Option Investor
Index Wrap

TOUGH MARKET

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THE BOTTOM LINE: This market is yielding the 'easy' trades on the put side. It's a tougher market for trading the short-lived rallies by buying calls and you need to be nimble there. Nasdaq, in terms of the Composite Index (COMP), has now fulfilled a 'minimum' technical criteria for a long-term downside trend reversal, as COMP's weekly low and close put it under it's mid-October downswing bottom at 2025.

The COMP Index may still find support in the 2000 area in the coming week, especially given how oversold it is and end up rebounding back above 2025 by week's end. Below 2000, next major support is at 1900 in COMP. The Nasdaq 100 (NDX) may find buying interest in the low-1400 area; NDX seems posed to re-test these 15-month lows of mid-April to early-May of last year.

The action and earnings picture looks OK still in the S&P indices and the Dow. The S&P 500 and 100 2-3 year weekly charts are still maintaining long-term up trendlines, but prices could break under these too if potential buyers withdraw, especially the big fund managers. If the tech-heavy Nasdaq market keeps falling, the NYSE stocks get marked down to as blue chip buyers withdraw and wait for lower prices to entice them back in.

You have to wonder how good this economy will be in coming months if technology stocks are acting so poorly. The bellwether Semiconductor (SOX) Index fell like a stone this past week. And, the Russell 2000 (RUT), which had previously held the low end of its broad weekly uptrend channel didn't. Major RUT support is some ways lower, around 616-617, relative to its 672 close. The small and mid-cap stock 'theme' seems to have finally lost some of its luster with individual investors.

I wrote last weekend and in my past week's Wednesday Trader's Corner column, that there were signs of a significant bottom based on the 10-day averages of Up Volume in NYSE and Nasdaq, a build up in bearish sentiment, the degree to which the major indices were oversold, the fact that the recent S&P lows held above the mid-June lows, as well as the possible double bottom in the Dow. Much was discussed on these aspects in my midweek Wednesday Trader's Corner column and seen by clicking here.

I give the benefit of the doubt to the ability of the S&P and Dow to stay above prior lows and maintain a bottoming pattern, but this over time. Wait this current choppiness out and trade less.

I didn't want to stick around in calls as OEX got stopped in its upward forward motion in the 580 area, resistance implied by the low end of the early-month trading range; you know, the low end of the back and forth dance that went on for a lucky 7 trading days, before prices broke 15 points. The Dow couldn't stay above its trading-pivotal 21-day average (11015). Time to exit on that!

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:

1225 in the S&P 500 (SPX) did turn out to be a key support per my speculation on this last week. I suggested buying S&P calls, including the equivalent in the S&P 100, when SPX got into the
1220-1225 area. I also suggested a possible buy, or further buy, if SPX moved above 1237.

I also noted last time that strong SPX resistance or selling interest might surface on a move back up to the prior 'breakdown' point around 1256-1257 (prices got a bit above 1260), at the then intersection of the 21-day average.

SPX did get above its pivotal 21-day trading average for one day, but that was it. This is the whys and wherefores of the 'two-day' rule, where what LACK of follow through on the following (second) day after a breakout above or below any key level suggest that a move is NOT going to be sustained and doesn't have staying power.

What now? The chart is mixed: on balance, bullish to neutral as SPX may be in the middle of 1220-1265 (possibly to 1280) trading range. Minor support looks to be 1230 and main support at 1220-1225.

Key resistance is at 1255-1260. It would take a close over 1260 and subsequent support in this area, to suggest that the prior 1280 highs might get tested again. Conversely, a close under 1225 sets up a next downside target to around 1210.


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

I suggested I'd be a buyer of calls in the S&P 100 (OEX) and cover any remaining puts in the 560 area. Too Low! OEX got to
563 and then had a decent rally, taking prices back up to the 580 prior 'breakdown' point. What had been support acted as resistance this past week.

Key resistance is in the 580 area, then at 585. Near support looks to be at 568, on down to 565, at the current intersection of the up trendline I'm showing below; drawn tentatively with a minimal 2 lows at this point. Main support is at 559-560.

A close under 560, with weakness continuing the next day, would suggest that OEX could be headed to an objective in the 544-545 area, a major 'line' of support from April and October of last year.

On balance, there seems some likelihood for a trading range ahead between 560 and 580.

SENTIMENT got quite bearish recently and now is headed lower again as traders react to lot of uncertainties and a war footing in the Mid-east. I would look for buying opportunities ahead and that includes a place to exit puts and go contrary to the bearish extremes in sentiment that show up in this indicator.

Very simple to follow this: when daily equities put volume on the CBOE gets equal to, or nearly so, to call volume, that's showing a strong outlook for a continued decline. When is the majority not right? A lot.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Key or pivotal resistance remains as the l1,000 11,050 zone in the Dow 30 Industrials (INDU); it would take two consecutive closes over 11,000 to suggest that INDU could be headed to the upper end of its range around 11,200-11,250.

Near support is at 10,800, then significant technical support implied by the double bottom low to date at 10,700. Major support implied by the low end of uptrend channel on the weekly chart (not shown) comes in at 10,600.

As with the S&P, I think that the Dow could be stuck in a 107 111 trading range in terms of the Dow Index (DJX). The inability for INDU to hold above its 200-day average suggests that buyers lack the conviction to keep buying in the face of the onslaught of negative news.

Such news includes the slow down of the housing boom and realization that the endless piggy bank of home equity is not endless. And there's a bunch of earnings ahead. And, do you yearn for the days of 'Sphinx-like' Greenspan, who was more guarded in his comments then the new Fed Head it seems.

In terms of bottoming action in the past, there is a tendency to have 2-3 dips under the lowermost line with the 21-day Stochastic AFTER a steep sell off and period of weakness. This action is consistent with another sideways to lower trend in the near-term.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The technical price pattern continued to look bearish when the Nasdaq Composite (COMP) couldn't make it back above near resistance around 2080. I've noted 2080-2100 as the key resistance area in the COMP daily chart below.

While an approximate double bottom, relative to the 2025 low of late last year, is still a possibility, there would need to be a close back above 2025 on Monday, or fairly soon such as Tuesday.

I previously rated the chance of a double bottom as significant. NOT any longer. It's a big fat maybe to not a chance. 2000 looks like it is now the key support, but if COMP starts slipping below 2000, 1900 is the major support as I noted in my 'bottom line' comments early on.

I previously anticipated resistance 2090...close, as COMP got to 2086 before churning, turning then diving. We could be looking at a 2000 to 2100 (at most) COMP trading range in the next 2-3 weeks. Stay tuned on that!


NASDAQ 100 (NDX) DAILY CHART:

Pivotal resistance in the Nasdaq 100 (NDX) 1500 area; several hourly highs registered in the 1496 area, before NDX crashed again. I don't think the downside is huge here, but is probably again to the 1400 area like last year. Worth hanging onto puts.

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.

NDX would have to get back above 1515 and hold this area as support subsequently, to suggest that the tech wreck was off life support. I would be a buyer of calls in the 1400 area if reached, risking to 1390, looking for an objective back up to 1460, or to the vicinity of Friday's high at 1463

Not let up in the bearish looking big cap Nasdaq stock charts. An attempt to gain some upside traction, successful this past week, in Microsoft on their news and a nice jump in Apple/AAPL (hey, love those colorful products from my neighbors to the north!), but otherwise, most big cap tech stocks still show bearish patterns, without 'basing' action shaping up and consistent with downside potential of another 50 points in NDX.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

36.80 to 37.15 is the near resistance zone in the Nasdaq tracking stock, QQQQ. 38.50 is current pivotal resistance implied by the 21-day moving average.

Very near support or a level of possible buying interest is assumed to be in the area of the prior recent low around 35.50.

If you follow the lower trendline that the Q's were making previously, 34.80 might be a next stopping point and 35.25 is the current intersection of my lower trading 'band' or the green moving average ('oversold') envelope line set at 5% under the most recent 21-day moving average. Possible stopping points on the downside here is on a 'best guess' basis!

QQQQ presents what is a classical definition of what daily trading volume will tend to do in a trend: expanding (increasing) in the direction of the dominant trend and decreasing (diminishing) on balance on a move against the dominant trend. The dominant trend here being still down. Volume did not jump significantly on Friday's downside 'gap' and may reflect more an absence of buying interest ahead of the weekend rather than the start of a new down 'leg'.

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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