Option Investor
Index Wrap

AT OR NEAR A BOTTOM

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THE BOTTOM LINE: Besides the overarching factor of price or chart patterns (e.g., possible double tops/double bottoms, key reversals, etc), I've found that the market is at or near a tradable bottom when Volume, particularly Advancing or daily Up volume, on a 10-day moving average basis, contracts to a certain area; which I'll show for both the Nasdaq and NYSE markets. This 'indicator' is good for bottoms only (no corresponding model exists for tops such as with either advancing or declining daily volume figures.)

I have some charts that I'll put in this section to illustrate some overall points about the market at this juncture.

A second condition that tends to be found at tops or bottoms is a build up of bullish or bearish 'sentiment' to certain extremes. My sentiment indicator will be seen with the S&P 100 (OEX) chart in the individual index commentary section.

A third aspect that tends to reflect both bottoms and tops is 'overbought and oversold' and I use the Relative Strength Index (RSI) mostly; this one has to be used carefully in deciding that it's time to go into calls for example. Careful use of this indicator is that it tends to most reliably or usefully be a 'confirming' type indicator for price and volume analysis.

The Nasdaq Composite (COMP) has the possibility here to make a 'double bottom' at recent lows, relative to the 2025 weekly low seen last October. The Nasdaq 100 (NDX) had a possible double bottom going too, but fell through its prior low in a further bearish move. However COMP has to be considered the key index in Nasdaq as it represents the overall stock universe there.

When an index is as oversold as this one and I measure COMP above with the broadest possible 13-week RSI. According to this measure the Composite is as overdone on the downside as it's been in recent years, at least since the late-2002 bottom.

Of course, with the break in the long-term up trendline seen in the weekly COMP chart above, we could be heading into a bear market, but that doesn't tend to get suggested until or unless the last prior downswing low of significance is penetrated decisively, which is the importance of 2025.

Some will say that COMP would have to fall through 1900 for the start of a bear market. I like to 'define' these things for backdrop purposes, but except for some long-term stock holds, establishing such major bull or bear market criteria isn't important for trading the indexes. Even in a bear market there are stocks worth holding. I imagine energy is one sub group!

RUSSELL 2000 (RUT) Daily Chart:
I go to the Russell 2000 Index (RUT) chart here because it represents a group of small to mid-cap stocks that have been experiencing a bullish earnings outlook and if they don't maintain THEIR uptrend; well, if the strongest lead stock groups/indexes don't hang in there, which includes the Dow, this would likely be a bearish omen for the overall market.

The technical point here relates to the long-standing and well-defined uptrend channel in RUT, which looks like it could 'hold' and would therefore suggest another tradable bottom.


VOLUME CONSIDERATIONS

The potential for a double bottom in the Nasdaq Composite Index (COMP) I've mentioned. But this consideration ALONG WITH and the contraction in Nasdaq Up volume back to a 'baseline' zone, which tends to define bottoms, is a supporting factor in keeping close watch for a bottom in COMP. Stay tuned on this!

Why UP Volume? Up Volume, or stock volume of stocks bought on up ticks, is an objective criteria of buying interest. The absence of it reflects the lack of this interest of course. But it always only goes on so long in a typical market cycle before stocks are perceived as in a value area again.

NYSE UP VOLUME
While I could plot the NYSE Composite Index against the NYSE daily and 10-day average of daily up volume, I use the more common index option trading vehicle of the S&P 500 Index (SPX), which not only correlates well with the NYSE Composite but also has been 'leading' the S&P 100 (OEX).

As far as the chart/technical pattern, one support or bullish uptrend line will be intact if SPX holds at or above 1225, especially on a closing basis, in the next few days.

As noted on the chart above, tradable SPX and OEX bottoms have tended to occur when the 10-day NYSE Up Volume average dips to around 600 million shares and turns UP. This sometimes precedes prices turning higher as volume activity will sometimes or often precede 'price' turns and direction.

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:

As I noted last week, the fall in S&P 500 (SPX) below 1263 was a bearish indication. SPX's close under this level, followed by weakness the next day, was confirming for the further decline that followed.

I continue to look for major support at the prior low around 1219-1220. Given the rebound off the intraday low on Friday and the other aspects of an oversold market, the prior 1219 low may not get tested; OR, 1225 will turn out to be the key support.

I'd be a buyer of calls in the 1220-1225 area; conversely, also on a move above 1237. Buying another or a further dip is safer no doubt if it develops, especially since a 1218 stop could be used and 'risk' kept small in this sense. Below 1219, SPX would be vulnerable for another 8-9 point fall, to the 1210-1211 area.

This market has a number of perceived negatives but they may be all priced in already. No way to go but up on any encouraging political, oil-related, Fed watch news?

Strong SPX resistance may come in on a move back up to the recent 'breakdown' point around 1256-1257, which is also the current intersection of the 21-day average. Trade up to this average, but not beyond it, is usually an sign that the index is not really for a sustained rally yet.


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

Besides the bullish chart pattern that was still in place, I suggested that OEX broke down technically on a move under 577. Good put play then. Since I like to play against the prevailing view, it may have been a good out on Friday in case the world doesn't come to an 'end' over the weekend.

I'd be a call buyer and cover any puts on a further drop to the prior lows around 559-560, exiting at 555. Immediate resistance is at 568. There's upside potential to the 575 resistance area however in my view. 585 is the area where major selling will likely come in again. 555 is the maximum downside I see for awhile.

BEARISH SENTIMENT, according to my indicator, reached the 'minimum' 1-day reading to suggest that a tradable bottom would be at hand within 5-days. The 'clock' is ticking on that, so stay tuned!

DOW 30 (INDU) AVERAGE; DAILY CHART:

It seems quite possible to me that the Dow 30 (INDU) won't get pushed below 10700-10650 anytime soon. I was a buyer on Dow Index calls when INDU got to the 107 area. I have an over the weekend risk to a degree of course, as the Dow could open under my exit point of 106.5, but this is still a reasonable speculation.

Puts were the play when INDU fell under its 21-day, then its 200-day averages. But at 10,700, most of the negatives it seemed to me were priced into the market. Resistances levels are noted, and are back up to the two moving averages mentioned, per the chart below.

On any calls purchased, I am going to be quick to exit, as I also perceive this market has being in a bottoming process and it may be a rolling bottom. Not to forget here is that rallies have been short-lived in typical bearish action fashion and the market is quick to give up all its gains.

OTHER CHART CONSIDERATIONS: WEEKLY INDU CHART

The low end of the weekly chart uptrend channel intersects fully a hundred points below near support, at 10,550 and this could be where INDU is headed to test what could be significant or fairly major support.

The long-term up trendline has been penetrated, but a major reversal to a bear market trend is not suggested technically unless there is a weekly close below 10,200.

A significant consideration here, as seen in the 8-week RSI indicator above, is that the Dow is as 'oversold' as it will tend to get before a rebound sets up.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The technical picture took a quite bearish turn when the Nasdaq Composite (COMP) took out its prior recent low, but now has stopped shy of its 2025 October bottom which sets up the potential at least for a broad-based double bottom.

The longer the time that separates a double bottom, the more significant it usually turns out to be. I rate the chance of a double bottom low forming as significant. I thought this was going to be true of the Nasdaq 100 also, but it cut through its prior low. The Composite may well be another story however and is very oversold on a week over week basis.

I spent more time talking about resistance last week than support, so I suppose if I talked about possible support, COMP will rally. Actually, there IS no likely support below 2025 except that the low-2000 area should attract some buying.

Resistance is anticipated at 2090, then 2125. A close over 2125 is needed to suggest that the Index could gain further upside traction, such as back to the prior 2190 high.


NASDAQ 100 (NDX) DAILY CHART:

I pegged the Nasdaq 100 (NDX) last week as 'relatively weak technically'. And how! I also thought that the prior lows around 1515 made this a potent support area to watch. Yes, a key area, WRONG! on stopping there. But my next lower target (below 1515) at '1465-1460' was close on the money as NDX got to 1456. WHAT NEXT? Watch the Composite as telling the story on when NDX will be ready to rally again.

Interesting that NDX got to my lower envelope line again, at 5% under the 21-day moving average. As if it had 'eyes' we used to say when prices would stop at trendlines and the like.

Near resistance now looks like 1500, then 1533. A close over 1543 at the 21-day moving average would be bullish and suggest that 1588 could be tested.

Prior weekly lows from late-April last year suggest major support could be found in the 1400-1394 area.

Many of the big stocks in NDX look very bearish in their patterns and in free fall again, such as Cisco which I thought might be a proxy mildly bullish play in selling puts. No where to hide in tech or internet stocks that I follow closely, except a few such as Google that at least haven't fallen completely apart.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

37.15 is closest resistance, then 38 is a pivotal next resistance area.

'Support' or a next area of buying interest below 36.0 is a big guess. If we look at long-term weekly charts (not shown below), it's apparent that the next major support may not be seen until the 34.35-34 area, lows made in late-April last year.

Volume has built and 'come out' on the downside so volume is confirming a still dominant downtrend. I had the idea that QQQQ was going to find some buying interest and establish a possible support 'base' around 37. I can't be too much more enthusiastic about 36 but short covering type buying and a rally do at least get increasingly likely as the Nasdaq 100 gets to a greater oversold extreme.

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