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THE BOTTOM LINE:
My last week's Index Trader title should have read 'easier' rather than 'Easter' which is past, but is this bull market past tense now? The selling has been relentless, but curiously, bearish sentiment has not gone up sharply, at least in the way that I measure it with certain call to put options volume ratios.

This lack of real extremes in bearishness suggests to me that traders think there is not a major risk here of sliding into a bear market. But, we need look at this possibility, certainly in Nasdaq. There has not been a more two-tiered market than this one in quite some time.

And, I thought that the 5/24 QQQQ daily volume spike might have reflected a selling 'climax' but that was before Thursday's (6/8) even bigger jump in daily volume. This was on another big down day that carried the stock to yet new lows at 37.5 intraday. The stock then rebounded substantially with the market into the close. However, Friday of course brought more weakness.

To recap generally what I notice as important. Besides the lack of a big corresponding jump in bearish sentiment, which suggests that this market may go still lower, the other key bearish technical developments from this past week are outlined next.

The S&P 500 (SPX) has had a weekly close under its 200-day moving average, for the first time since the October bottom. More importantly to me is that SPX has pierced its long-standing weekly up trendline, going back to early-2003. A close this coming week under 1248 (only 4 points under Friday's ending level) would exceed the December weekly closing low. 1248-1245 is an important SPX 'benchmark' area.

So far, also on a closing basis, SPX has not retraced more than half of its Oct May advance. If the index closes below 1247, my next downside target is to the 1230 area, with 1229 being a 62% retracement; on an intraday basis, it fell to 1235 already. A close under 1230 not reversed the next day, sets up a possible next downside target to the 1170 area of the October bottom. A major trend reversal or bear market is suggested with a close below 1170, especially on a weekly chart basis.

I'll go into the other NYSE related indexes below with my specific major index commentaries.

The Nasdaq Composite (COMP) with its Friday close at 2135 has retraced more than 2/3rds or 66% of the rally from its October low up to its April double top. This suggests a next downside objective that would equal a complete or 100% retracement back to that same October low around 2026 area intraday or 2037 on a closing basis. Nasdaq has no support or potential buying interest you can point to before this area. If COMP stabilizes in the 2150 area, the index hangs on by a thread to still being in an overall uptrend.

The other thing here that is similar to last October is that Nasdaq is now as fully oversold as it was then on a longer-term weekly chart basis. If you got NDX puts, you have to consider the risk of an 'oversold' upside rebound to be greater than the probability of another down 'leg' from here. The S&P is not as oversold as it was in October, or back in May of last year, but it's getting close.

RUSSELL 2000 INDEX (RUT)
I would also note here that the Russell 2000 Index (symbol: RUT) has a long-standing up trendline that has NOT been pierced yet and this trendline intersects in the 670 area currently; bullish hopes are alive in RUT if it can stay at or above 670 this week, at the low end of its broad uptrend channel. One close below 670 doesn't quite convince the heart of the bear, but two does.

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.

I discussed in this past week's (6/7/06) article about how the key moving averages of 21, 50, and 200-days had acted as strong resistance on the rally into the early-June high. Just as trendlines, once pierced, will often act as resistance on a subsequent rebound, so it also with moving averages at key junctures. This article can be seen by going back to your 6/7 e-mailed Option Investor Daily or online, by clicking here.

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:

Bye bye support in the 1260 area, which later developed as resistance on rebound attempts back up to the 200-day average. I take the prior 1248 closing low from January as a key level to watch on a daily close basis.

Possible 'support' implied by a 62% retracement of the Oct to early-May advance is at 1229. SPX has already fallen to 1235 so its gotten close already. There could of course be another shot down to 1229 to 1221, representing the 2/3rds or 66% retracement.

While there could be an eventual move back to re-test the 1170 October bottom, I would look for a rally phase before that. 1260 is the key near technical resistance level, with next higher resistance at 1272, at the 21-day average.

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

The S&P 100 (OEX) Index fell to the 570 area that I thought last week would offer significant support, being at the approximate low end of its multimonth trading range. Prices then slipped further of course, with the Thursday intraday low falling nearly to 566, a fibonacci 62% retracement of the Oct May advance. There was then a strong rebound by the end of the day; this after a lot of sell stops were 'run' below 570 adding to further downside selling as bids and buyers became scarce.

Now what? The chart pattern remains bearish, but OEX is so far holding the low end of its trading range of this year so the question of a new down 'leg' developing is still open, although market momentum is down of course.

A decline again under 569-570 would suggest a possible lower low ahead, to 563. Below 563 to 560, I don't have targets except for the possibility that there would be an eventual re-test of the October closing low around 545.

On the upside, near resistance is at 575 and then at 580-581. 588 is 'pivotal' resistance at the 21-day price average; with its forecasting ability on trend direction. A daily close above the 21-day average, not reversed the next day, would suggest that there was renewed upside potential.

There was no further 'oversold'/extreme bearishness reading after the first one in early-June, as seen in the lowermost indicator in the chart above. There was one dip of my indicator to just under 1.2 at the green dashed horizontal line.

Another such dip in this indicator would suggest to me potential for another 'oversold' rebound, contrary to the bearish expectations at that point.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) came close this past week to fulfilling what I thought could be its lowest low on this move, to 10700-10670. The Dow got to around 10750 this past week and quite close to its early-Feb lows.

I'd look to cover Dow Index puts in the 10700-10670 area, if reached, as there may then be potential for a rebound to the 11000-11035 area after that.

Above 11035-11050, next resistance begins at 11100 and extends up to 1117011200. Only a close above 11200 would suggest solid follow through buying interest and some renewed upside momentum, such that the average might again challenge its prior recent highs just shy of 11,300.

The oversold condition suggested by the low level of the 21-day Slow Stochastic, was a harbinger of Thursday's big rebound off the intraday low. This kind of oversold condition often suggests that while they can keep pushing stocks lower, buying interest can come in very fast also, as most who are going to sell stocks have done a lot of it already; limited buying then can lift the market quite rapidly and carry prices some distance higher.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The 2150 area seems 'pivotal' in the Nasdaq Composite (COMP) index. If COMP continues to sink below it, the index could fall to 2100 again, then back to an eventual re-test of the October low around 2025.

Above 2150, resistance is suggested in the 2190 area, then at 2230, at the 200-day moving average.


NASDAQ 100 (NDX) DAILY CHART:

1520, at the October low, is the key level to watch in the Nasdaq 100 (NDX) if it continues to sink. A close under its prior low, not soon reversed, suggests the intermediate trend has reversed to down and a bear trend gets 'confirmed' technically.

Conversely, a rebound from this area would set up a potential double bottom and I would be quick to cover puts. Below 1520, 1500 should offer some support; it would at least be a 'natural' area for short covering and some bargain hunting buying to come in.

Rallies that develop might not get even to, let along back above, 1600. The low end of the prior trading range at 1633 looks to be a massive supply overhang with heavy selling interest in that area.

Given the oversold extreme in the big-tech segment, I would not only want to exit NDX puts, but look at buying calls if it seemed that the 1520 level was again attracting buying interest. The risk or exit point for such a buy is suggested at just below 1500, with an objective on the trade for a rebound back up to near resistance in the 1587-1590, to 1600, area.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

37.50 is the key area to watch in QQQQ if and when further weakness develops; the week went out on a weak note certainly. Ability to hold this area set up a strong rebound this past Thursday. That old sinking feeling set in again on Friday however!

Below the 37.50-37.35 area, the next 'benchmark' prior low goes back to late-April of over a year ago and that bottom was formed around 34.50, a long ways lower it seems now. However, as with the underlying NDX, inability to hold the prior major low in the 37.50 area in the Q's suggests a reversal in the intermediate to long-term trend.

Immediate overhead resistance comes in at 39.00, then 39.50; finally, at 40. 40.3 offer a major resistance overhang or likely selling interest in QQQQ.

I said this last week, only about the PRIOR high spike in daily trading volume, that..."It looks like that 1-day volume spike noted on the chart above was a selling climax." WELL, one of those spikes might mark at least a temporary bottom!

Good Trading Success!

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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.

Index Wrap Archives