Option Investor
Index Wrap

MIXED PICTURES

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THE BOTTOM LINE:
A mixed picture in the Indexes: The Dow 30 (INDU), in a real switch, has broken out to its highest level since the first half of 2001. Not so in the S&P 500 (SPX), but the Index has equaled its high of early-January. It could be forming a significant double top; or, be consolidating ahead of a breakout. [Worst case I suppose, certainly for traders, is that the S&P goes sideways.]

I should also mention the Russell 2000 (RUT) which, as of Friday, achieved a new closing high at 736.6 taking out its prior high close at 735.5. The smaller company (investment) 'theme' is still in favor. RUT has been pretty much in a sustained uptrend since October, and missed the lengthily sideways trend that the main market indexes have been in more or less since November.

Meanwhile, in a refrain of 'I can't get no respect', the Nasdaq Composite is in the middle of the 2233-2333 trading range it has established since the beginning of the year, but is in a position at least to break out above its down trendline. The suddenly out of favor Nasdaq 100 (NDX) is languishing closer to the low end of its price range seen since the new year began.

It's getting OLD! Not this baby faced year, but this narrow trading range and lateral move. Tough for traders looking to buy calls or puts, versus selling premium and watching it erode and what short option holders like to see.

The influences right now seem to be somewhat in balance between bullish and bearish. Just one example is high oil prices. They're likely to act to some degree as a drag on our economy over this year, but oil stock buying is holding up SPX and INDU. Growth in the economy is decent, but not so much as to be an engine of job creation, which acts a lid on added consumer spending. And so on.

I have no great crystal ball forecasts, as we await either a breakout or, for a next skid. The Up Volume 10-day averages I look at for the NYSE and Nasdaq are either still falling on balance (Nasdaq) or going sideways (NYSE). These averages haven't contracted to the levels from where there's often the start of big explosive moves.

My Sentiment Indicator is showing more caution finally by traders who finally don't seem to be expecting the next big leg up any day now. Things have settled into a bit of a lull. Boring! But, trade less (take up poker?) until the market doldrums wind down.

Speaking of sustained uptrends, crude oil is back in its broad uptrend channel and this is a bit of a worrisome longer-term trend, but oil prices have not climbed in an unremitting uptrend, so our economy at least is dealing with it. But those who think oil will settle back down to around $40 are dreaming I think. Maybe we'll see $50 again, for a while. But also, 75-80 per barrel looks like it will be in our future, maybe only briefly, but quite possible before 2006 is over.

There's not much need to do more than look at the DAILY Index charts this week, but will mention anything significant I also pick up in the Hourly patterns.

MY WEDNESDAY 'TRADER'S CORNER' ARTICLES:
This article is an adjunct or companion piece to my weekend Index Trader, where I do a brief midweek update on my market outlook in conjunction with an explanation of technical analysis principles and indicators relevant to current/recent market action.

My last two Trader's Corner articles, besides having my usual midweek technical update, were about the (3) popular momentum indicators or 'oscillators', whose claim to fame is that they attempt to highlight where an Index or stock is getting 'overbought' or 'oversold'. Two Wednesdays' back (2/15)I went into the Stochastics calculation; viewable by clicking here.

This past Wednesday, I delved into the Relative Strength Index or RSI, which has an added usefulness in highlighting the occasional bullish or bearish price/RSI divergence and often correlated with upcoming trend reversals. This most recent (Wednesday, 2/22/06) article can be found in your e-mailed Option Investor Newsletter (OIN) of this past Wednesday; or, can be viewed online at the OIN web site by clicking here.

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:

Not a lot more to say from last week on the S&P 500 (SPX). SPX held its support at its up trendline on the last dip to 1255, so assume a still-bullish trend until proven otherwise. If SPX can't pierce the level of the prior high around 1295, there is the possibility of a double top formation. A close above 1295, not reversed the next day, would suggest upside potential to the 1312-1315 area.

Key technical support is at 1268, at the current intersection of the up trendline. Even more pivotal support is at 1255, at the recent (down) swing low.

I tend to leave my upper and lower moving average envelope lines on the major Index charts. If nothing else it's a good visual reminder of the sideways move and the low volatility. With SPX, the Index will tend to see some occasional 'envelope' extremes relative to its 21-day moving average; i.e., the index will run up to or fall to a level that equals 2.5% (sometimes, 3%), above or below the average.

Instead SPX is trading in fairly tight price range. If you catch the highs and lows, there are some two-sided trading opportunities in both calls and puts. Easier said than done.

When I see volatility dry up for weeks on end, I tend to then get both very selective on trades and initiate very few trades, at least ones where I hope to profit from an outright move, rather than short-option strategies. With Indexes, I tend to wait for the extremes of what I think the trading range is. [I find it more advantageous to use 'bellwether' Nasdaq and NYSE stocks in which to sell calls and puts, do spreads, etc.]

Are we at the top of the range with the S&P? Maybe. It's tempting to take out some puts with 'tight' stop intentions, such as to exit on a 3-point move above 1295 in SPX. I would more likely buy OEX puts to test this idea. Next on that next.

S&P 100 (OEX) INDEX; DAILY CHART:

It's hard to tell if the S&P 100 (OEX) is losing momentum like appears might be the pattern on the hourly charts (not shown), or is consolidating for a move finally above the prior high around 589. I keep remembering the old trading adage about 'when in doubt stay out'. That's where I mostly am right now.

Key trendline support intersects around 576 currently. Major support is at 570. I'm waiting and watching to see if OEX is going to break out up or down.

An 'easy' trading opportunity seems would present itself if a next rally got stopped in the area of the old highs. If so I'll look to buy puts with the Index around 589-590 and exit at 593. Downside potential, assuming a double top, ought to be at least 12 pts, back to the trendline. Risk 3 pts, with potential to make 12 ... my kind of trade!

Traders have stopped being so quick to crank up call volumes, so my 'sentiment' indicator has been stopping short of bullish extremes lately. RSI also stopped shy of a bullish 'overbought' reading, and is drifting sideways to slightly lower.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Friday saw the Dow 30 Average (INDU) rebound from its low and regain the 'line' of support I've noted at the prior 11048 top; "prior resistance 'becoming' new support". Below this area, key support comes in around 10940. Trendline support is at 10850.

Resistance or selling interest has been coming in at 11150. If INDU pierces this area, next upside potential looks to be to around 11250.

Let's talk about the high Stochastic level seen above. INDU will sometimes tend to 'hang' above Stochastic readings this high on a 21-day setting. But the longer this goes on the more likely it is that the Dow will experience a correction again. This might not be more than a couple of hundred points however.

Buying INDU on each of two last dips to its up trendline was a profitable trade in calls (assuming at least 3-4 weeks to expiration). In an uptrend of course it's going to be easier and more profitable to trade WITH the trend rather than trying to capture counter-trend moves against the dominant trend. But hey, if INDU gets high enough, risk to reward in DJX puts looks attractive for DEFINED downside objectives; e.g., to 10900.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
It looks like the Nasdaq Composite (COMP) is attacking resistance implied by its down trendline. The near-term trend is also still sideways, unless COMP can achieve a decisive upside penetration of 2293; the Index would then have resistance at 2315 to surmount.

2255, at the current up trendline intersection, is pivotal near support. Even more key is support implied by the prior recent lows around 2233. Tech has lost some of its luster for now, but 'down but not out' as they say. Key Nasdaq stocks are rebounding a little, but they had gotten pretty oversold. There's no convincing wholesale turnarounds yet.

The torch for now has passed to those kinda boring stocks of the S&P and Dow 30. If COMP trades above 2300 and holds this area on pullbacks, the Index will start looking perky again.

NASDAQ 100 (NDX); DAILY CHART:

There is this old saying that prior price 'gaps' show up as support or resistance later on. This is true lately in the Nasdaq 100 (NDX) as rallies have been failing around 1685, at the top end of the downside price gap that developed during the decline of early-Feb.

Key near resistance is at 1685; above here even more pivotal resistance is anticipated at the prior 1723 high. Key near support is at 1655 currently, at the intersection of NDX's up trendline. The next lower pivotal support technically is at 1640, then 1633, at the lowest intraday low of early-January.

On the subject of risk to reward: buying NDX calls in the 1630-1635 area, if reached, with an exit point at 1627, would have the kind of ratio (risk to reward) I favor. Buying at trendline support around 1655 looks favorable also. NDX should get back to 1700 at some point. Retracing at least half of its 123 pt. downswing (1/11 to 2/10) is a reasonable expectation.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Key near resistance remains at 41.4-41.5 and pivotal support at 40.440.25 in the Nasdaq 100 tracking stock (QQQQ). A close over 41.4-41.5 resistance could have happened this past week; but, not with the lackluster buying interest seen recently on rallies, where limited selling can drive the Q's lower again.

If QQQQ can get above 41.5 and mount a rally from this area, the next significant selling interest/resistance will come in at 41.8 on up to 42.27.

Volume goes down, down, down, while prices go sideways. Some spark is needed. Where is Alan Greenspan when you need him!? To say something so obtuse that bulls can rally the market on their interpretation of the 'good' news!

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 you are thinking or wondering about. Yea!

GUIDE TO MY TRADING GUIDELINES AND SUGGESTIONS
CHART MARKINGS:
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]
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.

Index Wrap Archives