Option Investor
Index Wrap

HAPPY NEW MARKET!

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THE BOTTOM LINE:
All the indexes broke out strongly to the upside and resurged back into strong uptrends. This included of course the lagging S&P 100 (OEX) and the Dow 30 (INDU), with each closing above their March closing highs and negating possible double tops. The sideways to lower correction, relative to peaks seen in late-November/early-December, lasted approximately 27 trading sessions into the first trading day of the new year (1/3).

It did turn out to be more a 'time' rather than (deeper)'price' correction, as the retracements were pretty shallow; only the Nasdaq 100 (NDX), retraced even a 'minimal' 38% of the prior (Oct Dec) advance. Just when I thought I thought that corrections would be deeper; e.g., the Dow back to 10600, rather than the prior summer highs of 10700; as prior resistance 'became' new support. WRONG! on the deeper correction, although OEX got to pretty strong prior support at 570 (also it's 50-day average). But 560, FURGETABOUTIT!

It turned out to be no repeat of the early-year weakness of 2005, more similar to 2003 and 2004, when there was strength in January; in those years more two-sided trading swings werent seen until later in the month or in the quarter.

Last week I had reservations about being aggressively short this market due to the contraction of my Nasdaq Up Volume Indicator to levels where prices had been bottoming in recent months and the fall in the RSI Indicator to closer to 'oversold' lows rather than near overbought highs. However, I considered the breakdown below prior recent sideways trading ranges, mostly in the S&P 500 (SPX), to suggest more 'typical' retracements lay ahead; like the aforementioned 38%, or 50%, of the prior run up.

Sometimes the market is best seen by action in the indexes, sometimes by individual stocks, which was the case last week. Although bullish technical action was shown on the pullback in the bellwether Semiconductor Index (SOX); its chart is below. Since tech has led this rally and since SOX tends to lead tech, the action in this sector index was a big bullish positive.

In the S&P, bellwether GE rebounded both from its 50 and 200-day moving averages (which had converged). Intel (INTC) did the same. Also in tech, bellwether Cisco Systems (CSCO) finally got in gear, rebounding back above its 50 and 200-day averages. Yahoo, Amazon, eBay, and Google all touched, then strongly rebounded from, their 50-day moving averages. Hotter than a pistol Apple Computer (AAPL), only pulled back to its 21-day average.

Bullish sentiment continues to be very HIGH, but this looks like one of those markets where traders are both very bullish and very right. Very strong trends, either bullish or bearish, will tend to have above average 'sentiment' readings. It happens just enough to fake out over-reliance on this, or any ONE, indicator.

Speaking of indicators, the amazing UP Volume 10-day moving average was the single one of those I rely on at least, showing that the lengthily sideways trend had likely put the Nasdaq back at a major BOTTOM. Rather than go over all that ground again, you can see this chart and discussion near the bottom of my recent (Wed, 1/4) Trader's Corner article, either by going back to that day's OIN e-mail, or online by clicking here.

Before I get into the major market indexes, here is the weekly chart highlighting the bullish technical action on the Semiconductor Index (SOX):

The SOX was in an uptrend relative to its 2002 low, then finally broke out above its weekly down trendline in mid-November. The up and down trendlines form a big symmetrical triangle. Usually a breakout above or below such a figure leads to a good-sized further move in that direction.

The 'test' was whether SOX would find support on a pullback to that previously broken (down) trendline. There is this well-known technical axiom that support (once broken) 'becomes' resistance and vice versa; i.e., that resistance 'becomes' support. This axiom is also true of trendlines and was certainly true in the case of the SOX, as the pullback to the trendline marked the low.

Changing time frames allows us to see slightly different things on the same index, so here's a switch to the SOX daily chart:

Seeing this double bottom low set up over Tues and Wednesday was confirmation of a likely Nasdaq bottom. I keep an eye on this 'bellwether' index a lot, and the similar bullish action in bellwether Intel (INTC) was confirming; plus, in the case of INTC, bullish technical action (not shown) included its Wednesday rebound back above its 50 and 200-day averages.

Double tops and bottoms are one of five chart patterns that tend to be the most reliable in terms of predictive value and none of the major indexes had this bottoming pattern, so seeing it in the SOX was a real 'gift' in seeing the upside reversal shaping up; contrary to my more bearish further downside price projections.

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:
An earlier up trendline got pierced in the S&P 500 (SPX) Index but a new trendline emerged using the Tuesday (and weekly) low. Although I measured a downside target to as low as 1225, I also noted last week that if SPX quickly rebounded and stayed above 1250, this would signal recovery from the technical breakdown seen in the last week of Dec; the 'breakdown' looking to be the drop to new lows for the month-long trading range.

Friday's decisive upside penetration of the 'line' of prior highs at 1275 was the likely signal for a new up leg, with an objective to at least 1300; to suggest clear sailing from here prior resistance at 1275 should be new support.

I re-drew the up trendline a bit once the low was established; last week's had the initial trendline intersection around 1240-1241; versus this past week's low at 1245.7.

A major tip off to the reversal was when SPX's first trading day of the past week saw a strong rally above the prior week's (Thurs-Fri) downside price GAP apparent ONLY on an HOURLY chart; and shown with the S&P 100 (OEX) later. [Standard & Poor's uses the prior Close when there are SPX stocks with delayed openings, not uncommon when there's a lot of pre-opening orders, to compute the SPX Daily 'Open'; unlike what you see in the Nasdaq.]

I took the SPX sideways pattern outlined above as a possible 'rectangle top', a loose interpretation, as this formation would typically have 1-2 lows later on (around 1249-1251) equal to the early part of the sideways trading range; if so, the downside breakout would have more likely suggested a deeper correction, such as to somewhere between 38 and 50% of the prior advance.

NYSE UP VOLUME:
In the past 12 months, the S&P 500 has been at or near a bottom when a 10-day average of daily NYSE UP volume has contracted to around 600 million shares. So simple, that I sometimes am not ready to buy calls heavily on this, or any indicator ALONE, if the price pattern is very complex or confusing.

The decline to a recent 'baseline' low in the 10-day Up Volume average, along with signs of an upside price reversal, was solid in suggesting it was time to get back into index calls; e.g., bullish price action as seen by the new low for the move, followed by an immediate and strong upside reversal, equaling a classic 'bear trap' reversal.

S&P 100 (OEX) INDEX; HOURLY AND DAILY CHARTS:
An S&P downside price gap was created over the final two low-volume sessions at year-end 2005. This gap is apparent on the S&P 100 (OEX) HOURLY chart below and was 'filled in' on the first hour of trading on 1/3. After some more backing and filling around intraday lows, the Index took soared on heavy volume, suggesting a bottom was in place. An upside reversal was 'confirmed' on the move above the hourly down trendline as SPX pierced 578-579, then consolidated above it.

The 578-570 resistance suggested by the hourly down trendline at the beginning of the week, was near immediate overhead OEX resistance apparent on the DAILY chart around 577. An initial sign of a reversal, suggesting that the bulls were still in control, was in OEX regaining 571-572 on the first trading day. This action, on heavy volume, negated my lowest downside price target for around 560.

Once the rally got underway in earnest, technically oriented traders quickly could see a new UP trendline emerge based on Tuesday's low. Especially so when using the ol open matchbook 'straightedge' applied to the latest price charts, favored by S&P futures and options traders milling on the Exchange floors.

Where to? A long-held possible next target is the 600 area based on the OEX piercing the old closing high from March. It would be important now for a continued bullish OEX outlook for the Index to stay above 582-584, especially on a closing basis. One close back under the prior 584.4 closing high would not be a big negative; a close under 578 would be. Major trendline support is at 572.

Bullish sentiment has been consistently high and doesn't signify a typical low, but IS sometimes characteristic of an up 'leg' or super-strong moves, where the 'public' starts to get excited again about the market's prospects.

DOW 30 (INDU) AVERAGE; DAILY CHART:
Not much else to say about the Dow 30 Industrials (INDU) bottom technically except that the Average so strongly rebounded from the 10700 line of prior tops from July-Sept. The subsequent close well above the prior 10940 12-month closing high, suggests that the Dow should finally test at least 11000. Moreover, a case can be made for a next target to around 11150; then, to the 11300 area at some point.

The Dow Transportation (TRAN) average has now long been above, and way above to boot, it's 2005 peak. This new high INDU close finally 'confirms' the other Dow Average; suggesting that the 'blue chip' stocks remain in an uptrend according to Dow theory.

Near support is at 10950, then at 10900. In the event of a deeper pullback ahead, 10840-10825 looks like must hold support for the bulls to maintain its upside momentum and trend.

The 21-day (slow) Stochastic indicator measuring price 'momentum' just touched its oversold lower line and marked the bottom of the move quite well.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
The re-drawn up trendline on the Nasdaq Composite (COMP) suggests that major trendline support is confirmed at 2200. Moreover, I note that weekly highs were seen in this area in late-2004 and again in late-July/early-August; "resistance 'becoming' support" indeed! My bearish target to the 2150 area?: furgetabotit!

Per my alert last week, the early week strong rebound above 2217, at the top end of the downside (price) gap, was a key to seeing the (upside) reversal shaping up. For those who had more pressing matters (like work!) and didn't see this unfold, the Close back above the 21-day moving average suggested a bullish strategy, such as a buy in Nas 100 (NDX) calls at the next morning Open.

Where to Sir or Madam? To remain in a solid uptrend COMP shouldn't get pushed back under the LOW end of the recent upside price gap at 2278; you're getting the idea about 'gaps', yes!? (My next Trader's Corner topic perhaps.)

On the upside, it's easy to target 2335 as a next objective, simply the top of my current moving average envelope lines. Ultimately, assuming a move to top end of the Weekly chart's uptrend channel (not shown), 2500 is an eventual major target.

Before I become a super-bull again, let's get back down to earth
and note that this market WILL get 'overbought'(and dangerous) again if/when this Market gets carried away in a wave of tech fever; I did my lower buy already and don't 'chase' rallies in Index Options. You can buy the QQQQ stock however for a 'safer' more conservative way to play tech however.

UP VOLUME INDICATOR:
A classic confirming buy 'signal' was near at hand when the 10-day average of daily Nasdaq UP volume contracted to under 300 million shares. Confirming price action gave strong support for a major Call buy 'signal'.

Market timing with the Up Volume average is always UPON solid confirming price action; and COMP provided the classic bear trap reversal pattern of a move to a new low followed by a rapid and strong rebound. Especially given that the latest low would connect to an internal (best fit) up trendline.

NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX), at its recent 1633 low, only got near my first downside target of 1630, before reversing strongly to the upside. This past week's confirming tip off for the strong upside reversal was NDX's decisive upside penetration of 1653, the top end of the chart GAP that appeared in the prior week.

The close back above the prior (steeper) up trendline was a bullish plus, as was the next morning's (Wed) opening above its 21-day average. It was a race after that! I was too bearish myself heading into this very Happy Market New Year, but got the idea on the ground on Tuesday. Seeing how a re-drawn up trendline made such a nifty fit, followed by the jump in upside volume, made a very convincing story!

Pullbacks, if any, to the 1705-1710 area ought to be well supported. Lots of key Nasdaq stocks are in gear and could move NDX next to 1760.

NDX got to within a few points of my lower envelope line,
at least suggesting that the Index was in an area for a reversal. And how: a sky shoot! Don't I love tech stocks when they move!!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:
42.1, which had been key overhead resistance in the Nasdaq 100 (QQQQ) tracking stock, became an important near technical support. As suggested last week, once the Q's regained 40.75 and stayed above this level, the low that was made (around $40) looked like it would not be seen again anytime soon.

My first downside target was to the $40 area; the reversal came after QQQQ hit 40.16, and the stock never got close to be pushed back under 40. The Q's completed a 38 percent retracement of the prior advance at 40.4. Upside potential is next to 43.15-43.25.

The tracking stock, unlike the underlying Nas 100 (NDX) Index (or any of the other major Indexes), got to a FULLY oversold reading on the RSI. The first day's jump in daily trading volume was a confirming indicator that a strong rally was underway. You got to love the Q's: they trade so 'technically' much of the time!

Good Trading Success!

Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] 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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