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Index Wrap

A NOMINAL PULLBACK TO DATE

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THE BOTTOM LINE: This update is pushed into Sunday due to my travel schedule, a period which is over now.
To date, the pullback or correction is 'nominal' and looks like it could be relatively shallow. All the major indexes, including the Russell 2000 (RUT) nature, have rebounded from at or slightly above technical support; e.g., the area of prior highs (prior resistance 'becoming' support) and the 21-day moving averages.

It also should be noted that technically, this pullback is coming from overbought readings on the RSI, both daily and to some degree, on a weekly basis and which may mark conditions for another shot down ahead in the indexes in order to 'throw off' the recent overbought situation.

The 21-day average, something everyone can follow easily is my key near-term trading benchmark here. If prices start to slip under this pivotal trading average or under slightly lower technical supports in the Dow and Nasdaq indices, then we can look to the 38 and 50 percent retracements as the next possible support points. Violation of the relatively close by technical supports I mention and will highlight below would also suggest to me closing out remaining index calls and waiting to see how deep are the retracements.

While economic weakness (housing, etc.) is starting to seem more worrisome, the thinking may soon begin that maybe by year's end the Fed will be back to applying some stimulus by even lowering rates a notch. And, tech stocks are starting to gain some limited traction and seem to be showing signs of life. I always figure that the market can't really go into 2nd gear without technology stocks participating. Moreover, it seems unlikely to me that the Dow is not going to at some point at least equal its prior high up toward 11,700 (versus its Fri close of 11,395).

There is a lot of focus on the S&P 100 (OEX), as always, but especially now since it's been an outstanding mover, slightly overshot its prior multiyear high, but then started falling. Without upside follow through of course, a double top could be setting up. I have still a 'minimum' upside target of 612 in OEX and could see that Index going to the 620 area even, but these are theoretical and ideal, whereas the possible double top is NOW. So, caution is in order, but I don't think it's time to buy puts. At least I would rather trade on the side of the current trend, which is up.

The charts look ok to bullish. Oil stock pullbacks are part of this correction, but that seems like a bullish positive. Especially so if there is group rotation going on and that money is going into sectors like tech. The semiconductor group (SOX) looks like it could make up to the 500 area (Fri close: 438).

MY WEDNESDAY TRADER'S CORNER COLUMN:
This regular Wednesday 'Trader's Corner' column, which is featured in your e-mailed Option Investor Daily newsletter, gives me the opportunity to write on 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 (9/6/06) article on Point & Figure (P&F) charting, part 2, I went beyond how P&F charts are constructed and more into their unique aspects and usefulness, especially the idea of vertical objectives up or down being potentially equal to the widest horizontal column count.

To read or review this article, check your 9/6 OI Daily (e-mailed) market letter, or click here to go to the relevant web page.

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:
This past week's pullback in the S&P 500 (SPX) remains fairly nominal and support developed in the low 1290 area and around prior lows, which keeps the chart bullish in its pattern to date. 1300 looks like nearest resistance in SPX. The index is still working off an overbought condition.

Key resistance is at the prior recent high around 1315, then at the 1327 May peak. The Head & Shoulder's bottom implies a possible upside target to around 1335 at some point. Stay tuned on that; SPX first has to get through the old high, an area which may see substantial stock for sale and technical type selling if reached.

Pivotal support is at 1295, then 1290. A close under 1290 and not reversed the next day, would suggest that SPX was headed back toward the low 1260 area.


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

I had calculated for some time that the S&P 100 (OEX) was headed to at least a test of the prior 604 peak. Sure enough it ran up to, then through the level a bit, as shorts ran for cover. Given the overbought condition it wasn't too surprising that this first test of the prior top couldn't gain traction. The Head and Shoulder's bottom pattern suggests an eventual minimum upside target to around 612, with these objectives being more the 'ideal'; sometimes they are realized, and exceeded, sometimes not. And, the target may not be immediately realized.

We can't overlook that what we actually HAVE currently is a possible double top. On the other hand, I won't 'assume' a double top is in place this soon. More trading action is needed to see where and how much buying will materialize in the next 1-2 weeks.

The technical action that followed buying interest coming in around the 21-day moving average seems like a replay of the pullback to the last low at 582, which was followed by another up 'leg'. Stay tuned on that!

Pivotal and close by support is at 598; at the 21-day moving average. Next support begins around 590. The low-580 area is where I assume that major support will be found. Any close under the prior (down) 582 swing low and not reversed the next day, would be a bearish reversal of the near to intermediate-term uptrend.

SENTIMENT AND OVERBOUGHT CONDITIONS:
Bullish 'sentiment' continues moderate according to my call-put indicator; nothing extreme. This pattern coupled with the chart pattern, keeps me overall bullish on the further upside potential ahead.

DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) sold off of course, but consistent with the overbought readings we were seeing. The rebound so far is from near-term technical support. A downside penetration of the 11,320-11,274 zone, especially on a closing basis (daily close below the prior 11,274 low close) and not reversed the next day, would be bearish and suggest a deeper correction to come, perhaps back to the low 11,000 area again.

Resistance is first and foremost at the prior recent high at 11,488. Major resistance and selling interest has to be assumed to lie at the former 11,670 top.

The downward momentum showing on the Stochastic model can't be overlooked but is not yet also a reason to exit remaining calls and enter puts. For that trade, I would want the chart to 'confirm' bearish price action; e.g., break of a prior low, etc.


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains bullish in its pattern, but COMP needs to hold the 2150 area to suggest that there is going to be another rally carrying back to and above 2200, such as to 2235-2250.

I said last week, "COMP has reached a pivotal area (2200), half way back to the prior high relative to its July low." And, as is often the case with these things that ..."either the rally falters at a retracement of half/50% (2200 area) or upside momentum continues strong. We should know on this soon."

Provided 2123 is not pierced, especially on a closing basis, I still see further upside potential sooner still rather than later. If 2123 gives way, downside potential is back to the 2050 area however.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) did end up doing the 'expected' or typical retracement of half or 50% of its April to July decline. I noted last week that 1600 would have to be pierced, always meaning more than a 1-day affair, in order to realize further upside potential to the 1626-1635 area. NDX's pullback from its highs hasn't so far changed the overall bullish chart pattern.

Near support remains around 1540, but I would also pay attention to the 21-day average at 1558 as very close by support. If NDX starts trading down under this level and (especially) closes under 1540, such price action sets up next downside potential to as far as the cluster of prior lows in the 1475 area.

Assuming a rebound back above 1600, 1635 as mentioned already, is a next potential target and would also represent resistance implied by it representing a 62% retracement.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

QQQQ support and resistance levels haven't changed from last week and the chart remains overall bullish, with the pullback from the highs to date, relatively shallow. 39.25 needs to be overcome to keep upside momentum going and a next objective to the 40-40.15 area.

Near term and pivotal support is at 38-37.9; major support is at 36.25. The key resistance area remains 39.25 to 39.48, the recent rally high.

A close under 38-37.9 would suggest that the Q's would see still further declines, possibly back to the cluster of prior lows around 36.25.

Nothing doing with the above indicators (the Money Flow index and On Balance Volume, OBV) that adds much to the price chart pattern. The MFI (Money Flow Index) has reached the area where it suggested an 'overbought' condition before, after which the stock started coming down.

While 80 is the 'common' definition of 'overbought'/susceptible to downside reversals, readings in the last 18 months at 70 have marked significant highs.

Do I think we're in the same situation? Not necessarily. As soon as follow an indicator in a 'mechanical' way, what happened before stops 'working' so to speak. However, as a technician I also pay attention to the lower probabilities for a next up leg ahead of when an indicator like this comes back closer to an neutral (50) to bullish (30 area and below) reading.

Good Trading Success!

** SUBSCRIBER MAIL **
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens 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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