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Index Wrap

KEY REVERSALS

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THE BOTTOM LINE:
My definition of a 'key reversal', typically suggesting a countertrend move to follow and worth being in for a trade, is exactly what happened at week's end in all the major indexes including the Russell 2000 (RUT). A key DOWNSIDE reversal is by my definition a move to a new 1 or 2-day high, followed by close under the prior 1 to 2-day LOW.

Key downside reversals also tend to occur in an advance that has been underway for a few days to a few weeks. This pattern is only rarely a short-term event. After a key downside reversal, as with a key upside reversal, the dominant trend doesn't often just immediately resume; so, I rate it unlikely that the market will immediately rebound other than short-term 1 or 2-day affairs.

Technically it will be important to watch whether key support (up) trendlines that are now close by in the S&P and Dow are pierced. If so, this will suggest that the correction is deepening, consistent with the idea of a 'key' downside reversal.

It was noteworthy that the reversal in the Nasdaq 100 occurred after that Index finally got 'fully' overbought; in the case of the Nasdaq 100, the Index reached my upper trading envelope line; akin to saying it reversed with it got really really 'overbought'

Now matter how great the pundits and government spokespeople say the economy is doing, the market doesn't act like it's clear sailing looking 6 months out. How much can the prospect of higher rates spook investors? Quite a long time it seems, or at least as long as the Fed keeps raising rates to deal with what it sees as negative inflationary tendencies and trends.

In the last couple of weeks I talked about the Dow forming a definite top. This average had been leading the market, so chances were good that it would foretell a correction in the other indexes too at some point.

Once the Nasdaq Composite caught up with its own move to a new high and an overbought situation, like the Dow and S&P before it, this sector may also ended up falling to a test of important technical support at its multimonth up trendline. Such a Nasdaq test would occur at significantly lower levels, unlike the S&P and Dow, which are closing in on their key up/support trendlines as will be seen on their charts.

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:

Even though it went on to make a nominal new high, as I suggested last week, the S&P 500 (SPX) looked like it would stay within an overall trading range and faltering upside momentum. Friday's move to a new high followed by a sharp decline and new low close for the week, smacks of a key downside reversal.

Nevertheless, SPX's uptrend remains intact as long as it holds the 1290 area. A close under 1290 would suggest downside potential to the 1270 area. The 1310-1315 area remains the key overhead resistance.


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

The S&P indices, especially the S&P 100 (OEX), is tracing out a possible rising 'wedge' pattern, which tends to be bearish and suggests that bullish control may be slipping. A rising wedge forms when the two trendlines drawn thought the various relative highs and lows narrow in to an apex. Such an upsloping wedge or pie shaped pattern can portend an end to a bullish trend. Time will tell on this.

The key aspect technically is whether further weakness drives OEX below its support up trendline currently intersecting at 585. All the foregoing is speculating until and unless the up trendline gives way. Absent that and if a further low rebounds from the trendline, the trend remains bullish. The strongest pattern is that a drive to new highs holds on pullbacks, rather than get pierced which happened here.

If 585 is pierced, 578-580 becomes a downside target again and must hold support, in terms of OEX remaining in an uptrend. Key overhead resistance is at 595-597.

Similar to what I noted last week, slippage in the OEX below 588 isn't consistent with a strong bullish chart. As said, the key up trendline intersects around 585 currently. This trendline connects the most number of lows for the prior 6 months.

Bullish 'sentiment' shot up early in the week, but wasn't predictive for the weak ending. In this market, peaks in bullish leanings have not suggested anything like a break out move or new up 'leg'.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) also had a key technical/chart reversal and the current pattern is looking more and more like an a-b-c correction in 'wave' terms. That is, within an overall uptrend, a 3 component down-up-down pattern.

The key thing with a corrective a-b-c pattern is that the last down swing 'c' tends to be longer than the first ('a'); often somewhere between 1.5 to twice that of the first downswing. In 'wave' terms, this is sometimes 1.6 of the first decline ending at point a, setting up a possible objective to the 10900 area.

However, the foregoing musings are a speculative interpretation of the chart and its tealeaves until and unless trendline support gives way at 11055. 11200 now looks like immediate overhead resistance in INDU.


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

My objective in the Nasdaq Composite (COMP) Index, once the Index cleared resistance around 2358, was met by the move to the 2375-2380 area as I noted last week. The downside reversal followed COMP finally getting close to an overbought reading in the RSI Indicator.

Support is suggested first at the 21-day average around 2316, then key or pivotal support at the up trendline around 2295, the area noted by the green up arrow.

I should mention potential near support at 2333 at the prior high; in the strongest advancing trends, prior highs or prior resistance once exceeded, 'becomes' support later on during pullbacks.

Key resistance is in the 2360 area. A daily close over 2360 and not reversed the next day, is needed to suggest ultimate next upside potential to 2395-2400.


NASDAQ 100 (NDX); DAILY CHART:

The Nasdaq 100 (NDX) suffered a key downside reversal this past week after the Index reached my upper trading envelope, representing a price that was 3% above the 21-day moving average. More important technically was that this high was right at technical resistance implied by the intersection of the up trendline extended from the February and early-March highs.

Speaking of trendlines, key support is defined by the intersection of the lower up trendline at 1700. Should NDX fall under 1700, an objective to the 1660 area looks possible.

The Nas 100 Index reached the 70 RSI level on Thursday, which is my usual definition of 'overbought'. Seemingly right on cue, a sharp pullback developed immediately thereafter. This is not often seen but not that surprising either; especially in a market that seems not quite to have major league bullish underpinnings.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Not much to add about the Nasdaq 100 tracking stock (QQQQ). It finally hit 43, which was seen as a key area of selling interest. No chance for it to get beyond the prior 43.3 high. The NDX tracking stock was too overbought at that point.

Near support is at 42. Key or pivotal support is at 41.5-41.6 currently, at the intersection of the up trendline and the area of the 21-day moving average.

Volume jumped some on Friday's decline, but not dramatically so. This reversal I'm sure is not yet seen as leading to a decline say all the way back to the low end of the broad trading range dating from December in the low $40's.

Good Trading Success!

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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.

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