Option Investor
Index Wrap

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THE BOTTOM LINE:
The lead Dow 30 (INDU) blue chip average, along with the S&P 100 (OEX), and the S&P 500 (SPX) are starting to drift sideways and could be forming minor tops. It's hard to say on the question of whether such apparent minor top patterns are anything but 'minor', since such 'indecision' or sideways trends are often seen ahead of the next quarter's spate of earnings announcements with a breakout if earnings are ok to good.

This sideways drift is of course difficult for the holder of long index options, which is why I tend toward buying em when (hardly) anyone wants em, as long as that's near a key support/resistance area, and exiting when the market stops running.

My crystal ball is cloudy on what happens next. It's necessary to wait for a breakout or breakdown, so I am going to be watching as to what happens at the pivotal support and resistance levels highlighted on the charts below. Since short-term sideways type moves are often 'consolidations' within the intermediate to long-term trend, give the benefit of the doubt to a renewed upside pull once earnings come in.

Bullish sentiment has moderated, which is a plus for a renewed push higher later on. A sideways drift also tends to 'throw off' the overbought readings in those type indicators; e.g., stochastics, and the Relative Strength Index (RSI).

I am not a fundamentalist per se, but I do have an opinion, which is not based solely on the charts and technical indicators. My thoughts on the economy continues to be some concern about the dollar holding up and especially whether job creation (more so with housing slowing) is going to expand enough to bring in substantially more consumer spending which accounts for so much of our GDP (unlike China); enough so that there would be a next strong up leg in the Market. Guess we're all waiting on more news and more on key economic trends...hence the pause.

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 finished up on the use, best use and 'abuse' of moving averages. I focused on the use of key moving averages as support and resistance. I use the 21-day moving average a lot and it often defines, by whether the indexes are trading above or below the average, whether (price) momentum is up, down or sideways; i.e., trading back and forth not far above/below this average tends to reflect a sideways trend, such as has been the situation for some weeks in the Nasdaq.

This past week's (3/22/06) 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:

It's important for the S&P 500 (SPX) to now stay above the prior double top around 1295, which is now key near support in my estimation. 1312 is near resistance, at the trendline formed by connecting recent highs with the January peak. A breakout would occur with a close over 1312 not reversed the next day. At that point, a next move higher could carry to the 1330 area.

1286 is support implied by the dominant multimonth up trendline.
A bearish break would be a fall through 1295 initially, but especially below 1286. The intermediate-term trend would only reverse lower on a close under the cluster of prior (down) swing lows at 1270.

The RSI is starting to fall back from its move up toward what is typically 'overbought' for this Index. A basically sideways move of 1-2 weeks more will 'throw off' the minor overbought situation reached at the recent SPX high.

HOURLY SPX:
It's usually worthwhile and an aid to trading index options to pay attention to the upper and lower parallel channel lines when the various highs and lows form a well-defined channel like the one below on the hourly chart.

At a minimum a well-defined channel like this one makes it easy to figure technical support or resistance and to see where there's a breakout one way or the other; up or down.

Resistance is at 1315 in the near-term, at the top of the channel; near support is at 1283, at the low end of the uptrend channel. Looks like SPX could be headed toward the middle to low end of this channel as it makes a pattern of recent lower highs.


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

595 remains the key immediate overhead technical resistance in the S&P 100 (OEX). Assuming an upside breakout above 595 not reversed the next day, I figure the index's next upside potential as being to 604-605; ultimately to 615.

588 is pivotal near support; if OEX resists falling below this level, the top of the prior trading range, the Index looks like it should work still higher. Below 588, trendline support implied by the current intersection of the OctFeb up trendline is at 583. A close under 580 would turn the intermediate trend lower and downside potential could then be to as low as 570 again.

My 'sentiment' indicator has been falling and this is works more in favor of an eventual further advance. This indicator doesn't 'predict' it (the index heading higher), but doesn't work against it so to speak.

Given that OEX got to an overbought reading and is working sideways to a bit lower since then, the Index could certainly fall some more and would be a typical pattern; going from overbought to at least midrange in the RSI. The Index may come back to its up trendline again. Stay tuned on this!

HOURLY OEX:

The OEX hourly chart pattern is of interest and the chart below highlights a well-defined uptrend channel. A question is whether the Index might not work down to the low end its channel again.

Key support is suggested at 585, at the low end. Pivotal upper channel resistance intersects around 598 currently.


DOW 30 (INDU) AVERAGE; DAILY AND HOURLY CHARTS:

Resistance is suggested for the Dow 30 Average (INDU) at 11360 at the top end of its uptrend channel per the daily chart upper trendline shown below. Technical resistance extends up to 11400 in the Dow.

Near support is at 11100, with major trendline support at 11000. A close under 11000 would be bearish.

Study of the hourly chart further on suggests that INDU might be forming a short-term top and could fall somewhat further, although still within an overall uptrend.

Given that the Dow is at the top end of an apparent channel AND reached an overbought 21-day Stochastic reading, the odds favor more of this recent sideways to lower action. It has been commonplace for at least a 200-point pullback (from high to low) once the Average traverses in this overbought area long enough.

HOURLY INDU:

The hourly chart shows a rounding top pattern, with resistance implied near term at 11300. 11100 is important support. I would not be surprised to see the Dow back down in this area and would offer a buy point in DJX calls. I rate the odds as significantly less for a pullback to the next lower trendline support at 10950.

The sideways trend is enough to put INDU back down closer to a short-term oversold reading on the hourly RSI. Maybe it won't go much more than sideways. Watch for a break below 11240-11220 for signs of further weakness.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

We're in the doldrums, we're in the doldrums ...sung to the tune of 'in the money'! Well, there is still a sideways movement, but tech sectors have perked up this past week.

On the bullish side the Nasdaq Composite (COMP) Index is holding above its 21-day moving average lending some hope, now that the Nasdaq finally is playing some catch up to the S&P, that it could break out to new highs above 2333. A close above 2333 not reversed the next day would suggest upside potential to the 2370 area. Absent a breakout above 2333, COMP remains stuck in its trading range.

COMP will stay above its up trendline as long as the Index holds at or above 2275. The 2235 is major support and the low end of the multimonth trading range for the Composite.

Unlike the Dow and S&P, COMP never got to an overbought reading according to the RSI Indicator. The RSI is showing minor upside momentum again. Tech stocks seem a little more attractive to money managers as some of the key Nasdaq stocks got down into and appeared would hold support areas.

NASDAQ 100 (NDX); DAILY CHART:

As was the pattern for months now, the Nasdaq 100 (NDX) tags along after the Composite, not leading the broad Nasdaq index. Key resistance remains at 1700-1705. A close over 1705 is needed to suggest the prior 1723 high could be re-tested. Major resistance begins most likely around 1740, extending up to the prior 1761 high.

For the bulls it would be good to see a rally LED by the Nasdaq 100, rather than all the little companies that made up the broad based Composite. Leadership by the NDX would suggest that the big tech companies were doing better and could help in a sustained market advance.

Google (GOOG) has been added to the S&P 500 index, so its recent rebound aids both NDX and SPX. Actually, the stocks sharp Friday advance was CAUSED by its inclusion in SPX, as index funds bought the stock.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Boringness! The 42.0 level remains immediate overhead resistance in the Nasdaq 100 tracking stock (QQQQ), with next resistance at 42.4; major resistance begins at 42.70-42.75 and extends up to the previous 43.3 high. I see nothing yet suggesting that QQQQ can or will break out of its relatively narrow range. At least holding the stock doesn't mean that option premiums are eroding in this sideway snail race.

Near support is at 40.85-40.75, with intermediate support 40.2, which has been the low end of the Q's trading range.

Daily trading volume numbers continue to be low and there seems to be a lack of enthusiasm or excitement for the prospects for the Nasdaq 100 stocks. I don't know what will cause a shift, but we'll see what announced earnings do for/to this situation next month. I'm going to take a trip myself and change scenery.

Good Trading Success!

** SUBSCRIBER MAIL **
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