Option Investor
Index Wrap

FOURTH OF JULY SKYROCKET

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THE BOTTOM LINE: Despite my 'bottom line' summary prediction last week that the market wouldn't gain upside traction anytime soon and would continue to trade in a slow mo summer desultory drift, Fourth of July fireworks came early with a sharp upside technical breakout. This owed quite a bit to futures arbitrage and short covering but that wasn't all of it of course. The summer doldrums will come later.

Moreover, I was rushing my thought it was time to take a trading 'holiday' and could be at risk of becoming a contrary indicator when I make any such grand prognostications in this summary. I'll concentrate more on my knitting together of individual chart analysis where, as always, I'm on firmer footing.

The best thing I did point you to was to look for "limited downside potential..." and "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." And how!

I would note a few specific technical harbingers dealing with one index or the other that had backlit the stage for the pyrotechnics that came on Thursday. These specifics are besides the general fully oversold extreme reached on a short, intermediate and long-term basis, as well the Fed interest rate watch and other fundamental factors that are well covered elsewhere in OIN:

1. The leadership of the Dow and that it (alone) had firmly held its 200-day moving average, setting the stage for another round of bluest blue chip leadership.
2. The double bottom that set up and now seems even more firmly in place in the big-cap Nasdaq 100 (NDX)
3. The S&P/Dow leadership of the very consistent and bullish chart action of the Oil stocks.

Since the weekly Oil Index chart isn't one that is my usual analysis presentation, I'll slot it here first. The great strength in the S&P that we've seen off the recent lows owes a lot to the increasing cap weight of the oil stocks. In times of an uncertain general economic, earnings and market outlook, big time money managers are going to go with the few themes that they are looking continued winners. And, who doesn't feel these days that even $40 oil is no more. I heard supposed 'oil people' talking about prices settling back to this area and figured they're going forward looking backward only.

I'm anticipating quiet trade in this coming week. With many market participants out for the week or not as fully engaged, a period of relatively small moves and quiet consolidation (of the recent strong rebound) should lie ahead, with fireworks confined to wherever your annual Fourth of July spectacle occurs.

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 this (weekend) Index Trader outlook.

In my most recent Trader's Corner (6/28/06) article on what aspects of Dow Theory appear meaningful for the current market outlook, I discussed the significance of the Dow 30 Industrials (INDU) matching the Dow Transportation Average (TRAN) in a new weekly closing high; thereby confirming that the overall market trend, and the economy, was still good to go. One key to overall and continued bullish potential for stocks is for INDU to maintain a weekly close above 10,980-11,000.

This Trader's Corner is in your retained 6/28 Option Investor Daily e-mail or seen on the Option Investor.com web site.

MARKET NEWS and INFLUENCES:
Closing index prices, as well as the recap of market influences such as earnings, company news, government reports and activities, are covered in the Option Investor 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bullish in its near-term pattern, but the intermediate 2-3 week trend won't turn back up until the prior 1290 upswing high is exceeded.

Near support in the S&P 500 (SPX) held very solidly at 1237-1240 and set the stage for a rally, although the steepness of the 1-day climb seemed surprising. As often emphasized in its importance as a key to momentum, once the down trendline and 21-day moving average were pierced there was no immediate overhead resistance that traders could point to. Sellers got scarce and scarcer when the Index crossed back above the 200-day average.

Look for near support at 1262, at the 200-day moving average; next support is at 1255 to 1252, with pivotal support back at 1238. Major support is unchanged at 1220. Near resistance has to be figured as coming at Friday's high around 1275, with major resistance up at 1289-1290.

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

As with the larger S&P 500, the S&P 100 (OEX) repeatedly held a key line of support; in the case of OEX, at 567, which I pointed to last week as likely to get 'tested' again. The fact that they couldn't push it under this level was like the ball under water that pops back up with force. Fed tealeaf reading got the ball really rolling.

Near resistance is at 582-583, with near support at 577, down to 573. Major resistance remains at the prior up swing high at 589. Major support is at 560.

Look for a minor pullback, such as back to the pivotal 575 area; dips to here should find OEX support and buying interest. A move below 575 should find good buying interest/support back at 567.5.

Being on the right side of the continued rise in bullish trader 'sentiment' has made money for many and this isn't often the case. Since the one real bout of bearishness, ahead of when OEX bottomed around 560, acting on the basis of 'contrary opinion' or going against the predominant sentiment, has been a losing proposition.

The continued bullishness of option traders on balance makes me a bit wary of being with the crowd on the same side of the market, but I am. Because, as the old saying goes and the number one rule: "don't fight the 'tape'."

DOW 30 (INDU) AVERAGE; DAILY CHART:

As I mention in my initial commentary, the Dow 30 (INDU) found good buying interest right at the closely watched 200-day moving average on two key tests of it; this became the floor from which the strong rally was launched this past week. The breakout above its minor down trendline brought in added technical buying to the Fed-inspired buying surge.

Yet to come is a key test of the line of resistance at prior highs around 11285. Stay tuned on that. Minor resistance should come into play again at 11,200. Support and buying interest again should be found at 11,000, then back to the area of the 200-day average just above 10,900. The inability to follow through to the upside on Friday suggests that INDU may drop back again to 11,000 before taking off again; doubtful that the Dow won't test prior highs at 11250-11285 after this last big push has taken it within striking distance of a 1-2 day advance.

As often happens, the stochastic dipped briefly as momentum slowed, but it didn't signal more than a pause on the way up. As I noted last week, there's often a sideways to lower drift after the first rally off such a big decline as seen from the April peak to the recent low.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

As I noted last time, a Nasdaq Composite (COMP) move above 2150, suggested a further rally to at least 2180 and COMP got to 2183. Major resistance remains in the 2233 area at the prior peak and at the 200-day moving average; only the 21-day average is shown on this next chart and that is now an expected support at 2133.

The 2100 area is significant next support; that last dip to and just under 2100 signaled a good buying opportunity in Nasdaq. It wasn't so clear last week and I noted that COMP had come up to a key resistance it needed to push through to suggest a second wave of buying was behind the first. It then looked like buyers were still scarce and skittish, but the S&P led and tech answered the call to a degree.

Where next? Most likely still higher, after probably another consolidation, this one at and above recent highs at 2150-2140.

NASDAQ 100 (NDX) DAILY CHART:

Key resistance in the Nasdaq 100 (NDX) is at 1612-1626. 1660 is a next resistance overhang. Look for support on pullbacks, especially to the 1560 to 1540 area. Buy dips into this zone, with an exit point at 1535.

NDX now looks to be a bit above the midpoint of its upcoming price range, although I'd extend the upper end it's possible price range to 1680, but there should be a lot of stock for sale if this area is reached. The low end of the broadest price range for NDX is the so-far double bottom low made at 1515-1520

Anyone who bought puts and 'faded' the recent rally should have exited quickly when there was the decisive upside penetration of NDX's down trendline. I wasn't going to try that one, but I did suggest an exit point for such a bearish play.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

40 remains the key resistance overhang for QQQQ. Near resistance is 39.0, then 39.5.

Near support 38.5, then 38.0. I said last time that the Q's looks like the stock was consolidating for a move through 38.5. And a nice move it was. Buy further dips into support, especially back to the low-38 area, using an exiting sell stop at 37.7.

No huge volume surge. Tech is not out the woods and is a follower not a leader in this market cycle.

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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