Option Investor
Index Wrap

MAJOR INDICES REVERSE LOWER AT KEY RESISTANCES

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THE BOTTOM LINE:
If significant or even interim tops/pauses have occurred in the week just ended, then these downturns happened at telling points in terms of the charts of the Weekly S&P 500 (SPX) and the Nasdaq Composite (COMP).

In SPX the turn came as soon as the weekly high touched resistance implied by the top end of its broad uptrend channel. A move to the very top of its broadest uptrend channel hasn't occurred since the highs of early-2004. Interesting. And, this event occurred after the lead S&P 500 Index reached the most 'overbought' condition technically since the same period of early-2004.

I'll lead with this weekly chart here of SPX. The pattern is the same in the Dow and can be seen in the major index commentaries below:


In terms of the Nasdaq, I pointed out in this column last week how the lead or 'bellwether' Semiconductor Index (SOX) had traced out a 'key downside reversal' in the prior week (ending 10/20) and this type action is usually one that will spell trouble ahead for the broader technology indexes.

What developed in the week ended Friday (10/27) is a possible double top, as shown in the COMP Weekly chart below. This is only a tentative possibility, but one that bears watching, especially if the Composite can't pierce 2377 on a weekly closing basis. COMP had only recently made it back up into its previous uptrend (price) channel. Implied support at 2333 at the green up arrow on the chart below, I view as near support and a level to watch for clues to the near-term trend; ability to hold above 2330 maintains a bullish weekly chart.

The same trendlines, such as the lower up trendline on the chart above, can play different roles at different times. This trendline was first a 'line' of support, then, when broken, defined resistance. When prices recently rallied back above this line, it could be viewed as a line of support again. Trendlines simply show a rate of price change over time. When prices rebound to such trendlines, it suggests that the trend could be back to its same rate of upside momentum. When that rate of momentum falters, it may then be that selling is overwhelming buying interest.

I showed possible resistance or upside technical price targets based on price channels and other considerations and measurements (e.g., pivot point calculations of potential 'resistances') in my most recent (Wednesday) Trader's Corner column.

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 Wednesday 10/25 and can be seen by checking your 10/25 OI Daily (e-mailed) market letter, or by clicking 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 figured last week that potential resistance in the S&P 500 (SPX) Index would be in the 1380 area, on up to 1400, and the Index continued to follow its upper trend channel line higher, hitting 1389 before backing off. There is some reason to think that this recent high may be at least an interim top based on the weekly chart analysis shown above for the S&P 500. There may also be another shot up to test the 1400 area but I think this will finally offer some tough resistance.

Technical support is assumed to lie at the low end of the very well defined uptrend channel seen on the SPX daily chart below, which intersects in the 1352 area currently. A decisive downside penetration of this lower channel line would be bearish and suggest that a top was in place for now. Key lower technical support is 1330-1327, then in the 1315-1312 area below that.


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

Prices in the S&P 100 (OEX) Index kept going up last week and hardly backed off with the Friday weakness. This Index is hanging tough! The upper end of its trend channel is now seen up in the 650 area, so this area may be the next minor restraint on rallies this week. If selling comes in sufficient to drive prices down, look for buying interest/support to develop around 630, at the low end of the aforementioned uptrend channel. Next support is around 620, then 612-610.

Whew! It's been quite a run and one of the dynamics continues to be the absence of so much call buying and full-blown bullish enthusiasm for stocks that it suggests market 'sentiment' is at the kind of 'extreme' bullishness often seen at a top.

SENTIMENT AND OVERBOUGHT CONDITIONS:

My indicator shown above of bullish/bearish sentiment continues to be fairly moderate, especially relative to this tremendous run we've had in the market. Although the recent high/overbought RSI reading suggests that the market should come down or moderate its unrelenting advance, there has yet to be even one day where equities call volume was double (or more) that of daily CBOE put volume. A day of such high call volume relative to puts, when it happens, will suggest a good possibility of a top to follow within a day to a few days. Until then, the corrections may continue to be mild.

The charts suggest some potential for being at or near a top, but this is not yet matched by a bullish extreme on my sentiment indicator, all of which adds up to being cautious but to also giving a lot of sway to the strong uptrend.

WEEKLY CHART:

The OEX weekly chart suggests that there is still considerable upside in the S&P 100 as measured by how far it could still go up before the index would hit resistance implied by the upper end of its uptrend channel OR would retrace enough of the prior decline to hit potential resistance implied by a fibonacci 62% retracement; the 'little bit' more that is often seen beyond 62% is a 2/3rds or 66 percent retracement. Now that OEX has sailed past a one half/50% retracement, the potential should be considered for a further move to 670 or to 690 at some point.


DOW 30 (INDU) AVERAGE; DAILY CHART:

I have been keeping track of the Weekly pivots and projected resistance points calculated by the method lately popularized by John Person. The Dow 30 Industrials (INDU), as seen in its daily chart below, hit the 2nd or higher weekly Resistance (R2) level calculated by this method which is calculated from the PRIOR week's price range; once INDU went past the 12,130 suggested weekly resistance point, the average then seemed to struggle with some late-week bearish news.

News that is potentially bearish (e.g., slowing economy) won't necessarily derail a strong bull market trend however. Stay tuned on that! I am finding it interesting to follow the weekly 'pivot' point calculated by this particular method and the 2 support levels and 2 resistance levels calculated mechanically from the pivot. I'm not quite ready to start showing these points on my charts every week but this method looks promising in showing these levels at some point or making note of them when and where appropriate.

WEEKLY CHART:

The Dow 30 (INDU) Weekly chart has the same pattern as the S&P 500 with a definite pullback developing right after the high for the week hit or touched its upper trend channel boundary. The market may churn around up near this line for another week or two or more, OR come back to the upper channel line again LATER as was the pattern in early-2005; at that time INDU came back to upper boundary 10 weeks after its first pullback (see the left hand side of the chart below). After this prior return to the upper channel line, the next decline was the more significant one in terms of a put play.


NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has been struggling to hold above the 2350 level. Resistance implied by the well-defined upper end of the (daily chart) uptrend channel seen below is in the 2400-2425 area.

Support suggested by the low end of this same channel, as well as the 21-day moving average, comes in at 2315-2320. If 2315 is pierced and not reversed back to the upside the next day, this would suggest that COMP could be headed down to the 2225 area in a re-test of the prior downswing low.

I've looked at the WEEKLY Chart of the Composite in my initial ('Bottom Line') commentary above. On the weekly chart the potential for a double top is apparent in the 2377 area. The COMP daily chart seen above doesn't go back to the April period when this previous high was made in the Composite.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) reached the top end of the uptrend channel drawn on the daily chart below the week before last and not a whole lot has happened since. Technically, the rebound back up toward the 1750 area, which was a new closing high, was accompanied by a declining Relative Strength Index or RSI as I've highlighted on the NDX daily chart below. This bearish divergence is suggesting that a top may be forming. If so, it doesn't mean that it also suggests a deep decline ahead; a sideways move or drift can develop also.

The key level to judge how much of a correction was developing is if support at 1700 was pierced; if it was, I don't see substantial chart/technical support until down around the prior swing low at 1623, on down to the 1600 area.

WEEKLY CHART:

The most interesting NDX chart is the weekly chart shown below. The rally to date has taken the Nasdaq 100 Index back up to resistance implied by the previously broken up trendline; my 'kiss of death' trendline for the way this trendline seems to be such a stopper for rallies back up to it. Stay tuned on this!

1800, if seen, would mean that NDX had finally retraced 25% of its prior decline. Pretty amazing really that the big-cap Nasdaq index has not even yet recovered a quarter of what it lost from the 2000 top relative to the late-2002 bottom. The area of recent highs is a key or pivotal area for NDX in my estimation. If there was a weekly close above 1800, not reversed downward the following week, this market could start to gain some traction. Right now I don't see it (happening) based on the underlying stock charts comprising the Index.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Key near resistance in the Nasdaq (100) tracking stock (QQQQ) is at $43 as I suggested last week. On the weekly chart (not shown) major resistance looks more like $44. Support is at 41.7, with lower support in the 40-39.9 area. Volume has been relatively low or at least has not been expanding on up days such as this past Thursday. However, On Balance Volume or OBV shows that there has been accumulation (buying) on balance on up days.

A mixed picture but I would rate this chart and the technical picture as suggesting that QQQQ is vulnerable to a price decline ahead, consistent with what I'm seeing in the underlying NDX Index. That said, the surprises in this trend or the no-surprise in this trend is that it keeps on going up!!

Good Trading Success!

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.

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