THE BOTTOM LINE:
My bullish sentiment indicator shot up to a bearish reading at the beginning of this past week, the day of the top and preceding another sell off, putting the market back down toward what has been major support in the S&P 100 (OEX) around 570 and with potential to send the Nasdaq 100 (NDX) back toward a retest of its early-Jan. 1633 low (Fri close: 1664) and the Dow (INDU) back to the 10660 area (Fri: 10793).
The consistent, persistent and relatively high level of bullishness seems to me to be a reluctance to 'believe' that the market would have any significant trouble advancing over 11000 in INDU and 2300 in the Nasdaq Composite (COMP) given our current economic growth. I look less at the perceived bullish 'fundamentals' on the economy and more on how much money investors are willing to commit to stocks. If more money was coming into stocks, the Index levels I mention would have been sliced through already.
Currently, whatever anyone, or the media talking heads may say about why we 'should' be buying stocks, the public is not engaged and wholly enthused. Job insecurity is widespread and until that changes, millions focus less on what the stock market can bring them and more on what the job market could take away. (Heating bills and gas prices are siphoning a lot out of wallets too!)
The high level of bullishness reminds me of January 2003. The market had been rising since a fall low and traders were highly bullish, but the peak was reached soon after and near the end of January. Stocks fell on balance into a March low. There is typically some downward price pressures in the first Quarter. Until investors see how the earnings come in for Q1, the market seems likely to continue to struggle to gain traction.
The price swings have been good for index option traders that have been very nimble, but difficult otherwise, at least when buying long options, versus selling premium. Prices did come up right to down/resistance trendlines that became well-defined by the pattern of progressively lower intraday highs; the reversals were right from those trendlines.
It appeared that OEX and NDX might break out above technical resistances, as INDU did briefly on Wednesday, but Thursday (common reversal days continue to be Tuesday and Thursday) saw stocks get slammed again.
I can't see any broad predictions to make other than this 'indecision' pattern is likely to continue. The Nasdaq stocks and trading indices look like a buy again if the Composite nears 2200, but COMP will struggle to break out above 2300-2330. The S&P stocks and indices offer buying interest with the S&P 500 in the low 1240's, and a sell near 1300. The pattern is a trading range; a 20-point range or less since the OEX Nov. top.
OTHER BELLWETHER INDEXES AND SECTORS:
MY WEDNESDAY "TRADER'S CORNER":
My past week's Trader's Corner article was about 'key' reversals, plus a midweek
view of the chart patterns. TYPO: I indicated in that article (Option Investor
Daily, 2/1/06) that the Nasdaq
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY & HOURLY CHARTS:
SPX then got near, but hasn't reached, pivotal support at the prior minor low around 1260. Below 1260, an even more technically significant low is 1246 and is assumed to be major support; and what has been to date the low end of a multiweek trading range. This is also the area of my lower envelope line, currently set at 2.5% under the 21-day moving avg.
I think that SPX could be trading between 1260 and 1280 in the coming week. Piercing 1260 could lead to an eventual fall to the 1246-1242 area however.
1280 is key initial resistance, at the trendline. A close over 1280, not reversed the next day, is needed to regain upside momentum. Stay tuned on that!
The key question I have with the S&P is whether it will test the early-year low and get back into the broadest trading range we've seen so far and, this time, get 'fully' oversold; something that hasn't happened since Oct. No predictions on this, but 'a body in motion tends to stay in motion'. Failure to rally above the trendline last week confirmed that the short-term trend was down.
As SPX gets close to a near-term oversold reading on the hourly RSI ('length' = 21) and given the cluster of prior lows around 1260, it increases the likelihood of at least a short-term (e.g., 2-3 day) rally from this area.
S&P 100 (OEX) INDEX; DAILY AND HOURLY CHARTS:
Pivotal near support is around 570, as suggested by the cluster of multiple downswing lows seen there in the past month. If 570 is pierced there's downside potential to around 563-565.
As I commented on in my initial commentary and on the daily chart below, OEX has been within a 20 point trading range since the highs seen in November; and mostly the Index has been whipping back and forth in about a 10-point range. These sideways trends are when many traders tend to give back the money they might have made in the last sustained trends; e.g., the August October decline or the Oct. Nov. advance.
I suggest guarding against the relatively trend-less periods eating up your trading account! Myself, I don't like close in hand-to-hand combat, me against the floor brokers!! There's always an option (no pun intended!) to stay out. All you need care about is ending up with a decent profit at year's end, not how much commission you surrender to a broker.
On the other hand, there's likely a trading opportunity coming up, but I would like to see the market get oversold in terms of the RSI and get my 'sentiment' model nearer a bullish reading.
It seemed to have been finally dawned on many options traders (CBOE Equities' options volume ratios being how I gauge sentiment) last week, judging by the dip in my call-put ratio, that MAYBE this market is mired in the mud; especially now that the fall in key tech darlings has sent the bulls scrambling for put cover.
Of course, 'oversold' and 'overbought' are relative terms and relate to the time frame being looked at with the 21-hour RSI I use reflecting the minor trend, the 13-day RSI reflecting the intermediate trend and the weekly chart's RSI set at 8 or 13, reflecting the major trend. And, some of the best trading opportunities tend to come when ALL time frames line up at overbought, or oversold, extremes!
DOW 30 (INDU) AVERAGE; DAILY & HOURLY CHARTS:
INDU could now be falling toward a key test of its up trendline, currently intersecting at 10730. Below this area, I assess next technical support to lie in the 10600 area.
No sooner had the 21-day slow stochastic swung back to a bullish upside crossover recently, then prices reversed lower. Shows how to not rely on these indicators in any kind of a mechanical fashion, especially in 'midrange'. These type indicators only give an idea of where the market is 'susceptible' to a reversal, especially when BOTH Stochastic lines get all the way into the upper or lower areas highlighted as 'oversold' or 'overbought'.
In that ONE hourly bar highlighted in the yellow circle, with the 'spike' up a new high (stops being run), followed by no upside follow through, is most of a minor 'bull trap' reversal pattern; i.e., a move to new high followed by an immediate price collapse.
I don't see any 'natural' support at 10800, not that this market has not been reversing at wherever news comes along. More likely is support/buying interest coming at 10750, then around and just under 10700. Odds somewhat favor a next major advance starting from when the RSI gets closer to 30 again.
NASDAQ COMPOSITE (COMP) INDEX; DAILY & HOURLY CHARTS:
With a lot of key tech stocks correcting, some sharply, maybe this time COMP will test the 2200 area and get more 'fully' oversold. It would be worth waiting for that to happen and this possibility seems a ways off still, so patience is suggested. The major trend is still up, so the best Index options opportunities are likely to come in calls.
Lots of price gaps, lots of uncertainties! I take the top end of this last DOWNside gap as a first key technical resistance; just as the low end of the last UPside gap marked support in the Composite for a short term 2-3 day period.
NASDAQ 100 (NDX); DAILY & HOURLY CHARTS:
1655 reached Friday is potential near support. The prior 1633 low is the key and pivotal technical support implied by the important early-January low. Usually market rallies cover the kind of ground seen over the first 7 trading days of January in a LONGER period of time. Most of that advance has now been retraced. Hmmm, maybe this was the origin of the old saying, at least in the futures markets, to "take 'quick' profits".
Buying NDX puts above 1750, where there was long-term resistance implied by the top end of the daily/weekly chart uptrend channels, has turned out to be a very nice trade. But, such sharp rallies also tend to scare many/most traders off from put plays.
A rally seems likely to develop before the prior 1633 low is re-tested or challenged, assuming it is. The test of whether any such rebound is only a short-term, will be whether NDX can get back above 1700 on a closing basis.
The key intermediate to major support is suggested at the 2006 lows, in the 1640 area, on down to the bottom-most hourly low at 1634. I think a rally can develop and before the Index sinks much lower than the Friday low already seen in the 1660 area.
NDX is now closest to registering a fully oversold reading on the RSI. This suggests buying bargain hunting type buying might come into at least enough of the NDX stocks soon to create a short-term rebound; that and short-covering.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY & HOURLY CHARTS:
Near resistance is at 41.5; then the pivotal down trendline suggests resistance comes into play around 42.
Support is estimated at 40.5, then at the prior low at 40.2. I would see a rally attempt shaping up soon. Looking a the hourly chart will provide some more 'detail' but nothing much beyond what can be seen in the daily chart immediately below.
Daily volume was increasing as price momentum faltered and consistent with volume moving in the direction of the trend. The chart pattern alone looks like a further fall is coming but I sense that if the prior (early-Jan.) low is going to be tested, it won't be immediately.
Based on where the 21-hour RSI is registering, a rally will likely set up soon. This 'length' setting for an hourly chart and for the RSI is a great aid in judging the potential for at least short-term reversals; and, not many traders use the longer settings on intraday charts, so I find it a helpful 'edge' indicator.
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 you are thinking or wondering about. Yea!
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.