Option Investor
Index Wrap


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The chart patterns of the two 'lead' major indices, the S&P 500 (SPX) and the Nasdaq Composite (COMP), have become better defined over time as being in at least minor declines within respective downtrend price channels.

Technically, either SPX or COMP intermediate trends wouldn't reverse lower unless SPX closes below 1245 and COMP under 2190. I'm unconvinced we've seen a tradable bottom yet The market may yet get near or close to the aforementioned levels in a second test of these supports. The major indices look destined to chop around in a sideways to lower fashion. There are some 'breakout' points that would suggest otherwise of course, as will be seen on the charts further on.

I've made note before of the very high bullish trader 'sentiment' seen in January, reminding me of same thing preceding the mid-January 2003 peak, after which prices fell on balance for the next several weeks during which trader sentiment saw some bearish extremes again.

My most telling indicator for the lack of a key internal dynamic associated with significant bottoms is seen in the 10-day averages of total NYSE and total Nasdaq Up Volumes. Prices are trending sideways to lower as total Advancing Volume falls, suggesting that investors are not 'chasing' stocks; quite the contrary, there is significant rotation from themes that have led the last advance into more underplayed big cap companies of the S&P and Dow.

The 10-day averages of UP Volume for COMP and SPX each would have to fall some distance yet to reach the 'baseline' levels that are associated with at least 2 of 3 of past months major market lows:

In the period shown below for the Nasdaq Composite, there was only one instance where the 10-day Up Volume exchange average fell to the 'baseline' 300 million share volume level, followed by only a minor rebound; the other instances marked major lows.

Such (10-day moving average) readings tend to occur very close to the timeframe of the actual price low, at least within a few days before or after a major bottom; most often such low volume extremes in the 10-day average, as seen at the lower green level line (+ highlighted in yellow) in the COMP chart above, precedes an upside reversal by 1-3 days; "volume 'precedes' price".

The use of the 10-day moving average of Up Volume on the two exchanges, as a 'indicator' with a baseline low extreme, is useful as an alert for a possible bottom. This indicator does not have the same usefulness in finding TOPS.

Since I'm looking for the next major buy side opportunity in Index Calls, a study of exchange Up Volume figures suggest we're not at a buy point yet, contrary to the bullishness reflected in the call to put options volumes (see the OEX chart further on).

The individual daily and 10-day NYSE Up Volumes are plotted on the lower portion of SPX daily price chart below. There's not much more to say about the declining pattern in the 10-day average than already discussed about the Nasdaq Composite.

It's interesting to note, for both exchanges, that prices ROSE on Friday, while Up Volume fell from the preceding day. This type action is more often associated with contracting buying interest and short covering, rather than an early phase of another up leg.

An adjunct or companion piece to my weekend Index Trader, where I typically update my market outlook, based on the market/price action into midweek, occurs in conjunction with an explanation of technical analysis patterns and principles relevant to current or recent market action.

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.

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.


NOTE: It's sufficient this week for me to use only the DAILY charts in my discussion of technical patterns and trends.

All the major Indices do not get out of their current downtrend channels until prices pierce the minor down trendlines in place on all; after that, closes above the prior (up) swing highs are needed to suggest this market had regained its bullish footing.

The S&P 500 (SPX) so far is holding the area of its prior lows around 1255 and well above the pivotal 1245 level. It's important for a longer-term bullish chart view that weekly SPX closes are maintained at or above 1245. If there's push below 1245-1246, SPX is vulnerable to a fall to 1236-1237. Even then, the key weekly close might well be back at or above 1245 and the thing to watch.

Important immediate overhead resistance is at 1278. Ability to close above this would set up a possible re-test of the prior rally high at 1288. I would rate it more likely that SPX will test 1245 at some point than close above 1288. If it does, the bullish short-term trend could be back on track; yet to come would be a test of the prior 1295 high. Major resistance is likely at 1300, the even-100 milestone level.

As with the other indexes, SPX didn't get 'fully' oversold at recent lows. A more 'oversold' extreme might be reached before a next sustained advance sets up. Stay tuned on that!

As well, these back and forth price swings of a broad sideways trend tends to make 'overbought/oversold' less meaningful trading milestones; extremes are sometimes just not seen.

Immediate overhead resistance in the S&P 100 (OEX) is at 578; above this looms the prior high and possible resistance at 583. A close above 583 not reversed next day, sets up a possible re-test of the prior 589 high.

Apparent on the charts last week was that pivotal near support was 570. There was one close under 570, but it was reversed the next day. A reason why I often talk about closes above or below key levels being of technical significance IF such a close (above/below key support/resistance) is not reversed the next day. Often when prices get pushed down below some pivotal low into an 'emotional' type close, there is a lot of liquidation at day's end; e.g., stop type exit points are triggered, but prices rebound in the next trading session.

If there was a decisive downside penetration of 570 ahead, OEX would be vulnerable to a fall to 563-562. Even then, it's quite possible the Index would wind up the week at or above 570. I think we're seeing a lack of buying interest rather than heavy across the board sell intentions.

Bullish 'sentiment' rebounded by the end of the past week. I would be more inclined toward buying calls if and when there is at least a day or a few days when put activity gets heaver than seen in recent weeks.

It's not enough to buy calls in an area that is proving to be 'support'; rallies from there may still be lackluster and limited in upside point potential. Meanwhile, premiums erode away in sideways trends. Good for sellers of options.

The Dow 30 Average (INDU) continues to falter in the same area, around 10940-10950. It will take strong upside follow though above 10950 to suggest that 11000-11050 would be retested. Two consecutive closes above 10940 would be a bullish plus, even if 11,000 didn't get challenged right away.

INDU reversed from the area of trendline support suggested last week in the 10730 area, with the actual reversal coming from 10740. Close enough. The bullish up trendline now intersects in the 10780 area and is near technical support. Next support and a pivotal one, is at the prior intraday low at 10661. If this prior low was pierced, further downside potential is to at least 10600.

A 'midrange' neutral on the stochastic model and nothing much of trading significance. It's all in what happens back the recurring 'line' of prior highs. Until there's a close above 10940 and a rally from there, the INDU pattern could that of a Head & Shoulder's top. More important than this speculation is that the up trendline has kept intact; with so many lows at this trendline to make it the PIVOTAL technical support currently.

Key immediate resistance is at 2300; then at 2315, at the previous high. The all-time 2333 peak is likely major resistance.

The minor trend has been down, although the recent low around 2235 wasn't far under the prior 2241 low; and of course, prices rebounded substantially by the end of the day on Friday. Nothing is convincing me yet however that COMP won't at some point put in a lower low, especially down around the lower end of the downtrend channel highlighted below.

Note that Thursday's intraday stopped right at the 21-day moving average. The longer COMP trades under this pivotal average the more potential I see for a fall to the lower (moving average) 'envelope' line in the 2200 area. Such a move would of course set up a possible 'test' of the 2190 intraday low seen at the beginning of the year. A close over 2300, not reversed the next day, sets up an opposing bullish outlook.

As discussed last week, the prior 1633 early-January low in the Nasdaq 100 (NDX) was the key technical support and it held in the week past, with the low a few points above the prior bottom.

I'm not sure NDX is done on the downside. The rally to resistance implied by the top end of the last downside gap at 1685 couldn't be overcome at all. New lows for the move were seen the next day. NDX could rally up toward the upper end of the downtrend channel, meet resistance around the top end of the channel around 1692, then start slipping again. On the other hand, there is buying interest in some key tech stocks rebounding from prior lows. It will be interesting to see how this plays out.

If NDX can climb back above the minor down trendline, the next important test and implied resistance, is the prior 1723 intraday high as noted on the NDX daily chart below. In the current environment I rate it a tough challenge to pierce the prior high.

So far, NDX has a potential double bottom that has set up or is forming and is a key chart consideration; sound technically to have exited puts when the Index rebounded from the area of the early-Jan. low.

41.5 is immediate technical resistance in the Nasdaq 100 tracking stock (QQQQ), at it's down trendline. A close over 41.5, coupled with the ability to hold this area on subsequent pullbacks, would suggest upside potential back up to re-test the prior 42.4 high.

40.2 remains support implied by the prior early-January low. Based on both the daily and the hourly chart (not shown), the Q's likely trading range ahead looks like around 40 on the downside to 42-42.4 on the upside. 40 should be the low end of the range for a while, but there could be price action around Friday's low at 40.25 again.

If Friday's low was going to be a major upside reversal, with NO further approach again to the low-40 area, I would have anticipated a bigger jump in volume. Stay tuned on this!

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!

1. Technical support/areas of likely buying interest are highlighted with green up arrows.
2. Resistance/areas of likely selling interest: red down arrows.
[Gray up/down arrows: support/resistance levels that got pierced]
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