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Index Wrap

Index Trader Wrap

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THE BOTTOM LINE:
The correction is underway; the one that looked like it would begin when the S&P 500 (SPX) weekly high (of the week before last) touched resistance implied by the top end of its broad uptrend channel. As I noted last week, a move to the very top of its broadest uptrend channel hasn't occurred since the highs of early-2004. SPX was also the most 'overbought' technically since this same period of early-2004.

In terms of the Nasdaq, I pointed out last week that the 'bellwether' Semiconductor Index (SOX) appeared to have topped, after tracing out a 'key downside reversal' in week ending 10/20 and a reversal in the semiconductor stocks/sector, usually spells trouble ahead for the broader technology indexes. I continue to look at the possible double top on the COMP Weekly chart below. It's worth repeating that the longer that COMP cannot get back above 2377 on a weekly closing basis the more that the 'possible' double top looks like a probably one.

More on the charts below as to what looks significant for the week ahead.

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 (TC) article was written Wednesday 11/1 and touched on the usefulness of trendlines, including resistance implied by the upper trendline that comprises the top end of the SPX uptrend channel noted above. More useful was the trendline break on the hourly charts as noted in my most recent TC column. A 'most' useful chart pattern called the FLAG was the other topic of this article. See your 11/1 OI Daily (e-mailed) market if saved on your PC, 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:
In the S&P 500 (SPX) Index key near resistance still looks to be in the 1380-1381 area. Major resistance is in the 1400 area. By the end of this past week, SPX had come down nearly to support implied by the lower end of its uptrend channel around 1360 as shown on the daily chart below. Support implied by the 21-day average (at 1368) has already been pierced on a closing basis, suggesting some potential for an eventual fall to the lower (3%) 21-day moving average 'envelope' line around 1321. The 21-day average tends to be a pivotal mid-point line.

There is a 50/50 tendency for both (at least initially) a rebound back ABOVE the 21-day average AND for prices to just keep moving lower, pulled down toward the lower 3 percent envelope line. After such a prolonged rally the odds of a deeper correction, then seen to date, is higher than a month ago. If prices are going to rebound back above near support implied at the 21-day average, it should happen soon. This rally covered so much ground from mid-July to the recent top, that a decline even back to the last downswing low around 1327 would only retrace what would be a fairly 'minimal' (fibonacci) 38% retracement.


S&P 500 (SPX); WEEKLY CHART:
The relatively steep (light blue) up trendline on the weekly chart suggests that the uptrend remains intact as long as the S&P remains above 1356 in the coming week on a closing basis. Conversely, a close above 1392 would be a bullish upside breakout. No doubt that SPX got as 'overbought' as it has since December 2004, after which prices rallied again to a higher high (but to a lower RSI reading) only to come down substantially after that.


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

Prices in the S&P 100 (OEX) Index got down to ITS lower trend-channel boundary by week's end and unless OEX rebounds and stays above 635, this technical support will be broken. A rebound back to near resistance around 642 seems possible, less so a close above the recent intraday high at 645. Intermediate resistance looks like 655 and 615 as support.

SENTIMENT AND OVERBOUGHT CONDITIONS:

My indicator shown above of bullish/bearish sentiment has been and continues to be in the mid-range (non-extreme) readings, which is not seen all that often during and after a prolonged rally. On the expected side, the October advance went into overdrive after an early-October dip into the level of bearishness considered to be a contrary indicator; i.e., suggesting potential for a further rally in this case.

Moreover, this recent period of a 'flat' trend in my sentiment indicator is the first time since late-2002 without any 1-day bullish or bearish extremes for the several weeks during and after a major move. This earlier period (early Octearly Dec '02) was also marked by a rally that was more prolonged and extended than anticipated by most traders. Since 'sentiment' is so much about expectations for the market, this makes sense.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Industrials (INDU) has also of course come down to the low end of its uptrend channel, and under its 21-day average, same as the S&P. Significant resistance levels are 12,165, 12,200, then 12,300. Near support is in the 11,980 area, which is in danger of being penetrated shortly. If this INDU move lower continues, look for downside potential to the 11,650-11,600 area.


WEEKLY CHART:

11,945 is the key area to watch this week for INDU basis the weekly chart. A weekly close below its steep up trendline suggested that the recent touch to the high end of its bullish channel was the definite 'signal' for a correction thereafter.


NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Pretty much the same chart picture everywhere, with the recent retreat in the Nasdaq Composite (COMP), only here the recent top was not from the top end of its uptrend channel, but rather from a line of recent highs around 2375. Look for lower levels from here, such as back to the 2234 to 2224 area.

Only if prices should hold around near support at 2326, and even more improbably break out above 2375, major resistance comes in at the upper end of the bullish channel, at 2425-2435.


NASDAQ COMPOSITE (COMP) INDEX, WEEKLY CHART:

The Weekly chart of the Composite highlights the possible double top and the steep up trendline, with pivotal weekly support on a closing basis at 2320 currently. A weekly close below 2320 would tend to 'confirm' that a bearish countertrend move is underway. Conversely, an ability for the index to hold above the low-2300 area and/or rally above 2377, maintains a still bullish chart.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has broken down technically below it's uptrend channel. Its subsequent rally took the index back to what is now resistance at the same trendline (what was support, 'becoming' resistance) and is bearish for the NDX chart. NDX chart action now looks more bearish than the Nas Composite chart.

1718 is key near resistance in NDX. I anticipate a continued move lower. Support is at 1692, then 1678, 1665, and finally more substantial and pivotal technical support around 1625.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Same chart, different levels. The Nasdaq 100 tracking stock (QQQQ) will likely see resistance coming in at first at around 42.25. Next resistance above that at $43.

Anticipated support levels: 41.0, then at the prior downswing low at 39.88. 39.75 to 39.55 shows up on my longer-term hourly charts (not shown) as prior areas of buying interest and therefore as potential support.


No change from my view of last week where I indicated that "I would rate this chart and the technical picture as suggesting that QQQQ is vulnerable to a decline.." More of the same coming up in my estimation.

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
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