THE BOTTOM LINE:
The S&P held at or above key trendline supports, then rebounded. The Dow came back down to its prior 'breakout' point and rallied, showing decent technical strength also. Whether the S&P indices will pierce their January highs and break out in a new up 'leg' is a whole other question however. The Dow is back about it's January peak, but will have to clear it's highs of last month still to suggest that DJX calls are a good hold for a while, versus being another ok short-term trading situation.
It's probably going to take getting past March and into earnings season before we see what this market is capable of. Meanwhile, I have a shorter-term trading orientation only. Puts in the S&P 100 (OEX) looked attractive when the Index got up near the high end recently of its well-defined trading range, but the dip was only to just under 580, to the area of up trendline support, before it was time to exit and where calls looked attractive. I like to buy moves to well-defined trendlines; I then have an exit point of just above/below the trendline, not far from my entry.
Trading for relatively brief 7-10 point trading swings is not my favorite game in OEX, although the back and forth swings have been between somewhat obvious and well-defined technical support and resistance areas.
The Nasdaq has given more to traders in terms of a more prolonged move. In a picture perfect technical pattern the Nasdaq Composite (COMP) and Nasdaq 100 (NDX), rebounded once again on reaching the area of prior lows. Once NDX built its minor double top on the hourly chart in the 1700 area, the decline good for 40 points before the Index reached prior lows and rebounded.
By the way, I have stronger confidence in 'double' bottoms, than in the triple bottom seen so far this year around 2237 in COMP and 1638 in NDX. Triple bottoms arent as predictable and strong a pattern so to speak. Once an apparent low has been made 3 times, odds increase that there will be yet another decline; one taking the Index to new lows.
However, we have to account also for the relatively stronger more bullish performance in SPX, OEX and INDU. The stronger indexes tend to keep the weaker from falling too far behind. At some point, value is seen in the weaker sectors.
MARKET NEWS and INFLUENCES:
MY WEDNESDAY 'TRADER'S CORNER' ARTICLES:
My past week's Trader's Corner explored moving average types (Simple, Weighted, Exponential) and some of the considerations on which ones are best to use, as well as what 'length' settings (number of trading periods being measured) to consider. This past week's (3/8/06) article can be found in your e-mailed Option Investor Daily Newsletter for Wednesday; or, it can be seen online at the Option Investor.com web site by clicking here.
S&P 500 (SPX); DAILY AND HOURLY CHARTS:
I wasn't focused too much last week on potential support implied by the previously broken January down trendline seen this week on my daily SPX chart below. The lowest low of the week reversed from this line at the up arrow. As often happens, prior resistance 'became' support later on; in this case, a support trendline. I have noted next technical support under 1280, at 1265 at this line. 1255, at the February lows, is a key technical support; if pierced a possible next downside target is 1245-1243.
There is still significant likely selling interest (resistance) at 1295-1297. A move above this area is needed to suggest much upside potential above 1300; such as to 1315, perhaps to 1320. I don't see this as the most likely next move, as the Index still seems stuck in a sideways or lateral trading range.
The hourly chart shows key recent support at 1271-1269. Pivotal resistance is in the area of the prior hourly double top at 1297.
On the upside, 588 is the pivotal resistance. Another rally to this area stands a good chance of breaking out to new highs. Although we hear about TRIPLE tops, there are not so many of them seen in the major indices; sometimes there will be 3 or more tops in the same area, when a lengthily trading range sets up. If there was a close above 588 not reversed the next day, it would suggest upside potential to 598-600.
On a risk to reward basis, based on the ability of the Index to rebound from the area of its multi-month up trendline, it looked wise to exit any OEX puts, plus buying OEX calls looked attractive, with risk held to an exit just under the SPX up trendline as noted further on with the hourly chart.
Daily equities call volumes finally fell enough relative to daily put volume, to put my sentiment indicator down to a level near to a level I define as 'oversold'. To at least a one-day reading suggesting a high enough level of bearishness to mark the CONTRARY potential for a rally; this past week my indicator fell to a level not seen in several. Bearish sentiment can build up, then build up again later, before a sustained rebound develops. Stay tuned on this!
As noted last week, sideways price trends tend to 'wear' out the bulls and traders get more cautious. A bearish market view or at least caution on rally potential is often a precursor to a next advance. A dip in my indicator to the lower line, accompanied by a reversal from the up trendline or a prior low, are the kind of combinations I look for at tradable bottoms.
Exit of any OEX puts, as well as possible call purchases, looked warranted (or attractive) this past week after multiple hourly rebounds from 578-580 and the formation of an up trendline in that pattern of rising lows.
As I noted in my opening ('bottom line') comments, a trade taken after a cluster of lows formed like this allows a 'tight' stop or exit point; e.g., at 578, just under the hourly up trendline. Even where I don't have a big conviction of upside potential of more than to around 588; that objective would be ok relative to the small 'risk' from trade entry at or under 580.
DOW 30 (INDU) AVERAGE; DAILY AND HOURLY CHARTS:
If INDU can stay above 11000 it would look increasingly likely that the cluster of prior highs around 11130 to around 11150 would be re-tested. A move above 11150 would suggest upside potential to the 11300 area.
'Must-hold' technical support is 10940-10900. If there was a close under 10900, not reversed in the following day or two, downside potential would then look to be as low as 10750-10700.
The Dow daily Stochastic oscillator has reversed back up, which is pretty typical in a sideways trend where the price range is getting narrower. These indicators are of little practical use in making trading decisions until there's an oversold or overbought extreme AND a price pattern suggesting a reversal.
The rising series of hourly lows led me to draw another up trendline, well above the major up trendline intersecting down in the 10900 area. This most recent trendline suggests near-term support at 10980.
The last run up in INDU has the 21-hour RSI edging upward toward an overbought conditions, making me watchful for a possible double top, since the Dow would be due for at least a short-term correction if highs in the 11130 to 11150 area were reached again in the next 2-3 trading sessions particularly.
Unknown yet is whether weakness in tech stocks will eventually pull the S&P lower or at least keep a lid on any rallies; or whether the Nasdaq will start to rally again since the Index has tested the low end of its trading range and be pulled up by the NYSE stocks. For now I don't see big upside, or big downside potential.
2237 is near support. Major support is at 2200-2190.
I peg near resistance in COMP at 2285, back at the previously broken (up) trendline, with next resistance then around 2315. 2333 is major resistance. Above 2333 there could be upside potential to as high as 2370; a move to, then above, the prior 2333 peak seems quite unlikely to me based on what I see on key Nasdaq stock charts currently.
If the Composite can climb above immediate overhead resistance at 2285, there's likely upside potential to 2314-2324. I don't see much upside beyond this area anytime soon. Not before Q1 earnings come out anyway. But believe what you see on the charts most of all, so stay tuned!
The recent low did put the 13-day RSI down to as low as it registered the last time that COMP got into the area of recent lows. This market is much closer to being oversold than midrange or overbought. A propensity for COMP to continue to rebound, at least back up to near resistance, shouldn't be a surprise.
When retracements don't fall below 2/3rds, it suggests that the index remains in an uptrend and is not likely to get pushed lower, such as back to the rally starting point. This pattern also suggests that 'must hold' support is 2244 to 2238.
The hourly chart pattern also suggests that prices may again dip toward or into the key 2244-2238 support zone. Conversely, the ability for COMP to climb above 2265 would be bullish for the short-term trend and suggest upside potential to 2285, a next resistance suggested by daily chart considerations as discussed.
NASDAQ 100 (NDX); DAILY AND HOURLY CHARTS:
The decline to 1638-1634 area of prior lows could be anticipated or expected once the Oct-Feb up trendline was pierced. That this decline was a successful re-test of the low end of the Nas 100 (NDX) trading range was not a surprise, especially when buying in the S&P and Dow lifted those indices.
The Friday NDX close wasn't impressive, and I am taking a wait and see attitude about the possibility of buying NDX calls. It looks to me like these recent lows may be seen again. If 1638-1634 gives way, then my next downside target would be to 1600-1605. I would favor covering any puts and probably buying calls around 1600 if decline to this area develops.
Near resistance is at 1672 and pivotal technical resistance at 1700-1705. Above this area, key technical resistance in the Nasdaq 100 (NDX) is at the 1723 prior high, then at the early-Jan peak around 1760-1761.
I mentioned last week that a decisive downside penetration of 1640 would set up sizable further downside technical objectives based on a large Head & Shoulder pattern. Some technical opinions are quite bearish based on this pattern and assume that the 'neckline' lows will be penetrated, leading to an ultimate decline to 1550. It's still speculative. The lows from early-January on can be just the low end of a consolidation, with ultimate new highs yet to come this year. Time will tell!
Resistance is at 41-41.1, then around 41.35. Pivotal technical resistance at the prior high comes in at 42.0. A close above 42 would suggest a next upside potential to 42.35-42.4.
On the downside, if 40.2-42.1 is pierced I doubt that 40 would be a next support; rather, buying interest might next be seen around 39.40 and create a buying opportunity.
Good Trading Success!
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GUIDE TO MY 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.