THE BOTTOM LINE: This is one of those periods where we can't say 'the', as in THE market is doing such and such or going to do whatever.... There are two 'markets' here, NYSE and Nasdaq, with each going their own way to a degree. I use the S&P 500 (SPX) as the representative stand-in for the NYSE Composite.
The S&P 500 and the Dow 30 Industrials (INDU) are looking ok still for a push higher, but Friday's action wasn't great in SPX and INDU, as the Close fell under the low end of the prior recent trading range in a new weekly low.
The S&P 100 (OEX) had the best technical action as it has consolidated in a typical bull flag pattern, as a sideways move traced out the same highs and lows. And the OEX consolidation has stayed in the upper third of the prior sharp run up, the typical 'high level' consolidation of a bullish flag pattern.
It's also true SPX has been 'leading' OEX, so I hold to last week's view to not take out new call positions unless there's a pullback to levels I discuss in my individual index commentaries. Alternatively, a break out above 585 in OEX would be bullish and some added buying (on strength) could be warranted.
That 'other' market, NYSE's poor country cousin Nasdaq, is languishing and unable to hold recent gains. If the Nasdaq Composite holds its tentative up trendline just over 2100 and Nas 100 (NDX) holds its recent double bottom low in the 1515 area, plus or minus 3 points, then Nasdaq would look like a buy again, but only using a tight stop in NDX; e.g., 1508.
What's not to like about this market for me as a contrarian, is the relatively high level of bullishness, but this may be warranted in OEX, just not in NDX. Also, there hasn't been the kind of volume surge yet I would associate with a new up 'leg'. Is summer and stocks can go up on lower volume, but these rallies don't typically have the staying power of strong moves on correspondingly heavy volume.
I thought this past week would be 'quiet' and it was. There were back and forth price swings on low volume (typical of a summer holiday-shortened week), but no upside traction relative to a rise above prior weekly gains and both markets lost some ground.
MY WEDNESDAY 'TRADER'S CORNER' ARTICLE:
In my most recent Trader's Corner (7/5/06) article I shared some thoughts on what to look for in volume relative to an up or down trend and what it (volume) might 'signal' about a reversal. I found a useful indicator on my TradeStation application that visually marks a day when volume is 50% or more of the average volume of the past 50 days. You might also find a similar volume indicator you didn't know about previously on your charting application; also useful for an index tracking stock like QQQQ.
'Bellwether' stocks like GE are good stand-ins for the S&P and Dow Indices. Look for multiple days of higher than average volume after a substantial run up or substantial decline as a potential sign that most of the buying or selling has 'come out' (of the market); and where the trend might then be vulnerable for a reversal, providing an option trading opportunity. AND, since I just looked GE's chart, it's recent price action has traced out what looks to be a bear flag pattern: not a great omen for S&P.
My last Trader's Corner is in your retained 7/5 Option Investor Daily e-mail or may be seen in that day's market letter on the Option Investor.com web site.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is bullish, but there's a cautionary note in the relatively weak close on Friday. However, Fridays have seen weakness in the recent past, only to be reversed by a buying surge after the weekend.
The 200-day moving average is a key near support at 1263; a close under this level, not reversed the next day, would be a bearish development. Conversely, an upside penetration of recent highs at 1280 keeps the pattern decidedly bullish and suggests that the 1290 prior high will at least get tested and challenged.
Next lower support around 1252 is also implied by a trading average worth paying attention to, the 21-day moving average. The recent weeks' emerging uptrend would look in trouble if the prior 1237 low was pierced. Major support is at 1220 in SPX.
THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) looks to be in a consolidation for another push higher; specifically OEX has traced out a bull flag. An upside penetration of the top end of the 'flag' consolidation at 585 would suggest a possible target to the 600 area again. Stay tuned on that, as OEX would also need to overcome possible or likely selling pressure at the prior 589 high.
A close over 589 would suggest an objective to the 600 area again, perhaps to 604 at the prior top. A lot of 'ifs' still, but so far the rally has been impressive.
Amazing isn't it that when there's no floor, no buying interest to be found, it looks like stocks will never stop going down. But the market very often goes from extreme to extreme in an almost farcical fashion; even giving rise to my concept of 'funny-mentals' or how to stop worrying about the Fed head.
On the downside, as with SPX, OEX needs to stay above its 200-day moving average, currently at 577, to maintain bullish momentum. 573, at the 21-day moving average is where I have marked the next support. 568 is 'must-hold' support to suggest that this (S&P) market is not going to fall back to 560 again and possibly lower.
I mentioned that bullish sentiment, as I measure it, seems pretty relentlessly bullish, for me to wonder if our 'happy' bulls are not being too complacent. On the other hand, OEX looks pretty strong still, so some herd mentality may just be the ticket.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart has a bullish chart pattern as long as it can stay above 11000. Below 11000, must hold support at 10925-10900 is suggested by the 200-day average and the prior low. A close under 10900, not reversed the next day, turns the technical outlook bearish for INDU.
11230 is the key near resistance area, then at 11285. A decisive upside penetration of this zone, would give me a next upside target to the 11500 area.
The stochastic model was registering the low end of what I usually take to be 'overbought' for the Dow and prices did drop on Friday. Not a great close for the week, but the first 1-2 days of the following week have been bringing in buying again, as long as the world didn't come to an end over the weekend. It seems peaceful enough so far, half-way through!
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) remains bullish to mixed in the look of the chart and indicators. The 'mixed' part is the sharp retreat from a minor double top at 2190 resistance. Moreover, a bearish aspect is the fall to under the top end of the LAST consolidation although it's only slightly into this territory so far. Key resistance is 2190, then 2233.
A close above 2233 set up a possible target to the 2300 which I consider to offer a big resistance overhang with a lot of stock for sale.
There's an emerging trendline intersecting at 2112. 'Emerging' trendline because there are just two lows with which to draw it. 3 lows makes a more definite up trendline; a rebound from around 2112 currently would establish such a trendline.
2090 is support implied by the prior (down) swing low and this is a more definite aspect technically; in this area real buyers with real money came in and supported Nasdaq previously. 2065 can be considered to be major support. If pierced, a next downside target is to as low as 2008.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) looks relatively weak technically in terms of having solid rally potential and buying interest near-term at least. Buyers get scarce when rallies run out of steam and is typical 'basing' action; at least I take it as part of a bottoming process.
Prior lows around 1515 makes this a potent support area to watch in my estimation. If 1515 was pierced, especially on a closing basis and not reversed the next day, it would set up a next downside target to as low as 1465-1460.
1588 is a recent line of resistance that is the key technical area above 1550. 3 tries to get above 1588 led to 3 strikes, you're O U T! It was a sharp retreat after that. Above 1588, the prior 1626 high is most significant. I consider 1626, on up to the 1650-1653 area, as major resistance currently.
I bought some NDX calls in the 1515 area, as an assumed 'double bottom' low risk play (with a close by stop), but exited after the failure of the rally to stay above 1580. I'm on the sidelines as far as buying calls, taking a wait and see attitude. Selling puts is a possible bullish alternative play, especially perhaps in some bellwether NDX stocks such as Cisco Systems (CSCO).
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
40 is major resistance in QQQQ. Near resistance is 39.15-39.00. Support is likely, and has been seen repeatedly, in the 37.30 to 37.15 area. Buying in this area, with a sell stop just under 37.00 looks to have favorable risk to reward, assuming a 37-40 trading range in the next couple of months.
If 37-37.15 gives way, downside potential is to the 36 area. I'd be a more willing buyer in this area if reached.
I will become a more enthusiastic holder of this stock, at whatever level, when there's a sustained surge of volume on a next good-sized rally that can get above 39 and hold this area on subsequent pullbacks. There was a 1-day jump in trading activity on the last rally to the 39 area but a quick slump in prices and buying interest/volume after that. At least volume has been subsiding on the pullbacks on balance.
As said about NDX, the pattern seems consistent with 'basing' or bottoming action. This can take awhile. At least owning the stock doesn't require the timing considerations of owning the options and their eroding premiums.
Good Trading Success!
Please send any technical and Index-related questions to me at firstname.lastname@example.org 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
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.