Option Investor
Index Wrap

HOME ON THE RANGE

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THE BOTTOM LINE:
Based on the price action of the past week, it is looking like the major indexes have once again gotten to the top end of their multi-month trading RANGE and are unable to break out to new highs and establish a new up 'leg'.

The Dow 30 (INDU), in a switch of leadership, led the February rally to a higher high than its January peak, but has now dropped back under prior highs seen in the 11050 area. A key technical sign of a new up leg is that pullbacks to a prior top find support there and don't dip long or much under this area.

The S&P 500 (SPX) has, to date, made a nearly exact double top relative to the previous high of Jan. I talked last week in my Index commentaries about the favorable risk to reward trade potential of buying S&P 100 (OEX) puts with the Index back up near prior highs (I mentioned the 589 area at former intraday highs; 588 was the prior high Close) and OEX got to 588 Friday.

The idea was that if OEX got to this area, it would either easily see further gains or be stopped around 590. If the later, the Index would not tack on even 3 more points from there; hence my OEX puts exit/stop suggestion at 593. Further downside OEX potential looks like it's (at least) back to the up trendline at 577. Risking 3-5 points in this Index for an 11-point dip or more is the kind of trade ratio I favor. Stay tuned on this outcome!

Just as the Dow went above its prior 2006 peak, then fell back, the Nasdaq Composite (COMP) started falling back from under its prior early-Jan top at 2333; COMP traded only briefly (to 2325) above highs established in late-Jan at 2314, closing at 2302.

The more select Nasdaq 100 (NDX) lagged significantly behind the Composite in the sense that the Index could barely manage to get above 1700 before selling picked up and drove it lower; this was well under its 1723 and 1761 tops of early and late-January, respectively.

What the bears have going for them fundamentally to support this near-term lackluster Market action I'll leave to the folks who report on this best. My focus is that I see trading 'environment' right now as range bound, which establishes my trading parameters for Index Calls and Puts. Home on the Range.

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.

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 three Trader's Corner articles, besides having my usual midweek technical update, were about the (3) popular momentum indicators or 'oscillators' of Stochastics, the Relative Strength Index or RSI and the MACD or Moving Average Convergence Divergence Indicator.

My past week's Trader's Corner delved into the MACD ('macdee') Indicator. This recent (3/1/06) article can be found in your e-mailed Option Investor Newsletter for Wednesday; or, it can be seen online at the OIN web site by clicking here.


** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY AND HOURLY CHARTS:
The S&P 500 (SPX) continues to find a lot of resistance or selling interest at and just over the 1295 prior high of January. The move to a new high on Friday, followed by a close near it's intraday lows, suggests a possible reversal and possible downside follow through in the coming week.

The short-term up trendline will be pierced by a continued decline to under Friday's 1284 low. There needs to be an immediate rally to suggest technically that SPX won't at least fall back to its principal up trendline, intersecting at 1272 currently. Below the 1272 area, key support can be assumed to lie in the area of the prior lows around 1255.

A close over 1295 on the other hand, assuming this area then were to find support on pullbacks (in subsequent days), would suggest upside potential to 1315; the even 1300 level may attract significant selling and should be watched also.


HOURLY SPX:
The rebound back to the previously broken hourly up trendline, which I sometimes dub the 'kiss of death' trendline (due to the tendency to mark the end of a move), plus this being the area of prior highs, was the point to exit calls and enter puts if you wanted to trade the SPX options.

I like trades around possible top areas, quite contrary to a 'trend FOLLOWING' approach, as the I need only risk to slightly over the prior high; slightly over the trendline. If there is NO top formation, prices will usually go well above my entry and I might as well exit quickly. If I'm right, there will often be a fall that is at least 2-3 times what I risk in terms of the move in the underlying Index.

Support for a possible put trade on this last rebound was seen in the still relatively high reading on the 21-hour RSI. There is a tendency for Index price swings to go back and forth in terms of RSI extremes. However, volatility has dried up in recent weeks/months and led to fewer 'touches' in recent weeks to the upper or lower lines, set at 70 and 30 respectively.

S&P 100 (OEX) INDEX; DAILY AND HOURLY CHARTS:

The pattern is that of a possible double top with Friday's price action in the S&P 100 (OEX). As I noted last week, technical indicators like the RSI were showing downward momentum on balance. A key event was the reversal from the area of the prior highs. OEX has to climb above 588 and stay there to suggest that a possible run up to major resistance in the 597-600 area.

Near-term support at 582 is close at hand, at the short-term up trendline intersecting around Friday's low. A decline under 582-580 suggests OEX falling further and a test of the longer-term up trendline at 577. Major support is at 570.

Daily equities call volumes have finally fallen off enough to start a downward trend in my 'sentiment' indicator. This trend at least now suggests that my call-to-put volume ratio may get down to or close to at least one reading that suggests an 'oversold' market in terms of a build up in a bearish outlook.

This may not happen, but the trend currently is to less bullishness. A sideways price trend eventually 'wears' out the bulls some or they get more cautious, which is often a 'set up' to the next rally. A dip in my indicator to the lower line above accompanied by a reversal from the up trendline or a prior low, are the kind of combinations I look for at tradable bottoms.

HOURLY OEX:

We saw the same kind of retreat/reversal in the S&P 100 (OEX) once prices rebounded to the previously broken up trendline. Just as a prior support, once broken, may act as resistance later on, so to with trendlines. This phenomena is so pronounced often enough that I've always used the 'Kiss of Death (KOD)' humorous name for such trendlines I first heard from Michael Jenkins.


DOW 30 (INDU) AVERAGE; DAILY AND HOURLY CHARTS:
The pattern of lower relative highs we're seeing in the Dow 30 Average (INDU) is demonstrating waning momentum and buying interest. This is illustrated of course by the declining Stochastics indicator trend and, in terms of the chart pattern, best illustrated in the hourly chart further on.

Rallies that constitute a next up leg or next phase of a strong bull trend will tend to pierce prior highs AND keep going. If there are pullbacks to the prior peak, the prior high will tend as now act as support. When prices instead retreat, it tends to be a sign that the index (or stock) is not ready to go into a next rally phase. It could be that INDU has just extended the upside end of its trading range some.

A couple of consecutive closes over 11100 would suggest that INDU was gaining traction again on the upside and suggest upside potential to the 11300 area.

There is a very well defined bullish up trendline intersecting currently around 10875. Only a daily close below this line would suggest that we could be back in a 107 to 111.5 trading range in terms of the Dow Index (DJX).

The immediate bullish test is whether prices pierce 11,000 and if there's then a close under the 21-day moving average at 10980. 10940 is support implied by the highs of a year ago. 10875 is key technical support at the trendline as already mentioned.

The Dow daily Stochastic indicator, which had been 'hanging' at readings in 'overbought' territory, has started down. My frequent experience with the 21-day Stochastic is that once there is a bearish crossover above 80 and the two indicator lines begin progressing lower below this level (80), the move continues for more than has been seen so far relative to the recent top. A fall to the 10900 area would be consistent with the average move.

HOURLY INDU:
The Dow down trendline becomes clearer and better defined when we switch to the hourly chart. Notice how things worked out on the last up trendline break. The subsequent rebound took the Average back up to the trendline (at the left red arrow), after which INDU reversed to the downside again. This was another example of the 'KOD' trendline pattern that I was discussing with the two S&P Indices above.


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) got back up to, then exceeded, the early January highs at 2314. But this new high led only to a sharp fall from there by the close on Friday. The minor up trendline would be pierced if COMP continued lower than Friday, especially on a closing basis.

The dominant up trendline suggests that the first pivotal technical support comes in around 2265 currently. The line of support noted at 2233 is at or just under key lows seen from late-Jan to mid-Feb. This market would turn bearish in its pattern if there was a close below 2230 not reversed the next day (or two); if so, downside potential would be to (as low as) 2185.

On the bullish side, if COMP were to get back above 2314-2315 the Index would be in a position to test the prior 2333 high. A close over 2333 would suggest upside potential to the 2370 area.


NASDAQ 100 (NDX); DAILY CHART:

Near resistance is at 1700. Above this area, the first key technical resistance in the Nasdaq 100 (NDX) is at the prior high at 1723, then at the 2006 (early-Jan) peak at 1761.

To suggest NDX was turning bullish, look for its ability to climb above 1700 and stay at or above the 1700 area.

1677 is near support, at the minor up trendline. The dominant daily up trendline, dating from October, intersects currently around 1665. A move below 1640-1645 would suggest that the trend has turned down.


A daily close below 1645-1640 would also suggest a bearish break of the 'neckline' of a large Head & Shoulder's (H&S) Top pattern that is a dominant 'bigger picture' pattern on the chart.

Such a price break (below 1645-1640) would set up sizable further downside technical objectives. I don't like making predictions or projections on this until and unless this level is pierced. There is a tendency for JUST the formation of the outlines of such a pattern to be predicted bearishly by some market advisors. WRONG! You got to SEE a neckline break happen not figure it WILL happen.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
I've nothing to add on the QQQQ that is different than the NDX chart in terms of patterns and projections; only the price levels are different.

Key near resistance remains at 42.4-42.5 (sorry! I misstated this last week as '41.4-41.5'); major resistance is the old high at 43.3.

Pivotal near support in the Q's is at 41.2 currently, at the up trendline per the chart below. 40.5-40.4 is the critical to the bulls support; a break of this area would set up a next target to (as low as) 39.5. [40.5-40.4 is also the 'neckline' of the QQQQ version of a H&S top pattern; a break of this line would set up substantially lower technical objectives over time.]


The jumps in volume are coming mostly on upside moves, so remains consistent with a bullish pattern; i.e., volume expands in the direction of the dominant trend.

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