Option Investor
Index Wrap

INITIAL PULLBACK

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THE BOTTOM LINE: I indicated in my last column (written Sunday, possibly not posted until Monday morning) that since the indexes were close to or at (in OEX terms) my initial objectives AND had been registering overbought extremes for a while, it looked like time to take profits on calls, which has saved some profits so far. Moreover, in my Wednesday (9/20) Trader's Corner, one of the 'high value' chart patterns I was discussing of double tops, it was obvious that the S&P 500 (SPX) could be seeing such a top.

In the Nasdaq my expectations were for a 62 to 66% retracement, that's all, and that's what we got. Often in the indexes, there's a 2/3rds (66%) retracement and then that's it for a while or that's it period.

Where we go from here on the various major indices is a subject of conjecture, but my expectation leans to a period of sideways to lower price action. The best I see is backing and filling for a while. The more bearish case is that the market does that for a while, then falls further for a deeper retracement. The next lower targets are the last (down) swing lows in most cases, per my discussions with the charts below. SPX would have to pierce it's prior swing low at 1290 (versus the close around 1315 Friday) to technically 'confirm' a double top.

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:
So far, unlike the S&P 100, the S&P 500 (SPX) hasn't quite reached the 'minimum' upside target I measured for this Index as derived from the Head and Shoulder's bottom pattern. Such measured objectives are sometimes not quite reached, many times they are and surpassed. However, the key technical aspect is whether SPX makes it above it's prior 1327 high and keeps going. So far, NOT and there's a POSSIBLE double top in play; 'confirmation' so to speak, of a double top is when prices not only back off from the prior peak but fall through the prior low, as noted on the chart below.

As I noted in my Wednesday Trader's Corner, when a market is hanging up in the overbought range according to indicators like the Relative Strength Index (RSI), Stochastics, the Money Flow Index (MFI) and the like, AND is at a prior major top, the risk to reward in an 'assumed top' is quite compelling.

That is, buying puts when prices are hanging in the area of the old high, setting an exit point just above and then waiting to see what happens. Usually in these situations, the downside potential on even a nominal pullback is 2-3-4 times more than the risk/exit/stop point; e.g., such as a pullback to the prior 1290 low.

Near resistance is 1327-1328; above this prior recent high, I figure selling intensifies in the 1335-1320 zone. Major-major resistance is 1358 currently, at the top end of the SPX weekly uptrend channel.

Possible near support may first come in around 1309, at the 21-day average; next support in terms of the chart is the prior 1290 low. If 1290 is pierced on a closing basis and the Index doesn't bounce back in the following session, this is the confirming point for a double top. That is the probabilities that a double top is in place (with significant downside potential ahead) increases dramatically when the prior low is taken out. Next support below 1290 is really not seen on the chart until back down in the low-1260's.

As far as what is suggested by the wave and seasonal patterns, there could be another rally ahead that does carry to new highs, followed by a more difficult October with a deeper retracement possibility and heavier selling pressures then.

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

The S&P 100 (OEX) got up just past my long-standing 612 target and the recent 615 peak is now the resistance de jour. 620 is the next possible area where selling could put a lid on another rally.

With the OEX, which has had the best relative strength of all the major indices, the pullback has been quite minor to date and hasn't even gotten back to the prior 607 high, which could now 'become' a first support area. The 605-607 zone is the area I'm watching on further pullbacks. A close below 605, at the 21-day moving average, would suggest the Index perhaps then dropping back to the prior 597 low. A close under 597, not reversed the next day, would suggest that OEX too has seen a top along with SPX. 585-582 is major support.

As far as taking in new positions, I'm not recommending anything currently. The 'easy' money so to speak (to the extent that index option profits are ever entirely sweat-free), was when the S&P was in a strong trend. Now, it appears that we're in a correction period. It may be more of a sideways 'time' correction or it may be a deeper retracement of prior gains, but that is not knowable yet technically. The conjectures of the economic and earnings outlook arent clear either, at least not to me.

SENTIMENT AND OVERBOUGHT CONDITIONS:
The RSI is backing off from an overbought reading, but just barely. This indicator has to come down substantially before it's in a neutral area around 50, let alone get back to oversold extreme. It may not do this now as far as getting back to an oversold extreme. A neutral reading or mid-range (e.g., 50), yes.

Bullish or bearish 'sentiment' hasn't gotten extreme for some time, so is not acting as a related indicator for a possible recent top. Most of the time major tops are NOT formed until there's more bullishness showing on relative to my call/put indicator. A bit surprising in that OEX clearly went to a new relative high. But not so surprising when the S&P 500 lagged this performance; and the Dow lagged more.

DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) nearly got to its old high, but about 40 points shy of it ran into too much selling spillover from the broader S&P 500 index and INDU fell in the last two days of the past week. The index to key in on was clearly the S&P and based on that, it started looking doubtful that there would be a new up leg that would pierce the prior 11,670 Dow 30 top.

The pivotal resistance zone is 11630-11670; a close above 11670 not reversed the next day, would suggest a next upside objective in INDU is to 11,770. I'm watching the 21-day average as potential near support, which is at 11,448 currently. The key technical support is the prior recent low at 11,323. A close under this level would suggest that the Dow too has made a double top; 40 points shy of its prior price peak is close enough to consider INDU as forming a double top too, along with the S&P 500.

Downward momentum showing on the Stochastic indicator is starting to accelerate a bit, but we've seen this before and the average popped back up. Maybe not this time; and keep in mind that a sideways or just sideways to only slightly lower move will cause this indicator to fall well away from its peak.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Last week I noted that there was probably not a whole lot more upside potential left for the Nasdaq Composite (COMP) Index. As I said when I wrote my initial comments at the top of this column, this outlook was based on the fact that the Index was nearing what I figured would be its maximum retracement levels.

Typically and especially when the index registers as high it was recently on the 13-day RSI, the maximum upside retracement will be in the area of a fibonacci 62 percent, or a bit higher, to around 66% or 2/3rds of the prior decline. When an index or stock of course retraces MORE than this, it's when I start looking for the potential for a 'round-trip' or complete (100%) retracement back to the prior top.

2261 is now the key resistance point, at the recent intraday peak. If there is a decisive upside penetration of this level, look for 2300 potentially a next upside target.

Key near support is at 2200 in COMP. The most important technical support is at the prior low at 2147-2150. A close under this prior swing low not reversed the next day, would suggest potential back down to the 2100 area.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has the same technical picture as the Composite in terms of being at an overbought extreme AND especially having retraced the same 2/3rds of ITS prior decline, after which it started falling. Near resistance is around 1650; if overcome however, NDX could be headed up to the 1700 area.

Near support is at 1600; then, the next support and the pivotal technical level is the prior low around 1558-1560. I would say that the 1600 level is going to be key as whether the Nasdaq big cap stocks develop more than the shallow corrections seen in the last few weeks. A lot of those individual stock charts don't look all that bearish yet and this period tends to show some seasonal strength in tech.

As I said, I'd watch the 1600 level as being key near-term for near-term direction. That is, watch the 21-day moving average (and it will 'move' or change some over the coming days of course), as to the ability for NDX to stay above it on a closing basis or not.

SAID LAST WEEK:
"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... I suggest standing aside and watching from the sidelines in the period just ahead." When you're right you had better write about it! Next time may well be different!!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Ditto on everything said above for the Nasdaq Composite and the Nas 100, as it pertains to the identical looking chart of QQQQ.

It the Q's can get and stay above 40.5, look for 41.5 as a maximum further upside target. 39.3, or whatever is the 21-day moving average on any particular day in the days ahead, will be a key trading benchmark as to a bullish (prices above the average) or bearish (below) chart pattern. The prior low around 38.3 is the pivotal support. A close below this level not reversed the next day, would suggest further downside potential to the $37 area.

The Money Flow Index (MFI) hit its 'overbought' zone again at the end of the week, so is hanging up there but prices are not. On Balance Volume (OBV) has turned down in line with the recent pullback in price. There are no divergences in these indicators here that suggest a reversal ahead; just the overbought extreme in the MFI suggesting that QQQQ may be topping out for now.

Good Trading Success!

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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