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Index Wrap

MEA CULPA + CAPITULATION AND THE RECENT BOTTOM

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THE BOTTOM LINE:
The phase 'mea culpa' which most of us have heard at one time or another translates from Latin as 'my fault' or 'my blame'. It certainly was! My most recent 'mea culpa' relates to my Wednesday Trader's corner article. As I say pretty much every week, this regular Wednesday column is my chance to explain technical analysis principles and indicators relevant to CURRENT market action. No matter how timely, brilliant, insightful, or any of these self-congratulating words, the article/analysis in order to be of any darn use to YOU, has to be SEEN!

In error I sent my 010406, first week of January, article into our production crew rather than the correct 101406 article. Due to some other production hiccups going on, the newsletter didn't get out until the wee hours, so I didn't see my mistake and get it changed on the web site until the following day (Thursday).

Doubtful that many readers of this column saw the corrected article on the web site. My 6/14 charts were up but amongst my January commentary! I recommend the review of my 'capitulation' article as the FIRST PART of my Bottom Line commentary, by going to it on the web site: it can be seen by clicking here.

The term 'capitulation' relates to a final emotional selling, or buying, climax. In the case of a selling climax, it is where some of the last holdouts owning stock, or options or futures, throw in the towel or give up the ghost and SELL. They 'capitulate' to the seemingly relentless decline. Get me OUT! eases the pain of loss but sometimes it's only a short time before the 'kick me' phase starts when the market surges back to the upside. This is a major reason WHY prior bottoms find good buying interest, as traders who sold out in that area are back BUYING this time!

Technically, the tip off to the bottom, included the backdrop of a (finally) fully oversold condition, a bullish price/RSI divergence in the case of SPX and COMP and a very bearish outlook or market 'sentiment'; NOT so much this time among options traders who were not heavy put buyers, suggesting they were seeing 'CORRECTION' only, not bear market.

The key to the seeing a good tradable bottom shaping up was the strong turnaround the retracement of 2/3rds or 66% of the Oct-May advance in the S&P 500 (SPX) and, in a very important bullish development, the double bottom low in the Nasdaq 100 (NDX) Index.

The Dow 30 (INDU) reversed after retracing to a low lying between the important fibonacci 62% retracement level and the 66% retracement amount. The S&P 100 slipped to a 1-day close BELOW its 66% retracement, but this was reversed the next day; a reason why I so often say to also look to what happens the following day when there are closes beyond trendlines, retracements and moving averages.

The Nasdaq Composite didn't get all the way to a re-test of its October low, unlike the Nas 100 and may slip down toward that area again. The Russell 2000 (RUT) held the low end of its broad daily chart UPTREND channel in the 670 area highlighted last week as 'THE' level to watch. As well, the CBOE Oil Index (OIX) rebounded from the exact low end its broad WEEKLY uptrend channel. These two charts are worth showing here, before I move into my regular index commentaries.

RUSSELL 2000 (RUT) DAILY CHART:
You can't predict from this action to date that the Russell won't go back down to, or under the lower support (channel) line again, but it sure showed accurately where RUT had a significant likelihood of bottoming (at 670).

CBOE OIL INDEX (OIX), WEEKLY CHART:
The Weekly OIX chart shows a very well-defined uptrend line, with some 5 lows establishing it in a very definite fashion. The good news was that the trendline was helpful in knowing where to buy oil stock calls. The bad news is that oil still looks to be in a strong overall uptrend, making for some bearish implications for the long-term market outlook in terms of inflation prospects.

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:

The S&P 500 (SPX) held support implied by its 66% retracement. I talked last week about slippage below the fibonacci 62% retracement setting up a test of the 1221 66% retracement level and that being an area that ought to hold. The intraday low on Wednesday was 1219.3, very close indeed.

The 1260-1262 area remains key overhead resistance. 1260 represents the 21-day average, 1261.3 the 200-day. A close over the 200-day average and the ability to find support in this area on subsequent pullbacks should be a key test of how far short-term upside momentum can carry.

SPX has probably found a significant bottom in the 1220 area, although this could be retested, but ought to hold as future support. I think the Index can climb higher, perhaps to next resistance at 1270, but not likely above 1290 resistance anytime soon. 1290, at the old high, is an area where there's likely to be substantial selling interest (resistance).

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

The S&P 100 (OEX) reversed to the upside, after a 1-day Close below the 2/3rds 66% retracement level. The close back above this level suggested that the retracement was not going to be all the way back to the prior low.

560 now sets up as major support. 577 is near resistance at the 200-day moving average and the down trendline; 589-590 is major resistance.

I think that the OEX can work higher, but I'd like to see the Index back above 577 and holding this area on pullbacks before I would be more comfortable holding OEX calls even if bought down near the lows.

Often the 2nd down 'leg' carries further than the first. In this case, to date anyway, a 'measured move' objective has been fulfilled where the 2 legs are approximately EQUAL. The first downswing (from a 604 High to 572 Low) was 32 points. The second was 30 points (from a 589 rebound High to 559 intraday Low).

Trader Sentiment never again got to an oversold extreme after one earlier reading. I most like to see this develop before assuming that there will be a more sustained rally. Sometimes this happens after disappointment sets in by another sell off to the area of the lows. Stay tuned on this.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) dug into a zone of support implied by its prior lows at 10744 and 10680, which happened to be close to coinciding with the area that fell between the 62 and 66% retracement levels. 10900 is near support.

11,035 remains key near resistance still; a close over this level and an ability for INDU to hold in this area on subsequent pullbacks, would be bullish and suggest that INDU could again work it's way back up to the 'line' of resistance around 11,285.

The second bullish (upside) crossover of the 21-day stochastic from its oversold area, almost always seems to mark a significant turning point and lead to a good-sized rally. Usually also there is more rally potential than just the first shot up.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) didn't fall back to its October low at 2025. It may still, but the Nasdaq 100 (NDX) double bottom low may be the key technical pattern for Nasdaq is in place, one suggesting (finally) that a significant bottom may be in place.

The key to this to me lies in COMP's ability now to hold the 2100 area on subsequent pullbacks. I would refine that further and say that support should be found on pullbacks to the 2087-2098 upside chart 'gap' area in the Composite.

Resistance is first at 2150, then not much higher, at 2160; with major resistance back up in the 1233 area.

There was a bullish price/RSI 'divergence' that set up in the COMP, as prices fell to a substantially lower low, 'unconfirmed' by a similar new low in the 13-day Relative Strength Index. You could say that the Index fell to a new low, but on greater relative strength.

Then, with the 6/15 Low above the 6/14 Close, creating a bullish upside chart gap, this was the bullish 'trigger' for a call buy.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) did not see the close under its prior low and instead made a double bottom in the 1512 area. This was a key event, and technical target for NDX. The upside gap that occurred the next day, especially given the bullish price/RSI divergence as discussed with the Composite above, suggests that a significant bottom is in place; and, the Index remains still in an uptrend.

Near resistance lies immediately overhead, at 1573, the high for the last two days of the past week and right at the 21-day moving average. If NDX can churn still higher, there could be an eventual re-test of the prior 1626 high. This is an area where, if reached, I would exit calls bought at lower levels, such as on the 6/15 opening at 1538.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Nothing more to say on QQQQ: a move above immediate overhead resistance at 38.70-38.75 is needed to suggest that there could be a rally that would carry back up toward tough resistance and selling interest anticipated at 40.

The 1-day high volume spike looks more an more like it was the selling climax or 'capitulation' per my starting point in my commentary. Stay tuned on that!

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. 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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