THE BOTTOM LINE: The indexes have gotten close to initial objectives I had for the S&P indices which is for a move at least to their prior highs; the S&P 500 reached a level just under, the S&P 100 just over and the Dow only had about 60 points to go to at least equal its prior peak. In the Nasdaq, initial objectives have been achieved for this move, which was for attaining 62 to 66% retracements of the previous decline. The just completed expiration was to the upside and the risk is for a pullback because of the loss of this influence for a time.
From current levels, given the increasing selling at or near the prior S&P highs or having retraced close to 2/3rds of the prior move in the case of the Nasdaq and given the overbought condition with both, it's likely going to be tough moving much higher for both Nasdaq and NYSE indices. Many key stocks are in gear in Nasdaq however, so I'm not really bearish, but just question how much upside versus how much correction there may lie ahead in the next 1-2 weeks.
At this junction downside risk may be equal to the further upside or reward potential. I sometimes evaluate a position I am holding, such as index calls in the present case, as to whether I would take a NEW position currently. If I did, if I was getting in for the first time, would my reward potential be at least 2 to 3 times what I would have to risk; this in terms of where it would make sense to set an exit point if the market went against me. In this present situation, the answer would be no. This leads me to the conclusion of being time to exit the bulk of my calls and to stand aside, rather than see if my only slightly higher objectives are met.
MY WEDNESDAY TRADER'S CORNER COLUMN:
In my most recent Trader's Corner (9/13/06) article I wrote on some miscellaneous topics such as 'pivot' points, re-visited some Point & Figure (P&F) charts as to how this chart type showed the S&P breakout first and, last but not least, wrote on the Head & Shoulder's (H&S) bottom pattern in terms of its predictability in showing where there will be not only an upside reversal but in how far the move will carry.
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MARKET NEWS and
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
Key resistance is at the prior 1327 May top. The Head & Shoulder's bottom implies a possible upside target to around 1335 at some point as I've been saying for awhile. And, as I said last week, SPX first has to get through its old high, an area which may see substantial stock for sale and technical type selling which we were seeing some of on Friday.
Pivotal near support is around 1300-1310; then at 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) pulled back a bit on profit taking selling at the end of this past week after coming within 1 index point of my 612 OEX target. If OEX makes it above 612, my next objective is to the 620 area. If reached, I will look at taking out some puts at that juncture, anticipating at least a pullback to the 600 area again.
Key near support is in the 600-597 area. A close under 597 would be bearish, especially if not reversed the following day. In that event, next support is 583-584 area.
SENTIMENT AND OVERBOUGHT CONDITIONS:
Bullish 'sentiment' has not gotten extreme and maintains bullish possibilities. I won't take this pattern as the one that determines that I want to stay in calls. I'm getting a little nervous with holding on to most of my gains in calls. This has been a good run and the wave or chart pattern suggests that there may not be a whole lot more upside, at least the pattern has fulfilled the 3-part rally pattern that is common or typical for a bull move.
DOW 30 (INDU) AVERAGE; DAILY CHART:
11,400 is near technical support; pivotal support is at 11,335. For a further 100 point INDU potential I figure I have a risk of a couple hundred point pullback. Hmmm, further reward potential 100 points, but with an equal risk of a couple hundred point pullback. I don't like that risk to reward if I was to buy into DJX calls right now. Not a bad way to evaluate whether you want to stay in calls.
The most that I've USUALLY seen the 21-day Stochastic model shown above hit the top 'overbought' area is 3 times, before a correction sets in. Stay tuned on that!
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 still, but COMP hit its prior 2233 peak and I'm not convinced that there's a whole lot more upside, without a correction of a 100 points.
An upside objective for 2233-2250 is what I was working with and COMP got to this area on Friday of course. I suggest standing aside from taking any new positions in calls in Nasdaq. Maybe COMP will reach the 2300 area before any substantial correction takes hold. Downside risk in a shakeout is down to 2175-2150 support. A close under 2150 would be bearish.
A retracement of around 62 to 66% is a good place to take some profits. It's unlikely that a new up 'leg' leading to a challenge to the prior 2375 high will begin from an overbought condition like we have currently and from a retracement level that is often a stopper to the bulls, at least for a time.
The Nasdaq 100 (NDX) has also reached my intermediate objective to 1635 and equal to a fibonacci 62% retracement. Maybe NDX can get to the 1675 area before coming down but also seems like a long shot, given the overbought present extreme.
Support is at 1582, then 1560-1558 area. The index could go up another 35-40 points, or down 35-65. Risk to profits in NDX calls appears to be more than the further upside potential.
The chart hasn't suddenly become bearish or anything, as NDX remains in a strong uptrend. While there's no suggestion of a downside reversal here, I also pay attention to when the key 62-66% retracement has been reached, to the overbought condition and to the probabilities they imply in terms of a still bullish risk to reward.
I'm suggesting to exit all or most NDX calls based on achieving my technical objectives and is my usual index options strategy; i.e., to trade for pre-set objectives and especially so with expiration is behind us. If you didn't roll into a further out month(s) in calls, I suggest standing aside and watching from the sidelines in the period just ahead.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
My next upside objective in the NDX QQQQ tracing stock has been met with the Q's move into the 40.15-40.5 zone. All other aspects of the chart and indicators remain bullish and intact. But from a trading standpoint the stock is overdone on the upside. Take profits on stock bought for a trade. Hold that bought for the longer term prospect for a move to and above 43 at some point this fall.
Immediate overhead resistance looks like it could come in at 41.0. Near support is 39, then 38.3.
The Money Flow Index (MFI) is showing an overbought extreme just over 70. Sometimes this indicator will get up to 80 before a correction sets in. The last time for this was back in June of last year (2005) and was associated with a two dollar correction; other times since then an MFI reading over 70 was associated with interim tops, where there was pullback of 1-1.5. I would like to buy back into the stock on a pullback to the 38 area, risking to 37, looking for a move to 42.50-43. Stay tuned on whether that ever unfolds!
Good Trading Success!
Please send any technical and Index-related questions to me at email@example.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
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.