Option Investor
Index Wrap


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THE BOTTOM LINE: As much as they might diverge at times, sooner or later the Nasdaq and the S&P indices start to come back in line. The S&P and Dow remain bullish in their (chart) patterns, but the upside looks limited and they are approaching an overbought condition.

The S&P 500 (SPX) has potential to the 1320-1322 area, maybe to as high at 1327. The 100 (OEX) which was trying to break out to a decisive new high (it did achieve a slightly higher intraday and closing, high) on Thursday and Friday, looks to have upside potential to around 605, assuming it can manage to a rally to as much as 2% over its current 21-day moving average.

Two percent, in terms of a percentage 'envelope' relative to its pivotal 21-day average, has been where the Dow 30 (INDU) has been topping out. Currently, INDU looks like it could reach the 11500 area, resistance implied by the top end of its uptrend channel.

The Nasdaq Composite (COMP) and the Nas 100 (NDX) are looking vulnerable to a further drop. They appear to be in a 'classic' down-up-down ('a-b-c') correction; the pattern is component price swings that are down, then up, then down again as part of an overall downside correction.

A second down leg in this pattern tends to tends to be a further drop than the first decline peak to trough, suggesting downside potential to the 2280 area in the Composite; this assumes that important support at 2300 doesn't hold. If NDX breaks minor trendline support at 1690, I don't see any real solid technical support before the 1660 area.

So, while the S&P and Dow charts remain bullish, it looks like they are nearing resistance and have limited upside potential from here. When the Nasdaq reaches a next bottom, wherever that is and the S&P is 'extended' by reaching technical resistance; e.g., top of uptrend channels, etc, the likely outcome is that the S&P and Dow will retreat and the tech-heavy Nasdaq will rebound. There is a lot of 'fast' hedge fund money sloshing around it tends to go into whatever is undervalued and starts to move. Meanwhile it gets pulled out of what had been running.

Oh, for the ease of the futures markets where you there are often special 'spread' margins and it's easy to be short one major index and long the other. Speaking of the futures markets, have you been reading/hearing of the amount of speculation by hedge funds in the oil futures markets? Quite a lot.

And, some talking 'head' (media pundit) was saying that this is an 'inappropriate' use of the oil futures markets which, he implied, was a hedging market (oil futures). Hello! I got news for him; there wouldn't be a market without the role of speculators. And, speculators 'speculate', hedgers 'hedge'. Of course when the speculators drive up prices all the USERS of the commodity have to lock in prices for the next one, two, or three months or longer. What's new is that the collective money in so-called hedge funds dwarfs any prior period of speculative pools of money that traded in futures.

The sell hedgers active in the New York crude oil futures market, which would be the major producing countries, are probably not looking to lock in current high prices (by short selling) quite as actively, but they do have their collective effect. Oh, those gas prices and with summer close at hand. Road trip, yes, or no, that is the question.

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 the way that I construct a 'sentiment' indicator, which you will see under the OEX chart further. The spike down in sentiment to more apparent bearishness, suggested at midweek that there was more UPSIDE potential to come. The topsy-turvy theory and I think 'reality' of contrary opinion suggests that when traders get predominately bullish or bearish, the market does not go in the expected direction more often than not.

This past week's (4/26/06) 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.

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. Yes!


I sometimes can't get beyond the similarities of this pattern in the S&P 500 (SPX) to a rising 'wedge' which is where there are two rising trendlines both through the tops and through the various market bottoms; both trendlines in a wedge pattern narrow in toward a convergence (an apex).

If the converging lines were further apart and steeper, it would look the most like what's called a rising wedge, which often has a bearish outcome. With a significant downside trend reversal as the 'compression' of buying and selling, the narrowing price range, causes a downside breakout. When they can't take em up, they take em down so to speak.

Nah, probably not, but every time I look at the chart, some little voice in my head says 'look out'! Good thing I am a (predominately) short-term trader of index options. Right now I have no position to speak of, not caring much for these low volatility periods, which suit some, just not me. We don't have to trade when things go quiet. In fact I seem to remember an saying (from the commodities markets) about "never trade a 'quiet' market".

As I noted already SPX is coming up toward its upper line of technical resistance. This assumes that the 1320 area, where this trendline intersects currently, will be a stopper or slow down any upside progress. I think it will.

Near support is at 1295-1296 currently, with the most significant support in the low 1280 area. I don't see SPX is moving yet out of a price range between the low 1280's and the 1320-1325 area anytime soon. The pattern of higher highs is a plus for the bulls. I don't discount upside potential, but that upper trendline just overhead, has been holding steady over several rally attempts. Noticeably so.

What we're seeing for the past few weeks is still more or less a broad sideways or lateral trend if you don't get too focused on the nominal new highs and look at where most trading has occurred. Marking time.

Speaking of nominal new highs, the S&P 100 (OEX) managed to break out to a new high. Its pattern however is where the use of the work 'decisive' is a good descriptor. There was sure not a decisive new high as part and parcel of what I've heard in fact called an 'indecision' pattern. I don't use that term as it's not standard technical nomenclature but it does have a certain ring to it, even if its dull flatness!

That all said, the chart is more bullish than not in its pattern as price consolidation has occurred at and above the 21-day moving average. Moreover, since the initial up thrust, OEX has given little back and prices are close to getting beyond the idea that we might be seeing a double top in OEX.

A close above 598 would suggest that the Index was heading at least for a test of 600 with potential to 605. I started using an upper trading band of 2%, which I'm using on the Dow. In the OEX chart below, I show the two envelope lines, one at 1.5 the other at 2 percent. If the upper band were reached around 605, OEX would be at risk for at least an interim top.

I also mentioned already the sharp dip in my sentiment indicator, caused by a sharp pick up in put volume one day this past week. A 1-day reading is all I need to suggest that traders took on a too-bearish outlook or were prematurely bearish when the market has still been quite buoyant. Sure enough, the next day saw prices come back strongly by the close after some earlier weakness.

OEX looks headed higher such as to at least 598-600. If the index got above 600, I would exit any call if 603-605 was seen, since I don't see all that much more upside ahead. Whereas OEX could easily fall back to its main support (up) trendline support around 585.

The Dow 30 Average (INDU) target is unchanged from what I wrote a week ago, up to the 11500 area. I don't have any near-term targets above this area currently.

I feel like whatever that word is for feeling you've been here before, but near support is exactly as it looked a week ago, in the 11250-11300 area, with major support around 11100. 11130 looks like the 'must hold' or pivotal trendline support.

I suggested taking profits last time on DJX May calls if there was a move to the 11500 area and this advice is unchanged. I'm tempted to say to consider puts in this same area, but let's see how it unfolds anyway to see if INDU has a 'predictable' further rally up to the 11500 area.

Near support is at 2320, then 2300. The pattern is neutral (sideways) to bearish, but the up trendline remains intact as seen in the chart below. 2280-2282 is 'must hold' technical support.

The bearish technical aspect of the chart is the possible double top at 2375. COMP has retreated quickly from this area. However, I mostly see this pattern as a trading range, so yes highs will and can be made multiple times in the same area.

My view is that we're in trading range market here too in Nasdaq, not all that different from the S&P although there, the S&P keeps expanding the top of its range, whereas the Composite is quick to fall back toward the low end of its approximate 90 point range.

The Nasdaq 100 (NDX) pattern has turned near-term bearish with the last rally making a lower peak than the prior advance. However, the uptrend line is intact and there has not been a lower low, which is what it would take to turn the intermediate trend down.

As I wrote when I started, the key short event to look for is whether NDX can continue to find support at the Oct. - Mch. up trendline, which intersects in the 1690 area.

As I said, there is no 'natural' area of support before NDX 1660 area. Looking at what it would be to have a one half or 2'3rds retracement of the last rally in the Index; for example, back to 1694, which is about where it got to already this past week and where it found good buying interest on Thursday; this is also the approximate area of trendline intersection.

Near resistance is at 42.50 to 42.3 in the Nasdaq (100) or NDX tracking stock (QQQQ). The up trendline seen in NDX on the Q's chart shows up at 41.7 in the Q's so looks to be an area to watch, but the pivotal support is 40.85-41.0.

It looks there could be another dip to 41, maybe even back to the 40.25 area. No suggestion on buying but if I wanted to get in would buy at 41 if reached, risking to 40.6, with an objective back to 43.

The last big volume jump was on Thursday's strong rebound, so volume suggests that the bulls are still in charge. There is some apparent lack of bullish conviction by would be investors, but that does not, has not translated into a significant bearish camp ready to press the short side of the stock.

Good Trading Success!

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