its big brother SPX, remains in an intact up trend. The rally failures of recent weeks could be a possible top formation, but this pattern is not conclusive given the obvious support on dips. If I wanted to take a trade, it would be buying some puts on rallies toward the prior high and (to date) double top around 584, risking to 588 only.

A bearish view looks wrong on a close above the prior 584.4 high and not reversed the next day; if, after such a rally, 583-584 becomes support on any pullbacks, a possible next up leg is suggested with an objective to around 600.

578 is near trendline support and becomes a level to watch to gauge the near-term trend direction. 572 is pivotal support at the prior low. A close under 572 would suggest a downside objective to around 563.

Bullish sentiment remains pretty consistently bullish as I measure it and usually works as a contrary indicator when it gets to extremes. When it doesn't act as a 'contrary' indicator, it's usually suggestive of a move of above average strength and duration; these come along occasionally, just often enough to remind that no ONE indicator works all the time.

DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) has a potential top pattern, but the dips remain well supported and a relatively steep (up) trendline is still intact. It's all in whether the prior highs at 10940 are pierced.

This average gives me the most pause on getting aggressively bearish. The longer that highs are hit in the same area or exact same level in the case of INDU, WITHOUT a conclusive break, the more likelihood that the bulls will push through the line of prior highs at some point. Stay tuned on this!

Near support, and the next two technical support levels are marked at 10870, then 10800 and at 10730. 10800 is pivotal support in the coming week.

The line of prior highs is all-important in terms of signaling the next move. A close above 10940, not reversed the next day, suggests that the psychologically and technically important 11000 level could be tested; i.e., a move to this area at a minimum, where buying versus selling strength will be seen.

Momentum indicators like the 21-day (slow) Stochastic indicator continues to reflect a retreat to 'neutral' readings; after a big advance, a second stage up is more likely after at least a mid-range reading in the RSI or Stochastics.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
The Nasdaq Composite (COMP) held its steep up trendline almost exactly. I marked it at 2215 last week and the week's low was 2213.5. 2237 is near support suggested by the same up trendline currently. The recent 2213-2214 low is pivotal short-term support, with 2165 next support; 2145 is major support.

Immediate overhead resistance is 2250, at the 21-day moving average; a close above this level suggests another attempt to challenge the highs. The line of prior highs around 2275 is all-important. A close above the prior price peaks suggests a next up leg is underway. If 2275 is pierced, it should also 'become' support on subsequent pullbacks (assuming they develop, versus just a strong spurt higher). The 2330-2330 area would become a next upside objective after an upside breakout.

COMP, after retracing only a quarter or 25% of its prior advance (not shown), resumed its rally. I don't have occasion to mention this much, but WD Gann always maintained that 25% was the FIRST meaningful retracement level in stocks and, in a strong trend, such a shallow correction might be the most that occurs.

The RSI Indicator got to a neutral reading, so is significant for that. After overbought extremes, at least a sideways move is typical, such that this indicator backs off from an extreme, BEFORE the market can 'set up' so to speak for another leg up.

NASDAQ 100 (NDX); DAILY CHART:
Same deal as the Nasdaq Composite: after the Nas 100 (NDX) retraced only a quarter of its major prior advance, buyers came in again. A combination of limited selling and renewed buying interest coming in at support around 1660.

After that it was a snap back to above the prior 1675 low in short order! A kind of 'bear trap' in a way, as traders who shorted and bought puts thought it was clear sailing once those prior lows were pierced. In a 'normal' market that would be the case, but buying into year-end remains strong relative to selling interest.

I take the 1690 area as important near resistance, at the 21-day moving average. A close over 1690 sets the stage for another test of the prior highs as noted on the chart. A decisive upside penetration of 1705-1710 and not reversed in the next 1-2 days, still suggests a next upside target to 1735 or higher.

Conversely, a fall under 1675 starts to turn the chart bearish again; the key test would then be the prior 1658 low. I estimate support then at 1632-1630, with major support at 1600.

NDX was close to reaching an initial 'oversold' reading before its latest rebound. The Index doesn't always get 'fully' oversold, as was case in Aug/Sept, before good-sized rallies.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:
42.1 remains the key resistance area in the Nasdaq 100 (QQQQ) tracking stock. QQQQ has immediate overhead resistance at 41.6 as suggested by the current level of its 21-day moving average.

41.2 is near support, at the up trendline; next implied support is at the prior 40.75 low.

A close over 42.1 probably resolves the bull/bear standoff and the next move is to 43. Conversely, a close under 41.0 suggest downside potential to 40. Stay tuned on the outcome!

The RSI indicator got to a nearly oversold reading which was of interest but not conclusive for a bottom. A sideways correction, as well as a steeper fall, will cause these type momentum indicators to fall to a more neutral reading, putting the stock or Index more in a 'position' to rally again.

As I often say, pullbacks can be relatively shallow, constituting a 'time' correction; or, corrections can see deeper retracements of the prior move, which is the typical 'price' correction.

This most recent rebound was on declining volume, not the more bullish related action of volume rising with prices as it suggests a rally most driven by short-covering. On Balance Volume (OBV) was at least trending in the same direction as prices.

HAPPY HOLIDAYS!!
and ...
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!

NOTE: TRADING GUIDELINES AND SUGGESTIONS
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.
 

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