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Index Wrap


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I don't see a whole lot more downside potential here based on the most recent week's price action, just more of a sideways drift. Volatility has dried up such that I have 'narrowed' my 21-day percentage envelopes for (above/below) the Dow and S&P, to 1.5%, from a more typical 2.5 to 3%. Haven't done that in some time!

The question in my mind is whether the S&P 500 (SPX) will complete a second 'leg' down, after breaking its trendline by at least tracking back down to the 1270 area. The equivalent level in the S&P 100 (OEX) is down to 578-580. What way is hard to say!

The Dow 30 (INDU) which has been the lead blue chip index, found support at its longstanding up trendline on its recent reaction low (11053) and only a break of 11100 would suggest that it would test key support 100 points lower at 11000. The blue chip indexes have not violated their dominant uptrends. SPX would have to retreat to below 1268 intraday and a 1272 Close, to do that.

The question on the Nasdaq is whether the Nasdaq will follow the S&P at some point to a similar downside trendline penetration as occurred already with the S&P. The Nasdaq 100 (NDX) could retreat to the 1680 area (from 1712) and still maintain its bullish trendline. The Russell 2000 (RUT) has held near support at 740, but might yet test the low end of its uptrend channel at 732-733.

The Nasdaq has had the best recent relative strength of the indexes. Since we've seen the Nasdaq and NYSE markets play leap frog, first one leading then lagging and vice versa, Nasdaq may yet be vulnerable.

The best thing that I can do here is look at each major index chart in turn, including the hourly chart patterns. When the patterns are not so easy to read on a daily chart basis, the hourly charts usually help fill in some added details.

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.

This mid-week article, besides explaining technical analysis principles and indicators relevant to current/recent market action, also serves as an adjunct or companion piece to this weekend Index Trader outlook by providing a brief midweek update on my market outlook.

This past Wednesday's Trader's Corner covered Moving Average Envelopes, an Indicator related to moving averages and which completed several prior articles on the use/usefulness of moving averages in general as well as the different types used.

This past week's (4/12/06) 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.


I suggested last week that the S&P 500 (SPX) uptrend was intact as long as it holds the 1290 area, where it did close out the week. I was thinking of SPX's holding at or above its Oct-Mch up trendline, which the Index in fact penetrated. This suggests further downside potential unless SPX regains 1295, then 1300, in which case SPX could climb back to retest the 1315-1317 highs.

Downside potential looks to me currently as limited to around 1270. A close under 1272, not reversed the next day, would suggest a more bearish outlook than I'm suggesting here. Major support is at 1255-1260.

The Index has gotten as 'oversold', as measured on a 2+ week basis, as it did when the last rally developed. Sinking lower from here would put the RSI closer to a fully oversold extreme.

The S&P 500 reached the low end of its hourly downtrend channel last week, but could sink again to the 1280 area, at the lower end of this channel. As noted on the hourly chart below, there's a band of near resistance at 1292 to 1295.

A close above 1295 sets up a move to test next resistance at 1300. A move above 1305-1306, at the top end of the downtrend channel would create a bullish breakout of the current short-term bearish pattern.

The recent low reached the kind of oversold reading on hourly RSI where rallies tend to develop, suggesting upside potential back up the 1300 area perhaps.

The chart pattern is bearish with the break of the Oct-Feb-Mch internal up trendline. An internal trendline connects the most number of lows or highs, so some extremes penetrate such lines.

I discussed the possible bearish 'wedge' pattern seen on the S&P 100 (OEX) daily chart, which suggested waning upside momentum, which is the way it went for a while but OEX stabilized from Tues on last week by going sideways. I look to my lower (green) envelope line as the low side of trading ahead; i.e., the level at which prices are 1.5% below the 21-day moving average. This area around 580-578 is also where the early-Mch rally set up. A close under 579 not reversed the next day sets up a possible downside target to around 570.

Ability to regain and stay above 588 would be bullish, suggesting potential (again) back up to test resistance apparent at 595-597.

Besides my Up Volume Indicator (not shown) coming down to an area where it tends to bottom, trader sentiment has improved in that the level of bullishness is coming down. Another shot down in prices would likely generate a (contrary opinion) bullish reading down near what I label as an 'oversold, overly bearish' extreme. Those conditions are where I would like to buy OEX calls again.

580-582 shows up as support on the hourly chart. A close under 579 suggests more than a pullback within an intermediate uptrend. [Such a close, not reversed the next day, would suggest that the intermediate trend was turning down.]

590-591 is resistance implied by the top end of the current downtrend price channel. Above this, 594-595 looms large as the next key or pivotal technical resistance.

I wrote last week about a possible next leg down in the Dow 30 Average (INDU) (the 'c' part of an a-b-c decline) with a downside target to as low as 10900. However, this interpretation is only valid so to speak if INDU penetrates its up trendline currently intersecting at 11080 (at the green up arrow).

This past week's low reversed right at the aforementioned up trendline in 'picture perfect' technical action, which is the way in fact that the Dow has been trading; i.e., very 'technically'. Even if 11080 (at the up trendline) is pierced, it would take a further decline to under the prior downswing low at 10964 or a Close below 10958 to suggest anything like a 10900 objective.

Immediate overhead resistance is at the minor down trendline at 11230, as marked with the first down red arrow. Major resistance is at the top end of the uptrend channel at 11450; well under this level I should note resistance implied by the cluster of prior INDU highs in the 11315-11330 area.

The Jan-Feb-Apr hourly UP trendline intersects currently around 11070 and suggests potential support. Support below here is anticipated at the low end of the hourly downtrend channel around 11030 currently; this 'line' then falls over the coming week and by week's end intersects around 11090, the same area implied by the daily chart up trendline.

The first resistance 'breakout' point is at 11180 at the beginning of the week; and at 11250 anytime.

I find a 30 reading on a 21 'length' setting for the hourly RSI to be a reliable area to look for a short-term rebound, which is the way it went last week. As of yet the pattern doesn't look all that impressive for a move above INDU's hourly downtrend channel, but stay tuned for more unfoldings on the Street of Dreams!

The Nasdaq Composite (COMP) Index is maintaining its intermediate uptrend, especially after the low of this past week held key trendline support. Support was found (at 2303), between the technical supports I noted last week at 2316 and especially 2295. Current trendline support is suggested at 2305-2308.

The rebound from this past week's low has so far stopped shy of near-term and pivotal resistance that keeps showing up around 2333 in COMP. A short-term bullish turnaround is implied by the ability of the Composite to close above 2333 and then find support in this area on pullbacks. The hourly chart next will allow us to better key in on higher resistance.

Beside the immediate pivotal 2333 resistance going back to January, significant next resistance has been seen on COMP rallies carrying to the 2360 area. Resistance then extends to the top end of the hourly uptrend channel, intersecting currently around 2380; and a long way from the 2325 Thursday close.

Near support is implied by the hourly up trendline (at the green up arrow) at 2310-2315. If there is another decline that carries under the hourly support trendline, COMP may retest 2282-2285 support.

The Nasdaq 100 (NDX) remains bullish in its overall pattern. NDX held pivotal support at 1700 this past week, at the minor up trendline and also implied by the 21-day moving average.

Below 1700, key support is at 1680, at the major Oct-Mch up trendline. If the last downswing low at 1660 gave way then 1640 is a possible target. For areas of proven or likely overhanging resistance, a look at the hourly chart is next.

This past week's rebound off the lows carried only to, not above, the band of resistance seen in late-January at 1717-1721. Sometimes resistance levels get very defined like this.

I would consider any daily close above 1720, not reversed the next day, as a bullish near-term breakout. If so, NDX could again test the cluster of prior hourly highs around 1741-1745. Resistance implied by the top end of the well-defined uptrend channel is now closing in on the early-Jan 1760 top.

Key overhead resistance in the Nasdaq 100 tracking stock (QQQQ) remains 43.0, extending up to 43.2-43.30; 43.3 of course is the prior high dating back to January, then all the way back to late-2001/early-2002.

41.75 remains key near support, with a break of this level suggesting downside potential to the 40.85 area, at the prior (down) swing low. 40.2 is major support implied by the low end of the multi-month trading range.

As long as the Q's maintain a weekly close at or above 42, there's reason to believe that there could be a new multiyear high made above 43.25-43.3. Certainly, there is a potential broad 'base' of support being established in the low-$40 area. Assuming a major top is not forming around 43! Stay tuned on this.

Daily trading volume fell on this most recent decline, which supports a bullish technical outlook.

A look at the hourly chart is of interest for a view of the uptrend channel that's developed over the past month. If QQQQ was to again gain traction for another substantial move up toward the implied upper end of this channel, there would be a new high made around 43.45 or higher, before the stock might again fall back some. We'll see, won't we!

A line of prior support is apparent at 40.85-41.0 and my current 'worst case' downside expectation if the trendline gives way.

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!

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]
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