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Index Wrap

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THE BOTTOM LINE:
Easier to figure out the recent bottom area than just how high will be the next rebound but I'll look at that further on. I say 'easier to figure' in that the recent lows in the major indexes were predictable in terms of reaching major up TRENDLINES in the S&P 500 (SPX) and the Nas Composite (COMP), the decline to key downside RETRACEMENT levels and the way some of my KEY INDICATORS lined up; those (indicators) are 1.) oversold indicators like the RSI; 2.) my 'sentiment indicator, which did show a high level of bearishness before the last low (such extremes are nearly always AHEAD of actual lows or highs) for at least the requisite 1-day extreme; and 3.) my Up Volume indicator, which is to watch the 10-day averages of total daily Advancing volume in both NYSE and NASDAQ markets.

I talked last week (5/27) about this later factor of keeping up on, from time to time anyway, the 10-day moving average of advancing volume on the NYSE and the Nasdaq and how, periodically, the 10-day average declines to a 'baseline' amount, which is almost always at or near a tradable bottom.

There's no point in reviewing this again, since you can go back and see a discussion of this topic in my last week's Index Trader column; making it easy, it can be seen by clicking here.

I'll briefly review some of the other technical considerations important to a bottom; these are more or less the reverse of top indications, EXCEPT for the Up Volume measures, which is only good for finding bottoms. Moving averages of total daily NYSE or Nasdaq Declining Volume don't have predictable turning points suggesting tops. Tops are almost always harder to figure out than major turning points on the downside.

Studying what worked for you is important as to assess how your key indicators, study of chart patterns, including trendlines, etc. did in showing you highly tradable turning points or trend reversals. I always encourage traders who follow my column to let me know what patterns and indicators worked in triggering THEIR trading decisions. Those who want to skip this rerun can skip down to the individual chart commentaries.

HOLDING MAJOR SUPPORT (UP) TRENDLINES:

The lead index in the NYSE market, although it has big Nasdaq traded companies in it also of course, the S&P 500 (SPX) had had 2 key long-term weekly chart up trendlines that have developed since the 2003 bottom. It's conventional 'external' up trendline, as well as its less used 'internal' trendline, are both shown on the weekly chart below. SPX pierced its internal trendline connecting the MOST number of lows, but held its conventional up trendline perfectly.

There was a dip under this line, but weekly lows on either side held it perfectly. The one low falling under this line, held support implied by the January SPX bottom as well as support implied by the 'line' of prior highs intersecting in the 1245 area; i.e., prior resistance, once pierced, tends to 'become' support on subsequent reactions. A return to the previously broken internal up trendline in the 1300 area is now the key resistance, as line may act as stubborn resistance.

It's worth noting also the degree to which SPX got down to a longer-term 'oversold' condition at its recent low, as suggested by the 8-week RSI Indicator seen above.

NASDAQ:

The weekly chart below is probably self-explanatory. The weekly support up trendline dating from the 2004 was the one to have watched. COMP came right down to it, and a bit under, then rebounded. I think the index probably has make a significant low, especially given how oversold it registered on the RSI at the recent bottom.

Notice how the recent top came right at the 'angle' of the steeper, broken, up trendline dating from the 2002-2003 bottom. It's amazing how often that rallies can't get back about the prior rate of ascent, which is what a trendline measures.


Recent lows relative to percentage RETRACEMENTS of the prior advance, I've talked about in my last two Wednesday Trader's Corner columns, so I don't think I need to go over that ground again either. (see the article LINK below.) Suffice it to say that the Dow 30 (INDU), which had been leading the market far and away, in 'a solitary walk of the Dow', retraced a 'minimal' 38% of price gain from its Oct. low to its last peak.

Next came the S&P 500 or SPX as well as the S&P 100 or OEX, which saw 50% retracements at recent lows, a common give-back amount for stocks and indices and often marking a low or turning point in a market or stock that had been seeing 'moderate' strength before its correction. Laggards, like the tech-heavy Nasdaq Composite, will often retrace a 'fibonacci' 62%, or a little bit more, namely reaching a 2/3rds or 66% retracement. When they go MORE than that, there is often a complete, or 100% retracement, of the last upswing.

MY WEDNESDAY 'TRADER'S CORNER' ARTICLES:
This regular Wednesday column is my chance to explain technical analysis principles and indicators relevant to the current or recent market action. It also serves as a companion piece to my weekend Index Trader outlook by providing a midweek update on my market outlook.

This past week's (5/31/06) article had the most to say about the likelihood that the recent percentage retracements of the prior advance, were suggesting that the market was ready to be bought again for a rebound, being careful not to 'overstay'. This analysis can be seen here.

OTHER KEY INDICATORS:
Other key indicators, as described above, especially the 200-day moving average, the RSI and my 'sentiment' model will be seen as part of my regular individual Index charts below.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

Good support was seen this past week in the 1260 area, right at the 200-day moving average and where institutional money managers would be inclined to support stocks and have some buying interest. I'd continue to peg 1260 as key support; below hat at the prior double bottom low at 1245-1246.

First resistance is at 1300; above 1300, at up near the 1320 area, or back at the previously broken up trendline.

I think that SPX could work its way back up to the low-1300 area next, maybe a bit higher, but not beyond 1320 in coming days. It will take some time to repair the technical damage cause on the recent sharp decline. On the plus side was the jump seen by week's end in bearish 'sentiment'. Options traders, like investors tend to look in a rear view mirror. They're getting prepared for the next decline, now that the one they should have been ready for is OVER.

The market is oversold enough so that the odds favor at least a sideways to higher bias to prices.

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

The S&P 100 (OEX) Index, like the 500, held its decline to a 50% give back or one-half retracement. It looked like things were going to fall apart again last week but that was typical 'head fake' for the bears.

It was bullish for OEX to have held above its prior low. Now a key overhead test is ahead, assuming stocks can gain some traction with the recent negatives out there. I don't think that there is huge downside risk, but the Index will have a tough time getting back above 590-592.

Support can be expected around 582. Fairly major support looks to be at 575. I suggest paying attention to hourly charts as there is an emerging uptrend developing that can be seen in better detail on the 60-minute chart.

It would be bullish sign for OEX to get, and stay, above 592; then, to work above 595.

Along with the RSI low extreme, the really good bottom indicator was provided by US option traders as there was a 1-day bearish (5/17) reading that suggested a bottom could be close; i.e., within 1 to a few (5) trading days.

Friday's rise in put purchases in equities options, relative to call activity, constitutes another suggestion of limited downside risk in the days ahead and is what put my sentiment model into bullish territory. This is not likely suggesting that the market will continue to rebound at the same rate as seen from the recent lows to Friday's peak.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Now, the Dow 30 (INDU) is lagging as those stocks have been over-done and fund managers will be looking for stocks more undervalued then the leaders of thus pack of 30 stocks.

Key resistance is in the 11300 area, at the 21-day moving average and at resistance implied by the previously broken up trendline or the 'KOD'(Kiss Of Death) trendline. Stay tuned on that! Next resistance is at 11400. I don't think INDU will make it back above 11400 anytime soon.

11100 is key, and must-hold, support especially on a closing basis. The Dow is bullish in its overall pattern no doubt as it has put in a solid double bottom low to date, as it found support in the area of the April lows around 11060.

The 21-day Slow Stochastic, while not an 'exact' timing model to buy DXJ options or anything, is very reliable in showing you where to watch the charts CLOSELY for signs of just such things as double bottom lows.

A bullish chart pattern like a double bottom low, when also accompanied by an oversold extreme as suggested by the lows seen in the Stochastic model above, offers one of those few yearly opportunities to buy a bit more heavily, looking to trade out of a third of those options, as soon as the upside momentum slows.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Resistance in the 2230 area, at the 200-day moving average, than at the prior 'breakdown' point at 2240 are key near-term upside testing points for the Nasdaq Composite (COMP). A couple of days of closes above 2240 would suggest COMP could work up toward some higher resistances, especially at 2300. A reverse Head & Shoulder's bottom on the HOURLY charts (not shown) is encouraging for the bull case, but only implies limited upside potential, such as back to 2280 to 2300 area. 2300 is going to be a touch resistance cap on future rallies.

Support developed recently in the 2175-2180 area. As long as the Composite stays above recent lows around 2160-2165, at that important long-term weekly up trendline discussed above, I dont see big downside risk. But there is likely going to be a lot of backing and filling ahead. The uptrend momentum seen in March is not going to come again anytime soon.

NASDAQ 100 (NDX) DAILY CHART:

There is a cluster of Nasdaq 100 (NDX) resistance points that begins around 1630 and extends up to the 1650 area, at the 200-day moving average. 1680 is about the best I would expect anytime soon in NDX.

Trade the OEX, as this index is going to be tougher going to try to eke out some winning trades. I would be interested in NDX puts perhaps in the 1680, to 1700 area. Entry points can be narrowed down more later on.

A down trendline (not shown; sorry, forgot to draw it!) intersects currently at 1680. A straight edge on the screen does as well as anything. Better than open match books on cocktail napkins formerly and probably still favored around Wall Street watering holes.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

QQQQ has to regain 40.3, then do the neat trick of staying above this level, to get me interested in owning the stock. I only see slow upside potential back up to the down trendline around 41.30 currently.

Good support should be found on any pullbacks to the 38.50 area.

It looks like that 1-day volume spike noted on the chart above was a selling climax. Now the repair process begins and don't look for anything but slow labored upside chugging. The most significant chart feature is the massive top overhang that was traced out over the first half of this year.

Good Trading Success!

Please send any technical and Index-related questions to me at Click here to email Leigh Stevens 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!

NOTES ON 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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