If you like trading volatile Microsoft (MSFT), you should love the Index price action of the past several weeks, as prices whip back and forth responding to a number of different crosscurrents both fundamental and technical.
I find this market challenging to trade, at least in terms of 'timing' and directional plays in long calls or puts. Finding the periodic bottoms and tops has been best done by close following of BOTH the daily chart patterns and indicators AND the intraday charts, especially hourly/60 minute. It hasn't always been necessary to do more than look at the hourly charts at the end of the day, but checking price levels once or twice a day is very useful, especially mid-morning and around 1 pm (Eastern).
It is important that whatever you use for charting show at least a month of hourly data. And, use of the Relative Strength Indicator (RSI) be set to 'length' of 21 (i.e., measuring 21-hours). In such (as I call it here) a 'whippy' market, the hourly charts have best shown recent tops and bottoms setting up. There have been good-sized trading swings between highs and lows. As a routine thing now, I'll start to show and discuss my take on, the HOURLY charts for the major indexes.
It looks like the major indices could follow the newly resurgent small and mid-cap market segment to new highs per the Russell 2000 (RUT) index, but I'm evaluating this market day to day as trends can reverse on a dime. There is a lot of rotation going on, with various bellwether tech stocks now in corrections, and the 'fast' money has moved on to stocks in the RUT. 'Jack/Jill be nimble, Jack/Jill be quick' ... or suffer a reversal.
Bullish sentiment is too high or extreme to make me convinced that this market is going to resume a smooth upward trend. The first quarter often has a lot of back and forth price swings, as in 2003 for example. Good trading market really, but as I said, requires trading smaller price swings. Again, a daily eye on hourly chart and indicator patterns, in conjunction with the daily charts and indicators, is essential.
I mentioned the Russell 2000 (RUT) and will show its chart here and then move on to the major trading Indices:
WEDNESDAY "TRADER'S CORNER":
My past week's Trader's Corner article on my particular market 'sentiment' indicator and a bit on bullish/bearish 'flag' patterns, can be viewed by going back to your Wednesday 1/25/06 e-mailed Option Investor Newsletter (OIN) or online at the OIN web site by clicking here.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY & HOURLY CHARTS:
On balance SPX held its 50-day moving average. Minor resistance implied by the 21-day moving average was pierced and the first sign of a renewed uptrend. 'Confirmation' of this renewed uptrend came the next day when the minor down trendline was pierced. 1295 at the prior high is now pivotal/key resistance. A move above 1295 suggests SPX upside potential to around 1310.
Since the market is still in a bull market trend, as defined by the series of higher highs and higher (down) swing lows, SPX has also not gotten to an oversold extreme since this current rally began in Oct. Use of the hourly charts however, define the 'overbought'/'oversold' ranges in a shorter time span and are also important for trading Index options.
The minor bear 'flag' that preceded this double bottom low did signal some further weakness, but it was only a 'set up' to the important double bottom that preceded the next sharp advance.
The second bottom that was formed in the SPX hourly chart seen above was accompanied by a higher low on the RSI and which is a bullish price/RSI 'divergence'; i.e., prices were going sideways, but 'relative strength' was RISING, lending credence to buying S&P calls.
S&P 100 (OEX) INDEX; DAILY AND HOURLY CHARTS:
In the S&P 100 (OEX), there was an approximate double bottom low (569.4 versus 570.2) that formed in the daily chart; double bottoms of course being an important bullish pattern. Daily chart patterns offer a key to the intermediate-term trend, as opposed to the shorter-term trends seen in intraday charts such as hourly, my favorite.
I peg support now at the (re-drawn) up trendline, intersecting currently around 573. The OEX is still locked in a relatively narrow 20 point (570-590) trading range. As we know, a lot of cross currents are making this a kind of broad 'indecision' pattern for the biggest cap stocks.
The high bullish sentiment I find fairly amazing and more characteristic of major runaway up trends, as opposed to stuttering ones like this one. As I noted in my Wednesday Trader's Corner article, we have to go back to January 2003 to see such extremes. That year, late-January brought a top that was not exceeded until the December yearend rally of 2004.
Maybe there IS a major new up leg coming in Jan-Mch, but have some doubts about this scenario. But hey, I've been wrong before on the major trend (especially) before!; the perils or limitations of being a shorter-term options trader no doubt.
The low of last week held just above the prior hourly lows of late-December. The various recent lows formed a down-sloping trendline, opposite the up-trending trendline formed by the RSI relative lows seen above, making for a 'classic' bullish divergence. This divergent pattern, plus OEX holding above the prior low after getting oversold, were tip offs for a coming upside reversal.
DOW 30 (INDU) AVERAGE; DAILY & HOURLY CHARTS:
Trendline support is suggested now around 10720, with resistance suggested at the prior 'line' of prior highs at 10940. 11,000 is important 'psychological' resistance and a figure that the public will notice assuming INDU starts to trade above it.
To better define resistance, our focus is on the prior intraday high at 11048. A close above 11050 or so, not reversed in the following 1-2 days, could lead to a move to the 11150-11200 area.
The 21-day slow stochastic, which seems to work well in defining the intermediate price swings in the Dow, was showing a bullish upside 'crossover' buy signal at the end of this past week.
As with the OEX, the cluster of hourly lows in INDU suggested bottoming action (by holding the area of the late-Dec bottom), as did action in the RSI as the indicator trended higher as prices went sideways. 10750 is suggested as support if the Dow fell back to this trendline; (prior) resistance 'becoming' new support. The consolidation around 10900 has the appearance of a bull flag.
NASDAQ COMPOSITE (COMP) INDEX; DAILY & HOURLY CHARTS:
If 2333 is pierced, there is an upper channel line that helps define potential resistance; this line intersects at 2378 currently.
The tip off for the rally, and COMP delivered a lot more than a smallish rebound, was the oversold extreme reached by the hourly RSI (see above); this coupled with the retracement level of 62%, was telling about the potential for an upside reversal.
When prices GAPPED higher on Tuesday, it provided a third bullish technical aspect for the Nasdaq. Note that support developed in the aforementioned GAP seen on the hourly chart above and tending to confirm that buying interest was there and was going to drive tech stocks higher again.
NASDAQ 100 (NDX); DAILY & HOURLY CHARTS:
Trendline support is now figured at around 1675. Immediate overhead resistance is at 1718, still in the area of the Close and highs of Friday. No decisive penetration of the minor down trendline has been achieved yet. A close over 1720 would be bullish, especially if support/buying interest was subsequently found in this area thereafter. Pivotal resistance is in the 1760 area, at the prior high.
Near NDX support is around 1700 now. So far, the narrower Nas 100 Index price action is showing bullish potential ahead, like the Composite, but NDX especially has to continue higher to show a convincing bullish pattern.
As cited with some of the other major indexes, the sideways bottoming trend seen in the hourly chart above, was accompanied by a RISING bullish trend in the (21-hour) RSI.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY & HOURLY CHARTS:
I was holding out for a buying opportunity in QQQQ closer to $40. TOO LATE? Probably. This coming week is important however to see what further upside traction can be gained. If favorable earnings don't continue to provide upside momentum, then there is not going to be a lot for stocks to trade off from until Q1 earnings are assessed. The Fed is a wild card as they continue to focus (fixate?) on inflationary dangers, not (slightly) slowing growth.
Right now the assumption is that the economy will rebound in Q1, but if people think that rising prices for energy are going to abate and help out, I doubt it.
Good Trading Success!
SUBSCRIBER MAIL **
TRADING GUIDELINES AND SUGGESTIONS
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.