Option Investor
Index Wrap

WHO WOULD HAVE THOUGHT IT!

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THE BOTTOM LINE:
Who would have thought that the indexes that were first would now be last! The narrow Dow 30 (INDU) blue chip index leads, followed by the S&P 100 (OEX), the S&P 500 (SPX) and the Nasdaq Indices (the Composite and Nas 100) bringing up the rear. As is often the case the Russell 2000 (RUT) is somewhat off on it's own, but it looks like RUT would hit significant resistance at the top end of its likely uptrend channel around 758 (Fri close: 746).

With the Dow out front like this, is the situation a 'solitary walk of the Dow' or will the rally broaden out if the earnings pick up? Could be. Since the two S&P indices held so tenaciously to the low end of their longer range up trendlines and broke out to highs for this move, you'll see on my charts below that I now account for high end of broad uptrend channels, which allows or for considerable upside Bellwether S&P stock, General Electric (GE) broke out above its down trendline and closed above its 200-day moving average; first time above this key average since mid-January. This bodes well for the S&P

Tech is back lagging again. However, if we don't focus on what seems to be, at least right now, a few over-hyped go-go Nasdaq stocks like Google, Apple, etc., tech bellwether stocks like Cisco Systems and Microsoft are experiencing strong advances currently. Although bellwether Intel is languishing, the overall semiconductor sector reflected by the SOX index is nearing what may be solid support around 480 (Friday low, 489, close, 496). In other words, this rally has room to broaden out.

As traders who cares in a way! OEX offered a great call buy when it held it's up trendline on the last dip to just under 580 and has had a decent move from there. Of course, DJX calls have been steller since the last dip back to the very well-defined 'line' of prior resistance at 109.4, which then defined good technical support over a 3-day period. Hey, a gift or an easy-peasie buy.

The kind of index option trade that I am forever recommending was handed to us as a gift. The index (DJX) was either going to hold RIGHT there or break significantly lower. Entry could be made with an exit point just under its up trendline at 108.9. With DJX closing Friday around 112.8, hey! you could have exited some or all calls and taken the money home for the weekend.

While I myself wasn't convinced (still am not) that the Nasdaq 100 (NDX) wasn't going to break below it's prior double bottom low around 1638, NDX calls did offer a trade with a favorable risk to reward ratio. Even if NDX can't climb much higher than 1700 (and I think it can get to the 1720's), its a good trade.

The S&P has broken out finally above the top end of its 3-month old trading range. The fact that is has in the S&P suggests that the lead NYSE stocks ought to have a pretty good further move. Strength in the NYSE nearly always eventually pulls the Nasdaq higher. (And, vice-versa, when tech is leading the charge.)

Finally, what is encouraging about this rally having a little more staying power this time is that traders didn't get wildly bullish this time on this advance, as reflected in my 'sentiment' model, specifically seen in the equities call-put volume ratio at the bottom of the OEX daily chart below.

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 past week's Trader's Corner went on with my exploration of moving averages; types, crossover pairs of moving averages and 'optimal' length settings; i.e., the number of weeks, days or hourly closes, etc. that the moving average is made up of.

This past week's (3/15/06) 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.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY AND HOURLY CHARTS:
The S&P 500 (SPX) finally achieved a decisive upside penetration of the prior double top around 1295 and had a decent further run up this past week. SPX would reach the top end of my moving average envelope around 1325; at that point the Index would be in the area where it tends to top out for a while or slow it's rate of ascent; this as represented by how far it's trading above it's 21-day moving average.

The lower and upper envelope lines are not 'targets' exactly, but do represent a gauge of upside potential for a 'normal' move based on recent months ranges. If we were to assume that the SPX was in a strong next 'leg' higher, it could reach the high end of the uptrend channel projected on the chart. This is a broad uptrend channel, with the high end up near 1360.

Meanwhile back down at 'earth', key near support is at the prior line of resistance at 1295-1297. As long as SPX can maintain closes above this area and not dip too far under 1300, its chart pattern now suggests the 1325 area as a next upside potential.

1283 has to be viewed as significant technical support, at the up trendline, but the dominant trend would not reverse lower unless there was a close under the last downswing low at 1272-1271 area.

HOURLY SPX:
Well there are price channels WITHIN price channels and SPX has reached the top end of its near-term hourly uptrend channel. Given this pattern along with the 'overbought' (21-hour) RSI reading that was reached, very short-term traders probably want to be OUTTATHERE!

Buy puts around 1310? I would rather buy calls on a pullback and trade with the dominant trend. Buy pullbacks to the 1280 area or the low end of the hourly uptrend channel.

I know I just said above that SPX should hold above a 1295 daily Close, but intraday weakness, even a 1-day daily close below 1295 could happen of course. Enough to keep the bulls on their toes!

S&P 100 (OEX) INDEX; DAILY AND HOURLY CHARTS:
By looking at one trendline across the recent tops, the S&P 100 (OEX) may have hit some near-term resistance around the Thursday and Friday highs at 594.5.

I measured the weight of technical evidence as being bullish based on the rebound from the dip under 580 as OEX held pivotal technical up trendline support dating from the October bottom.

Since OEX's pivotal 588 resistance was pierced, the daily chart is now showing an upper end of a broad uptrend channel. It gives perspective to the upside potential if this rally really gets cranking. First off however, OEX has got to clear another even-100 level, at 600. These even-100/even-1000 levels, are usually if not always quite significant in the major Indexes.

Meanwhile, the daily RSI (13) has again after several months reached an 'overbought' extreme. An overbought extreme only suggests the possibility of very much of a retracement of the prior move. If near support (prior resistance) at 588 was pierced, the next most significant technical support is at the OEX up trendline at 581-582.

As I noted starting out this piece, daily equities call volumes have not shot so far above daily CBOE equities put volume, to create a major jump in bullish sentiment as measured by this particular indicator/formula that I use. Moderating bullish sentiment is fairly common on 'legs', or a major further price swing within a bigger trend.

What happens on/after any nearterm correction should be quite telling as to how this trend unfolds. The more caution or, a better word choice perhaps, more 'restraint' in call activity, the more upside potential I would see coming up.

HOURLY OEX:
Not surprisingly, the OEX shows this same pattern as SPX, of recent highs being at the top end of its apparent up trend channel on the HOURLY charts; key resistance based on the upper end of this channel coming at around 595. The recent pause or sideways move, and it may only be a pause before prices pierce 595, came after the 21-hour RSI got to an overbought extreme.

There is this tendency for corrections to set in at or after readings above the typical 'overbought' line (at or near 70/70+). Keep in mind that, like last time, the high extreme was only followed by a lengthily sideways move, then a brief dip, followed by another sharp run up. Stay tuned on whether this same pattern repeats in a similar fashion or we see something new!

Calls bought on the last dip to and just under 580 had an initial stop or exit point suggested for 578 or just under the hourly up trendline. That trendline has of course risen. Not by a lot, but the broadest 'trailing' stop based on the underlying index is now just under this trendline and suggests 582 as giving the widest leeway for long call protection; assuming an entry made when the underlying index last dipped to the 580 area.

Exit of some or all OEX calls (and a necessity for the March OEX calls) on the move to the apparent upper end of the hourly channel at 594 made for a good trade completion. At least for those not looking to hold on to a bullish position and in April calls, perhaps after rolling from March to April options.

DOW 30 (INDU) AVERAGE; DAILY AND HOURLY CHARTS:
The Dow 30 Average (INDU) doesn't have an apparent technical resistance that I can measure before about 11360, then at 11400, with more significant/major resistance at the 11500 area.

Near support should be found in the 11135-11150 area, assuming the prior INDU peak now 'becomes' technical support on a pullback to this area. Major technical support is at 10940.

The Dow daily Stochastic oscillator is again back into 'overbought' territory. When an index is 'running' like this one and has strong upside momentum, I consider overbought readings to be a cautionary sign to not jump on board with new DJX calls once bullish expectations and volatility has inflated call premiums. And, I tend to avoid raising my average price on long calls as the risk of a shakeout grows. Also, unexpected negative events impact an overbought market more severely than an oversold one; this is almost always true unless there's a very dire event.

HOURLY INDU:
Use of the hourly chart will help greatly in seeing where the short-term steep up trendline would be pierced. Currently, first support on this basis, at least at the start of the week, is at 11220, as noted below at the green up arrow. Next lower support at the lower up trendline is at 11025. Those looking to protect profits on some if not all DJX calls, should anticipate possible further weakness if 112.2 gets pierced. That level then rises over the course of the week of course; it's a steep trendline.

The pattern still looks quite bullish on the hourly chart. However, when I see those trendlines get closer and closer to vertical, I get nervous about the risks of a shakeout.

Not that I don't like staying in index options if on the right side of big power moves, but I do start to watch hourly chart action quite closely, especially after one or two instances where the hourly RSI (set to 21) gets up above 70-75-80.

NASDAQ COMPOSITE (COMP) INDEX; DAILY AND HOURLY CHARTS:
Did I say something about a 'power move'; don't us tech lovers WISH we had one in the Nasdaq Composite (COMP) Index!

Stuck in doldrums of a continued trading range, COMP is at least back above its up trendline dating from the fall. There was of course a good-sized rebound from the low end of COMP's trading range. The 2237 area held, as could be anticipated by use of the charts. But what next(?), since the rally so far was only back up to near resistance around 2315. Well, there was a COMP Open that was above 2314-2315, where we've seen the MOST number of COMP intraday highs. By the close however, it was that sinking feeling again.

Not to fear little bulls, once the speculators get that bullish bit between their teeth, buyers will come in. A Close above 2315 would be bullish on the chart. Next resistance is at the old 2333 high.

I said last week that if COMP could climb above immediate overhead resistance at 2285, there's likely upside potential to 2314-2324 (only) and the weekly peak was 2323.8. Opps, off by .2 on my upper estimate!

Unlike the Dow and S&P, COMP is still well under any overbought readings caused by any sustained or strong upside move. There should be more speculative and investment money going into tech sectors again once we see any encouraging Q1 earnings, but we got a ways to go yet before we start seeing how the first quarter played out.

HOURLY COMPOSITE:

Use of the hourly chart adds some interesting highlights to what is apparent on the daily, such as the near-term double top made around 2320; hey, right back at the Kiss of Death (KOD) trendline. The 'KOD' trendline is when an Index comes back to a previously broken up trendline, which then acts as the opposite of what the trendline represented before; i.e., a 'line' of support 'becoming' resistance.

Or vice-versa, prior resistance, once broken, tends to become support later on a pullback; in which case I suppose I ought to nickname such a trendline, the Kiss of 'Life' trendline or 'KOL'!

NASDAQ 100 (NDX); DAILY AND HOURLY CHARTS:

1700 is key resistance in the Nasdaq 100 (NDX). Near support is at 1675. Major support is in the 1640-1638 area; next resistance (above 1700) is at 1723-1725. Major resistance is at 1760.

I think that NDX has upside potential from the 1675 area of 45-50 points. But, the Index also is captive to the S&P right now. It just doesn't seem likely that Nasdaq stocks will exhibit much independent strength ahead of some positive earnings coming in.

HOURLY NDX:
All the Nas 100 (NDX) has managed so far is a move back up to resistance implied by the previously broken up trendline where it then promptly lost traction.

1720 is the obviously key or pivotal near-resistance. Above 1720, there is upside potential for NDX to tack on another 40 points. Looks like near-support is down around 1660, with major support as said at 1640-1638.

On a short-term basis NDX did touch an initial overbought reading and promptly started falling again. Touch that line and you get fined!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

42 is key near-term resistance in the Nasdaq 100 tracking stock (QQQQ), but look for support around Friday's low, at the 21-day moving average (at 41.2).

A move above 42 seems sure to bring a test of the prior 42.4 (up) swing high. Major resistance begins at 43, on up to the prior high in the Q's at 43.3.


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!

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