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Index Wrap

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THE BOTTOM LINE: I said last week that the market, in terms of the S&P 500 (SPX), needed to get above 1290 which represents a 2/3rds or 66 percent retracement of the early-May to early-June decline; this, in order to suggest that the Index could retest its prior (early-May) top around 1325. SPX has failed in its initial attempt to pierce this key level (1290), at least so far.

The S&P 100 (OEX) overshot the same 66% retracements of its prior decline by getting nearly to 595. However, OEX fell well back from its Friday intraday peak and on a closing basis has only retraced 2/3rds of its prior decline.

The Dow 30 (INDU) mirrored SPX and fell well back from its Friday intraday high for the week; that high also equaled a 66% retracement. Why these numbers in percent terms and why the importance of seemingly arbitrary figures like these?

As to the percentage figures, it's been shown and known for a long time that stocks often will retrace about half or 50% of a prior move before resuming the direction in its prior trend; if the index, stock or commodity has had a strong rebound, the retracement will tend to retrace around 62 to 66 percent of the prior move, before resuming its prior trend; that prior trend in our current market being down.

The 38, 50 and 62 percent retracements either of a prior up OR down swing are the so-called 'Fibonacci' retracements and are fairly widely followed. The rule of thumb is that if a retracement exceeds 38%, look for a 50% retracement; if the retracement exceeds 50%, anticipate a 62% retracement or a bit more, which is 66%. If a retracement exceeds 66%, look for a possible 100% retracement of the prior move. 100 per cent retracements that hold this area are the ones that form double bottoms and double tops.

WD Gann, who was trader in the 1900's, instead of a long ago, pre-stock market Italian mathematician, was the one who pointed out that sometimes a VERY weak retracement might only equal 25%, perhaps one-third or 33%; and that a very strong recovery move would run to 66 percent or 2/3rds of a prior move before faltering. I don't usually talk about 25% retracements, but that's all we've seen in the Nasdaq so far. The Nasdaq Composite's (COMP) counter-trend rebound may be running out of steam with just this 'minimal' retracement effort. Stay tuned on that, but in the OEX, DJX and Nas 100 (NDX), I will be evaluating not only if its time to exit calls and take the money and run, but to see if its also time to get back into puts.

More on the retracement and other chart/technical aspects in the individual charts further along. Fundamentally, all eyes will be on the FOMC meeting outcome next week to see if the Fed raises rates another notch or pauses here due to the slowing economy. Technicals reflect fundamentals ultimately, whether the market 'fundamentals' are completely understood or not at the time.

There's nothing magical about the technical aspects. But they can help us steer a more 'objective' course; e.g., a 66% rally retracement in SPX to 1290, followed by inability to pierce that level, equals a possible to likely interim top. A move through 1290 suggests potential for a test of the prior high (1325 area) and that sort of criteria.

There is one more chart that is not one I usually produce, but is relevant to Dow Theory and a slowing economy. An objective criteria for economic activity slowing down is the degree to which goods are being shipped and that shows up in what the Transportation stocks are doing. Anyone looking at the Dow Transports (TRAN) has noticed how this average went to a new all-time high back late last year. However, as you see in the chart comparison of INDU and TRAN in their weekly (close-only) line charts stacked one atop the other, the Transports have been in a steep retreat since this Average peaked in early-May.

TRAN appears to heading back down toward the 4200 area and the up trendline that reflects its long-term rate of change. The chart or price action of TRAN is suggesting that the US economy might be headed to more than a 'soft landing'; this is not completely clearcut, as the Transport stocks did appear to get to excessive or unrealistic evaluations on their run up into May and the sharp retreat from there may be just a realistic adjustment. Still, comparison of the charts of the two averages is striking to me.

My usual Wednesday TRADER'S CORNER column didn't get produced this past week due to some technical difficulties I was having with my data feed.

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:
Key support in S&P 500 (SPX) remains 1260, an area that should be held in order for SPX to maintain the strong bullish pattern of the past 3 weeks. Key or pivotal resistance as already discussed is 1290. A break out above 1290 or below 1260 suggests potential for a further move of 20 points in either direction.

The chart remains bullish as far as the uptrend pattern, but the technical aspect of retracement suggests that SPX may have rallied as far as it can and selling pressures could start to build. The key bullish aspect is whether 1290 can be exceeded. If prices start to slip from recent lows at 1271-1273, further weakness may be in the offing. A close under 1260 suggests potential down to the 1240 area. Conversely, a decisive upside penetration of 1290, could lead to an eventual move back to prior highs at 1320-1325.

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

I wrote last time about Key resistance in the S&P 100 (OEX) as being 590, representing the 66% or 2/3rds retracement of the sharp early-May to early-June decline. While OEX ran up to nearly 595 on Friday, the index could not stay above 590, a pivotal level in suggesting a possible next up 'leg'. If the Index can climb again above 590, especially on a closing basis without reversing soon thereafter, a possible target remains for a retest of the prior high around 604.

I still consider pivotal support as in the 580-581 area. A break of 580, especially on a closing basis and not reversed the next day, suggests the current upside momentum was slipping and gives a possible 572 downside target.

If OEX can't rally above 590-595, this could represent the top end of a 565-591 trading range. A renewed move above the recent 594 high keeps bullish hopes alive for a retest of the early-May peak.

SENTIMENT:
Trader 'sentiment' or opinion on market direction started slipping to a more cautious stance. Activity in puts didn't suggest a strong bearish view but the overall trend was going more that way. Traders probably would like to be bullish, but are cautious in the face of the mideast turmoil and especially the next FOMC move.

I rate my sentiment indicator as being mildly bullish; caution in a rising trend tends to favor that trend having further staying power. On balance, based on all factors I'm seeing, I'm being watchful for another drop but more so if OEX starts slipping below 585 and 580.


DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Industrials (INDU) got to a key resistance around 11335 as I suggested last week; I think I had it pegged at 11333. The sharp intraday retreat on Friday after INDU got to the 11335 area, representing resistance implied by the 66 percent retracement, makes me cautious about the further upside potential of the recent advance. Only a close above 11335 would suggest eventual upside back up to the prior early-May INDU peak around 11670 in a retest of the prior top.

The key near level for a bullish 'hold' in INDU is 11100, especially on a closing basis. The next pivotal lower technical support comes in at 11040 at the 21-day average and then around 11,000; 10,991 is a potential support implied by the 200-day average.

As I wrote last week, if INDU "stops its advance in the low-11300 area, we could be looking at trade between the 11300 area and 11000; a 300-400 point trading range well into August." Stay tuned on that perhaps too 'grand' prediction.

To maintain/continue a bullish chart, a decisive upside penetration of 11,300-11,335 and the ability to hold 11225-11300 as support on any subsequent pullbacks, may lead to an eventual advance back up to or near the 11,635-11,670 prior highs.

The Stochastics indicator, on a 21-day basis, is now in its 'overbought' zone. This aspect coupled with completion of a 66% retracement, suggesting a possible 'maximum' rebound, led me to exit Dow Index calls. I would rather re-enter calls if there was a pullback that took INDU back down a couple of hundred points, such as a dip back to the 11,000 area with another strong rally setting up from there again.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

I started out this Index Trader article on how very weak retracements will sometimes not cover more than a quarter or 25 percent of the prior move, which in this case was the early-May to mid-July decline.

You can see on the next chart of the Nasdaq Composite (COMP) the retracements I'm watching with COMP, beginning with 2103 and representing a 25% rebound; then the 2150 area and a 38% retracement. COMP got to an intraday high on Friday that would be the approximate area of a resistance or down trendline. A close above 2105, not reversed the next day, would be bullish and suggest upside potential to around 2150.

Near support comes in the 2051-2052 zone. Next lower support is suggested by the prior lows around 2012.


NASDAQ 100 (NDX) DAILY CHART:

The first pivotal retracement/resistance level was reached Friday at 1523 and a bit above in the Nasdaq 100 (NDX) and was followed by a retreat. There may be added upside potential to 1550 or even 1565, representing a 38% retracement. The Friday close looked weak technically. On the other hand, we can't read as much into what happens on a Friday with current events and as thoughts turn to the next Fed move in the coming week.

Must hold support for the bulls looks to me like 1475 in NDX. If the index starts slipping below near support at 1490-1484, then dips under 1475, a retest of prior lows in the 1450 area seems possible. I'm on the sidelines with trading Nasdaq index calls or puts at least outright and well, who wouldn't rather play the OEX or DJX options in the current environment. [I might remain long the QQQQ tracking stock, figuring that an oversold tech sector can still rebound further if the next Fed action is restraint or is seen as the last rate hike for a while.]


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

37.40 is the key near resistance; if exceeded, upside potential is to maybe 38.25 to 38.40 or possibly to a retest of the prior high at 39.15, but this seems like a bit of a long-shot right now. On the other hand, I don't see huge downside risk to those that want to just hold the stock as long as it can maintain levels above recent lows at 35.5 although major support isn't until 34.30. Maybe 34.00 should be the major sell stop for a continued hold.

Key near support is 36.25-36.30. We were stating to see a bit of a volume pick up last week in terms of daily volume, but nothing to write home about.

I know its tough to be in the airline business but perhaps tech is tougher right now. Google (GOOG) held an important up trendline, Apple (AAPL) was hanging pretty tough in the face of negative news (we love those Ipods no matter what!) and some other key tech stocks like Intel (INTC) are trying to build bottoms and Microsoft (MSFT) looks like it could (gasp) maybe get back into no mans land above 25. Looking at some of the bellwether stocks, there is no suggestion of another down 'leg' in the big cap Nasdaq 100. Strong upside potential? Well, that's another story!

If long the stock on a trading basis, a move to the 39 area is possible this month. My exiting stop would be bumped up to 36.40 (from 36.15) and I assume this is where entry was made at or below 36.


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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