Option Investor
Index Wrap

INTO THE DOLDRUMS

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THE BOTTOM LINE: The recent rally offered a solid tradable rebound, with the Dow Index (DJX) holding the 107 area and climbing back to 111; the S&P 100 (OEX) reversing from 560 and getting back to 575; and the Nasdaq 100 offering a good tradable bounce from the area of its prior 1515 low, followed by its brief advance back above 1580.

'Brief' is the operative term here, for after such a wipe out free-fall decline, where the big money was made in index PUTS, the market will take time to 'build' a bottom. By this I mean that buying interest comes into the underlying stocks in the major indices around current index price levels and under, down to the prior lows; this, for a period of the next 2-3 weeks and longer.

We've entered the summer 'doldrums' now and this will get more pronounced after the 4th of July. Yankee Doodle Dandy! Investors and money managers are sorting out the themes that will guide their investment choices ahead with an anticipated slowing economy.

What this means to the index option player is that it will likely be awhile before the indices can gain traction on the upside. Buyers will bargain hunt but arent I think going to start paying up for stocks anytime soon. Willingness to 'pay up' for stocks, buying on upticks, is what makes daily Exchange Up or Advancing Volume numbers worth tracking.

I also see limited downside potential here, perhaps back to retest recent lows at a maximum. Not that we can rule OUT the possibility of the Nasdaq Composite retesting its October low around 2025 (Friday Close: 2121); such a move would surely take the Nasdaq 100 (NDX) below its recent closing low at 1517. Mostly I think that buyers of index options have to be careful of eroding premiums with the market going 'flat' or sideways for a period.

Speaking of summer, this might be a good time to take off for a trading holiday, at least in terms of buying premium or purchases of calls or puts, other than quick 'scalping' type trades. Hey, if that's your game, go ahead and whack away at it! When I could or wanted to watch the market very closely, I would trade in and out for short-term objectives.

Benchmarks to watch: only the Dow 30 Industrials (INDU) is trading back above its 200-day moving average. None of the major indices, including the Russell 2000 (RUT), have managed more than a 1-day Close (INDU & NDX) above the key 21-day average I watch for near-term trading direction in terms of the indexes trading above/below this average.

If there's a breakout above the 21-day moving averages, the recent sideways move of the past few days will turn out to have been a consolidation for a push higher. I'll look at upside potentials on the individual charts below.

MY WEDNESDAY 'TRADER'S CORNER' ARTICLE:
This regular Wednesday column allows me to talk about trading and technical analysis ideas relevant to current or recent market action, serving as a companion piece to my weekend Index Trader outlook by providing a midweek update on my market outlook.

In my most recent Trader's Corner (6/21/06) article I discussed some of the noteworthy technical aspects that suggested that the recent low was a tradable bottom, still within an overall long-term uptrend; titled "Gauging If A Bottom Has Formed".

The aspects discussed were: (1) Market 'Sentiment' (not much help in signaling the recent bottom); (2) a double bottom (in the Nasdaq 100); (3) Bullish Price/RSI 'divergences' (Nasdaq only); (4) amounts retraced, in percent terms, of the prior advance; (5) my Nasdaq and NYSE UP Volume 'indicator'; (6) the reversal and rebound from a well-defined multimonth up trendline (Russell 2000 Index). This Trader's Corner can be seen in your 6/21 Option Investor Daily e-mail or by clicking on the link to it 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:
Principal support in the S&P 500 (SPX) is implied at the recent 1220 low. Near support is at 1237-1240.

Key near resistance is at 1256 at the 21-day moving average and at 1260 at the current intersection of the down trendline. 1262 is an important level also as the 200-day moving average. Further resistance is at 1270, with major resistance at 1290.

A close over 1262, coupled with the ability for SPX to hold this area on subsequent pullbacks would be bullish and suggest that the Index was into a second up leg, the first being the move from 1220 to 1258. If a second leg tacked on as much as the first, the S&P would reach the 1278-1280 area. Conversely, a decline below 1237 would suggest that upside momentum was faltering.

The chart pattern is mixed. The major decline appears to have run its course and I'm not anticipating new lows. There could certainly be another dip, such as to the 1230 area, before another rally carried above the recent 1258 high.

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

Recent support has been seen in the S&P 100 (OEX) at 570 to 567 but 567 may get tested again judging by the way the Index went out on Friday, where the index was seeing selling pressures and lackluster buying interest. A move below 567 would suggest that OEX might fall a few points lower, such as to 564; or, back to the 560 area in a retest of recent lows.

What OEX has to do on the upside seems clear. I emphasize the importance of a close above the 21-day average and the down trendline at 575, to suggest an upside breakout above resistance. (As always, it would be important for subsequent pullbacks to hold this same area, especially on a closing basis.) The market would also take notice if the Index closed above its 200-day moving average, currently at 576.8.

Resistance above 577 is at 582, then major resistance at 588-589.

The level of bullishness suggested by my sentiment indicator seems a bit high for the fact that the market has only rebounded from a very oversold condition and has not managed to carry above near resistance. However it develops, it wouldn't be surprising for another move lower that would set up a more bearish outlook.
That's a common pattern at least in similar circumstances.

However, the economy is still seen as strong and investors remain optimistic about earnings prospects on balance. Higher interest rates are assumed to be 'priced into' current index levels.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The recent intraday high in the Dow 30 (INDU) sets up at least 2 points of a possible down trendline, suggesting 11,100 as important near resistance. The Average also appears to be struggling to stay above its 21-day moving average at 11020. There has yet to be 2 consecutive closes over this pivotal trading average.

If there is a close above 11100 not reversed the next day, the next important technical resistance is at 11250, up to 11285, at a line of prior highs.

Near support is at 10900, at the 200-day moving average. A close under this level would be bearish. If buying didn't come in the following day to lift the Dow back above this key average, it would suggest a possible retest of the lows, or at least down to 10815-10800.

The 21-day stochastic also shows the faltering momentum as the upper line, of two, started turning down Friday. A bearish downside crossover, if that happens, wouldn't be surprising. There is often a sideways to lower drift after the first rally that comes after such a sharp decline as we've seen from the April peak.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) has what may be tough resistance and or selling pressure that comes in at 2147-2150. A close over 2150, not reversed the next day, would suggest that the Index could be headed up to 2180 or higher. Major resistance is in the 2233 area, at the prior high, which also corresponds with the 200-day moving average (not shown).

Conversely, if COMP falls under near support at 2103-2100, or its next support around 2087, the Index could then be headed back to re-test its prior 2065 low. Major support is assumed to be at the prior 12-month low around 2025.

I have no strong feeling about which way COMP is headed. It's come up to a price area which it needs to push through to suggest that there is a second wave of buying coming after the initial surge partially driven by short-covering and bargain hunting, a type of buying that carries only so far.

NASDAQ 100 (NDX) DAILY CHART:
As with the Composite, the Nasdaq 100 (NDX) has come up to technical resistance implied by its 21-day average and down trendline in the 1567-1570 area; this is the important area on a closing basis; a close above 1570 not reversed the next day, would suggest at least a re-test of 1586, resistance suggested by this past week's (Wednesday) intraday high.

Principal resistance is at the prior high at 1626; the 50-day moving average (not shown) also falls in this area, at 1628.

The way NDX went out on Friday it looked headed back toward near support at 1544-1545. Next lower support is in the 1530 area, at the low end of the upside chart 'gap'. Below 1530, key support is the cluster of prior lows at 1512-1515.

I'm taking a wait and see attitude, as NDX looks to be in the middle of a possible range, with further upside potential not much greater than downside possibilities.

There may be a put play here if bought at the recent highs, given the potential for a re-test of the prior lows in NDX. At least an exit point is clear, at just over the down trendline. I'm lacking enough conviction to want to be in this one.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The equivalent (to NDX) pivotal resistance on QQQQ is at 38.5. If 38.5 is pierced, a move back up to 39 resistance is suggested. A close over 39 that held the following day(s) would suggest a test of the prior high at 40, which is also the best upside potential I see anytime soon.

Near support is at 38, then at 37.7. Pivotal support implied by recent and prior lows is at 37.3 to 37.15.

The current pattern doesn't add up to anything overly decisive as far as expected direction for a next move. Strictly on the chart pattern, QQQQ looks like it could be consolidating for a move through 38.5. I can come back and look at other factors and figure the index is going back down. Stay tuned!

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.

Index Wrap Archives