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Index Wrap

STAY THE COURSE\?

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THE BOTTOM LINE: As I said last week, there was no indication of topping or reversal type action from the week before and bullish sentiment was not extreme. That is still the case with sentiment. Bullish 'sentiment' reached a high point at the beginning of this past week, and while it was showing a more bullish outlook by option traders than seen previously, it was still not the bullish extreme typically associated with a significant (i.e., tradable) top. Consequently, I have no suggestion to exit index calls yet, especially since I exited this strong trend early. But again, risk to reward considerations from this point on in calls is not ideal or particularly favorable.

It's STILL a guess on where this rally will run of steam, although weekly chart channels suggest that the major indexes may be hitting some (at least) interim resistance. There are some disquieting signs in some key market sector 'bellwethers', which I'll show. Meanwhile, I'm mostly watching this market, and not liking to get back into calls given the length of this run without much of a correction.

OIL:
The CBOE Oil Index has hit the low end of its broad weekly uptrend channel and rebounded for the 6th time, which is very consistent, even amazing. On the one hand, strength in the oil stock sector is bullish as the oil stock group will tend to pull up the overall S&P. On the other hand, another rise in oil prices, if that's what is starting off again here, seems destined to be some trouble to the U.S. economy:


SEMICONDUCTOR INDEX (SOX):
The Semiconductor Index (CBOE symbol: SOX) has retraced 50% or half of its prior decline, which was followed by a trend reversal, even what I would call a weekly 'key downside reversal'; i.e., a move to a new high followed by a close under its prior week's low. Rallies led by the likes of Google (GOOG), Apple Computer (AAPL), even Microsoft (MSFT) are not enough usually to keep the tech stocks, as represented by the Nasdaq market, headed to major new highs. Participation by the SOX is usually needed for the Nasdaq to keep pushing to new highs.


Whether this action of the SOX is suggesting that the Nasdaq is a short (e.g., buy NDX Index puts) at this juncture can't be predicted yet, but it's action is at least a bearish divergence from the action of the Nasdaq Composite

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.

My most recent Trader's Corner article was written the week before last (10/11/06). This article described a 'pivot point' computation method from trading advisor John Person that projects 2-3 levels of support and resistance for the next day, week or month. The S&P 100 (OEX) chart that was shown in this Trader's Corner article with the October monthly 'resistance' points as calculated from the prior month's (September) price range:

Monthly resistance point 2 (R2) was reached in this past week by OEX at 635.95; call it 636. If this recent high turns out to be a turning point in the market it will be not only be very interesting but suggest that I start calculating at least the two main pivot point support and resistance levels and make mention of them weekly. A still-higher third monthly 'resistance' point (R3) is calculated for 647.2 in OEX.


To read or review this article and the aforementioned OEX chart, check your 10/11 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:
I thought last week that resistance might develop around 1368 in the S&P 500 (SPX) Index, then eventually up around 1400. SPX in fact got up to 1372 then came back down a bit and drifted more or less sideways for the rest of the week. I would peg resistance now at 1376-1380.

Technical support should be found first at 1343-1340; then, at the last downswing low at 1327.

This market is at an overbought extreme; nothing new there, but there is nevertheless buying interest and willing buyers still coming in. 'It's the Fed stupid' coins the phrase as to what is driving this PROLONGED rally. Before this, we were still in a Fed-engineered slowing by its power to raise interest rates. This market has had quite a run for this 'leg', of over 120 points without more than short-lived pullbacks of 20-30 points.

WEEKLY CHART:

SPX has now broken into its broadest uptrend channel with the weekly close of this past week taking prices above 1366 and the lower and lighter upper channel line. Next implied resistance at the upper end of the broader channel is at 1392 this week. There might be a weekly high around 1400, but a weekly Close over 1392 is needed to create a bullish upside penetration of the uptrend channel line.

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

Nearby technical resistance is still apparent in the 640-642 area, based on the upper channel line seen on the S&P 100 (OEX) chart below. Prices of course may just keep following this steep line and rate of price 'ascent' higher.

Near support is at 628-629, with important trendline support at 622-621 and key support implied by the last downswing low at 607.

SENTIMENT AND OVERBOUGHT CONDITIONS:
Many, including myself in several instances, keep thinking this rally has got to pause in a corrective pullback and potential call buyers hold back, but with this attitude being part of the dynamic that holds down bullish sentiment. When we see a day of twice as much (CBOE) equity options' call volume as puts (a ratio of 2-2.1 or higher), this will be the type of bearish 'capitulation' that tends to mark a top even if a temporary one.

WEEKLY CHART:
OEX weekly trendline resistance implied by the upper end of the broad uptrend channel comes in first around 640. If there's a weekly close above 640, then looking at the broader uptrend channel gives us the possibility of the Index heading up to as high at 664. Stay tuned on that!

This market is quite overbought at this juncture as judged by the 13-week RSI, here representing a quarter of a year (52/13 = 4). Coming into March '04 (not shown), OEX got more overbought than this but the Index traveled from 385 to 572, a distance of 187 points, in 7 months. By comparison, this rally from the low end of the weekly channel to this past week's high has advanced 78 points over just 4 months.

DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Industrials (INDU) cleared anticipated resistance around 12,000 and continues to follow the upper trend channel line higher as seen on the daily INDU chart below; implied near resistance along that line now lies at 12,075 on up to 12,100 by week's end. This market is going to go where it wants to go and any top prediction could be done as well with a dartboard as anything else.

Near technical support is at 11,900, then at 11,800. The prior downswing low at 11,653 is an important support; if this level was pierced, it would constitute a near-term trend reversal.


WEEKLY CHART:

Resistance implied now by the weekly chart uptrend channel is now up at 12,075. If the below channel is 'accurate', INDU could be about to top out, or pause in the 12,075-12,100 area, maybe for a week or two and then come down more substantially.

11,800 is technical support implied by the steep uptrend line, as noted at the green arrow.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
2390 on up to 2400 now looks to be the next technical resistance in the Nasdaq Composite, at the top end of the daily chart's uptrend channel.

Near support is 2300, then at 2224, which is most critical at the last downswing low; a close under this prior low would reverse the short-term trend lower.


WEEKLY CHART:
COMP has yet to pierce resistance implied by the prior highs at 2377. This may prove to be some tough resistance. With the Semiconductor (SOX) sector not fully participating in the rally, it may be difficult for the Nas Composite to make it above its prior top. Conversely, a weekly close above 2377, especially if it was part of a decisive upside penetration of this old high, would suggest that COMP was instead heading to the upper end of its prior bullish channel with its potential for an objective of the 2550 area before resistance was seen.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) reached the top end of the uptrend channel drawn on the daily chart below, with prices backing off after that but only in a more or less sideways drift. Another run at this upper trendline (to the red down arrow) would carry NDX up to the 1755-1760 area.

Support implied by the low end of the aforementioned uptrend channel (at the green up arrow) is at 1680. The near and intermediate-term trends are bullish/up as long as the prior 1623 low is not pierced, especially on a closing basis.


WEEKLY CHART:
Potential resistance suggested by the Nas 100 weekly chart comes in at 1761, at the prior high, then at 1773 at the previously broken up trendline, also noted by a red down arrow.

1663 is intermediate-term support at the weekly up trendline.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
In the Nasdaq (100) tracking stock (QQQQ), $43-43.25 could be the next resistance area, with 41.40 as near support. 39.88 at the prior low, remains the key or pivotal support; a downside penetration of the prior low would reverse the trend technically.


On Balance Volume (OBV) was again trending higher at week's end, which is a related bullish positive.

WEEKLY CHART:
As said already, 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 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.

Index Wrap Archives