Option Investor
Index Wrap

PICKING TOPS ARE TOUGH

HAVING TROUBLE PRINTING?
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THE BOTTOM LINE: We've been in a strong market move and trying to pick a specific price target for a top or stopping place for a pause or pullback is tough; tougher than bottoms usually. My further upside expectations for the indexes are based on the weekly charts and their well-defined uptrend channels, shown and discussed in my individual index commentaries. At this juncture when old recent highs are being surpassed, it's time to start paying closer attention to the longer-term weekly charts.

We may start to see some backing and filling (sideways) now that new highs have been seen and buyers could turn somewhat cautious heading into October, a not always favorable period. We have a slowing economy. The bullishness in a hoped for 'soft landing', where the Fed stops tightening, is the bullish story and not earnings expectations in the next two quarters.

My recent trading advice was to take profits on S&P and Nasdaq index calls held from lower levels, as it looked like a double top might be setting up in the S&P 500/SPX (not in the S&P 100/OEX as it had gone through its prior peak), especially given that the index was overbought. With Nasdaq, what I thought might be the stopper was the retracement of 2/3rds/66% of the prior decline, which can be a tough resistance point. However of course, the rally powered on to some degree this past week.

I went back to some 'homework' and ran a study on the history of double tops in bull markets, which is how this current market certainly has to be categorized, and double tops in a bull market are not all that common. I also pointed out in my most recent Wednesday (9/27) Trader's Corner article that a double top needs to be 'confirmed' by a Close below the 'confirmation' point, which is the downswing low prior to the second top; SPX 1290 in this case. That's the technical story; fundamentally, never underestimate the economic hope implied by the Fed easing up on the rudder!

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 (9/27/06) article which was more about 5 'high potential' (in terms of predictive value for the trend ahead) chart patterns, especially the double top, the Head & Shoulder's, and (new) the 'broadening' formation; e.g., a broadening top/broadening bottom.

To read or review this article, check your 9/27 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:
Recent renewed strength tells us why the Head & Shoulder's bottom (or top) patterns are reliable, as well as the 'minimum' upside price targets implied by this pattern. The S&P 500 (SPX) finally reached the 'minimum' upside target I measured for this Index as derived from the Head and Shoulder's bottom pattern traced out over May to July.

Such measured objectives are sometimes not quite reached, many times they are and surpassed. The rally above and beyond the prior 1327 high takes out the possibility that there was a double top forming. 'Confirmation' of a double top of course never came either, as there was nowhere near a pullback that would have taken prices to a CLOSE below the prior 1290 low (made before the push to the 1327 previous peak). Taking out puts on the basis of an 'assumed' double top had limited risk however, IF exit was made just over the prior high OR when the pullback rebounded from near support implied by the 21-day moving average.

Weekly chart analysis (following the daily chart) provides some idea of the next potential 'resistance'. It's hard to figure on the daily chart. SPX is trending higher within my 2 percent upper band (relative to the 21-day average), but this tells us nothing about a price target. It will sell off when it does and call holders should be alert given the overbought condition.

Look for near support at the 21-day moving average. If pierced, anticipate at least a short-term decline, unless prices pop right back above this trading average the next day. Pivotal support is at the last (down) swing low at 1311. A close under 1311, suggests that the next prior low around 1290 may get 'tested'.


WEEKLY CHART:
The key aspect of the weekly SPX chart is the well-defined uptrend channel that has been traced out over the past two years. The upper end of this channel intersects currently around 1362 and I take this area as the beginnings of major resistance. There's been a tendency for prices to continue to trend higher after reaching the top end of this channel, but the good-sized corrections have come AFTER this sideways to slightly higher trend runs its course and up trendlines or low end of the prior price range, are pierced.


THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) finally seems to be running into more selling up above 620 and the hourly chart (not shown) has formed a minor rounding top. It's hard to judge if a next correction will be as minor as the last ones. I continue to use the 21-day moving average as my guide; if this key trading average is pierced, look for a possible test of the prior swing low in the 597 area. Prices could then retreat to the 590 area even and still be within a quite 'normal' correction; and, head still higher after that.

The weekly chart shown after the daily chart will give a better 'take' on any major resistance and suggests that OEX doesn't hit major resistance until or unless it gets up into the 660 area.


SENTIMENT AND OVERBOUGHT CONDITIONS:
Finally, the last push higher took the RSI also to a new relative high, so there is no longer any bearish price/RSI divergence. Often characteristic of major, powerful and prolonged moves, what we can call a 'leg', is the LACK of extreme bullishness, at least by individual investors which is well measured by my call to put 'sentiment' indicator seen above. This situation alone keeps me believing that this advance has further to go.

WEEKLY CHART:
As I noted above, resistance implied by the top end of OEX's weekly uptrend channel is still well above current levels. The use of price channels like this are often good measures of where we are in the current market cycle; i.e., do we have a little or lot of room in the current trend trajectory for a further move in the direction of the trend.


DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) finally took out its old high, which was well noticed by the talking pundits. It's significant but new highs are as much sometimes made on stops being run, with a reaction or correction starting after that. I'd be watchful if holding Dow Index (DJX) calls.

If INDU doesn't correct further from recent highs, I figure near resistance and selling interest coming in to play next around 11,800. Near support is in the 11525-11475 zone. A close under the prior 11475 low, not reversed the next day, suggests a deeper correction than seen in the past few weeks, such as a decline that carried to the low 11,300 area.

How long can the 21-day stochastic 'hang' up here in 'overbought' territory? A long time when we get in a run like this, characterized by enough disbelief in its staying power. About the only other thing to be said about a prolonged overbought situation like this is that just when I, or you, decide that we just (finally) 'HAVE' to buy some calls, it will be over! Just kidding...sort of...not really!

WEEKLY CHART:
The first way of drawing the weekly upper channel line suggests that the Dow is already running into the upper end of its expected range, albeit within a still broad uptrend. If we expand the possible price range by using a parallel line that intersects the prior HIGHER weekly high, resistance isn't implied until/unless INDU got up into the low-12,000 area currently; or, this could of course be at whatever the intersection is during a week that the Dow gets up to that higher channel line; e.g., 12,100, etc.


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
Hum, I had been thinking previously that the Nasdaq Composite (COMP) Index wasn't going to climb above the 2240 area, and here we are with the COMP seemingly headed to 2300; if so, one implying a move up to retest the prior top in the 2347-2360 area. A good number of tech stocks are in decent recovery/up trends.

On an hourly chart and indicator basis, the short-term momentum is headed lower based on the past 3 days sideways movement. Near support is at 2220 down to 2208. Below this area, the key/pivotal support is at the prior 2147 low. Figure support in COMP around 2150, give or take 3 points. A close below 2150, not reversing higher the next day, would suggest slippage of another 25 points or so, but I don't have lower targets currently than that.

Near resistance looks like 2300. Major resistance suggested by the weekly chart begins in the area of the old highs around 2350. I anticipate COMP eventually reaching its prior highs but not getting above them as this area offers possible tough resistance for the Composite. Technology stocks look like they are in a decent recovery but the charts are not suggesting a major bull move.

WEEKLY CHART:
While the double bottom is a significant bullish positive in terms of viewing the weekly chart below, a key test is coming up with possible tough technical resistance implied if there's a run up to the previously broken up trendline; at the red down arrow at 2350, intersecting at what I sometimes call the 'kiss of death' trendline.

However, if COMP climbs back INTO its major uptrend channel, then this would suggest to me that COMP was back into a bull market phase; one with upside potential of 200 points; to 2550 or so.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has trended the same as the Composite in terms of piercing expected resistance at the 66% retracement level; this around 1640 in NDX. As with the Composite, the shorter-term hourly chart (not shown) is suggesting a possible start to a correction, such as back first to the 1615 area. Key technical support is implied by the prior low at 1558; if this level is pierced, look for next support around 1535.

Anticipated next resistance is up around 1700, then at the prior intraday peak at 1720. While NDX may turn around and rally again before coming down, it's due for a correction. Take the money and run seems like a good idea for those holding call positions.

I was a little early in exiting myself, but I prefer that to trying to hold on for the last possible points, but I tend to look at trading mostly on a probability basis; i.e., what is the likelihood of this move continuing 50 points higher versus correcting 50. When those two possible outcomes appear about equal, I won't take or stay in the 'bet' so to speak.

WEEKLY CHART:
Looking at the bigger picture weekly chart, it suggests that the longer term outlook is for more upside over the intermediate to longer-term, from around 1650 currently on up to closer to 1800 before the index would hit double trendline resistance; one, being the top end of NDX's uptrend channel, the other being resistance implied by a return to the previously broken weekly up trendline.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I don't have lot more to say on the Nas 100 tracking stock, or QQQQ, other than the price levels. Resistance is at 41, then 41.50-41.75. Major resistance is at 43 at the 'line' of prior highs.

Near support is at 39.8-39.6. Key technical support is implied at the prior 38.3 low, with a next lower technical support at 37.75.


The Money Flow Index (MFI) and On Balance Volume (OBV) indicators have turned sideways with the recent trend. MFI is at an overbought extreme again, but traveled a bit higher than before as the market continued to pull in buying. But...daily volume was trending lower this past week. Correction ahead? Probably, but stay tuned on this, as I'm only looking at the short term picture, but that is (still) within a strong intermediate uptrend.

WEEKLY CHART:
Case in point on the still strong uptrend, at least as implied by the tendency for back and forth wide-ranging price swings within the uptrend channel seen below on the weekly chart. Major resistance is not reached until the $44 area.

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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