THE BOTTOM LINE: I don't favor anything new at this juncture and am standing aside from taking any new positions. I'll wait to see some conclusive signs of an interim top, a break of the nearby up trendlines, and the like before assuming a bearish trading stance even if just for a trading turn. If the upper end of weekly uptrend channels are reached, I'll suggest index puts and will be using the weekly charts more in my assessments.
A wait for a buy in point after a correction is my preferred option even though it puts me on the side of the many who are playing this waiting game. There is an increasing risk of a correction to this powerful bull move but the outlook is still bullish for further gains over time. This market may continue to power higher without much of a retracement of the rally. It is the RISK of a shakeout that is rising, so should be weighed in taking on any new call positions. Taking out Index puts will go against a powerful trend, so has its risks too. As I said last week, tops tend to be rolling and more prolonged than bottoms, so taking such counter-trend trades are a difficult proposition for success too.
The dynamic so far has been a significant holding back by option traders to jumping in on this rally, this bandwagon. This has kept my bullish 'sentiment' indicator from getting to an extreme, which I measure in terms of equities call to put option activity on a daily basis. The situation of a big advance but an absence of a corresponding high bullish sentiment is fairly characteristic of many big market advances, especially those where there are only recent new weekly highs in a 1-2 year period. More prolonged and especially very steep runaway type bull markets are another story; everyone gets bullish in an excessive way and hangs on for a long portion of the inevitable decline, which is part of the dynamic of a bull market ending.
I'm usually early in getting out of Index call and put positions when there are these occasional prolonged moves that put the major stock indexes deep into overbought or oversold territory. To balance out this equation I am usually early in getting into major market moves. I like to take a big slice out of the middle of a price swing.
MY WEDNESDAY TRADER'S CORNER COLUMN:
In my most recent Trader's Corner (10/4/06) article was about the subject of 'pivot' points, which I will write more about this coming week, about how a recent sharp dip in bullish sentiment 'set up' the last big upside acceleration and was a review of upside objectives in terms of the high end of the weekly major index uptrend channels.
To read or review this article, check your 10/4 OI Daily (e-mailed) market letter, or click here to go to the relevant web page.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I have no crystal ball feel for the next move ahead. The RSI did confirm the most recent high in SPX. This market is as overbought as it typically gets, but that is not going to necessarily be a timing indication; this market can just keep going up too, 'overbought' or not. But the risk of a shakeout is growing apace equally also. I am targeting the idea of entering puts in the 1360 area if reached, risking 5 points.
The weekly chart shown after the daily chart here suggests that top end of the major uptrend channel is either 640, with the widest possible trend channel interpretation suggesting major resistance up around 660. I favor playing the put side if 640 is seen, risking 3 points only.
11,600 is support implied by the 21-day moving average and which would also put INDU near its up trendline. 11,475 is support implied by the prior downswing lows and a close below Dow 11,475 would suggest a short-term trend reversal. The market is certainly due for a correction, but the money is still flowing into big cap stocks. It's hard to see right now what might bring prices down. It's the case that stock prices tend to go from extreme to extreme.
This recent period is as long as I've seen the 21-day stochastic hang up in overbought extremes, without a correction starting. Except for other 'legs' and that is why we can't rely on overbought/oversold extremes as a timing device to go against the trend; in this case with DJX puts. A losing battle has been fighting the bullish tide in recent weeks.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
Support in this market looks to be first at 2245-2250, then at the prior lows around 2210-2212; a close under this level would likely bring in some more selling pressure. The 2150 area looks like major support.
The Nasdaq 100 (NDX) has likely technical resistance at 1700, extending up to 1712-1715. Major resistance implied by the weekly chart comes in around 1775. Near support is at 1640, extending to around 1625. Significant technical support is also anticipated at 1615 at the prior low. A close below 1615, not reversed (back above this level) the next day would turn the short-term trend down.
The weekly chart suggests that major resistance and selling interest may not come into play until up around 1775. Of course I'm talking about something other than a very short-term play, but rather one where the downside (from 1775 for example) might be close to 70 points. Of course it may that NDX gets to 1700 and then backs off to the 1650 area. This wouldn't be a bad trade for traders buying puts around 1700.
Hanging on to calls in a 'trend following' mode to this point has been a good strategy since it's kept you in the move. Sooner or later however there will be a quick reaction and downswing. Hopefully you see it coming and exit with most of your profits intact in calls.
Unlike the S&P, the RSI indicator has not been 'confirming' the recent push to a new relative high, suggesting a bearish price/RSI divergence. The RSI is trending sideways, while prices push on to higher relative highs. This divergence suggests at least to be wary to protect profits by a quick exit on some or all NDX calls in the next few days.
$42 is anticipated next resistance in the Nasdaq 100 tracking stock (QQQQ), with technical support in the $40 area. 40 is a key price, with a close under this level suggesting downside potential back to the 38-38.3 area. On the other hand, a weekly close above 42, suggests a next higher target around 44, as suggested by the weekly chart.
Like with the underlying NDX RSI indicator, the Money Flow Index (MFI) and On Balance Volume (OBV) indicators have turned down, although the Friday close was just a hair's breath from the previous day. This may be nothing more than the effects of the profit taking that has been a tendency of the end of the end of the trading week profit taking selling and squaring of positions.
I am cautious about the drop in volume at the end of the week in QQQQ and if long the stock on a trading basis would we watchful in the next couple of days for the effects of any bearish news.
Good Trading Success!
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] 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
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.