Option Investor
Index Wrap

FINALLY, TRADERS ARE BELIEVING THE BULL!

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THE BOTTOM LINE:
This bull run (emmm, sounds funny, except they are BOTH 'battles') picked up a surge of 'believers, given that Friday finally brought a bullish extreme on my bullish/bearish 'sentiment' indicator; i.e., the CBOE Equities Call to Put daily volume ratio got up over 2.1. That is, total CBOE equities call volume was 2.1 times put volume that day, the threshold ratio where I consider the market to be at an 'overbought' extreme in terms of the bullish outlook by traders.

One key indicator suggesting a possible interim top should be also balanced by noting that many bellwether stocks are in solid uptrends and the bellwether Semiconductor Index (SOX), a sector index important to the outlook for tech stocks, broke out above its weekly down trendline with this past week's close. Even the CBOE Oil Index (OIX) remains solidly within its weekly uptrend channel, the recent pullback in oil prices notwithstanding; gold stocks as represented by the Philly XAU index is in a downtrend, after making a major Head & Shoulder's top. Still, I have to take note of the fact that the only thing missing from a more normal (read 'tradable') correction has been the lack of bullish belief in this rally and bullish froth to this market by traders, particularly us index option speculators.

And sure, the extreme I'm talking about was an expiration Friday, but I have not found that the extremes in these ratios are not 'modified' or negated so to speak by an expiration. The bulls haven't had as many believers in the big bull move we're in compared to some past ones, but this situation is also fairly typical of the first RUNAWAY move in a bull market. The situation is one typically where there are still a lot of cross currents fundamentally, but institutional money gets behind buying stocks in a major way; the rally is especially fed by the 'trend-following' money managers. Individual traders don't lose THEIR jobs if they don't buy into a big rally. They have to believe in it!

Typically a top will be seen within 1-5 trading days after such call to put readings (2.1 and higher on my indicator). Sometimes the timeframe to a top gets stretched out, but this is the exception. And, I'm not talking necessarily about a 'final' top or anything, but corrections of an intermediate nature and duration; i.e., a tradable pullback and put purchase opportunity for nimble traders, or a correction leading to a pullback low that is (finally) perhaps a 'safer' place to re-purchase index calls. Such a top tends to follow in a fairly predictable 1-5 day timeframe after the extreme per the OEX chart below. It also makes sense that there has to be correction soon; otherwise, it wouldn't 'set up' the Santa Claus (opps, excuse me, 'holiday') rally into year end.

My 'sentiment' indicator points to broad timeframe trading-wise: 'up to' 5 days is a long time in trading. And an extreme in bullishness doesn't pinpoint a PRICE ZONE as a possible resistance or reversal target. But my indicator has been over many years a mostly reliable first indication that a market move is getting 'overdone'. After this kind of tipping point, I tend to get a lot more focused on where major indexes might be hitting certain resistances or on acting on any 'key reversal' day (a new high, followed by a close under the prior day's low) and so on. You can see my call to put 'sentiment' indicator as always on the S&P 100 chart below.

MY WEDNESDAY TRADER'S CORNER COLUMN:
Featured this past week was some of the ways that I look for a top or 'resistance' points in a move which is taking the major indexes to one new high after another. I'm referring to my regular Wednesday 'Trader's Corner' column that appears in your e-mailed Option Investor Daily newsletter. It is my 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.

To view this article, see your 11/11 Option Investor (OI) Daily (e-mailed) market letter, if it is saved on your PC, or by clicking here to go to the relevant web page to see it on the OI web site.

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:
The S&P 500 (SPX) Index broke out above the cluster of highs at 1389, and what was resistance can now be viewed as near support. Just as 1389 defined the upper trend channel line, a next potential resistance area at the extended upper channel comes in at 1416.

1376 is current trendline support and the 1360 area, support implied by the last downswing low. Looks like this move is going to continue forever and we will all get rich owning stock! Opps, in case I'm daydreaming and you're heavy into index calls, don't fall asleep.

If there is a move to a decisive new high, followed by a close under the prior day's high or, more definitively, under the prior day's low, this becomes the type technical action that suggests a near-term reversal; especially so, if followed by the up trendline being pierced on a closing basis, which is not reversed the next day by a swing back above the trendline. And watch for a move again to the upper trend channel line, followed by lows that start falling under the prior 1-2 days. It may be hard to believe that SPX will again rally to the upper end of its channel and invite profit taking, but then again why not.

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

The big cap S&P 100 (OEX) is falling a bit behind the broader S&P 500, but it also has a heck of further move higher last week. I figure that money managers are ranging out to some of the smaller S&P companies that look less pricey than the big cap stocks. 660 is an area of resistance that appears here. Not only as implied resistance by the upper channel line, but by some other calculations, the major one of which appears on my last chart in my most recent Trader's Corner article, which can be seen by following the link noted at top.

644-645 is key support; if pierced, even more pivotal support is implied by the prior downswing low at 634.

I anticipate exiting the few OEX calls I bought on the last dip (and after the sideways 'basing' type move over 5 trading sessions) if OEX starts falling under either 646 OR rallies to the 660 area. Moreover, I also figure to enter OEX puts on a move to the 660 area, risking 3-5 points, anticipating a pullback to at least 645 after that.

Trying to buck this trend has been a suicide mission, but I've tried once or twice only to quickly get back on the side of the trend. When I get so bullish that I can't see anything BUT this market going up for another 50 OEX points, then I will be a GREAT indicator of it being time to buy puts like crazy.

SENTIMENT AND OVERBOUGHT CONDITIONS:
I highlighted above in my 'bottom line' commentary above, that what I have NOT seen to date indicating excessive bullishness, the kind that suggests this market is near an interim top again versus it current 1-way flow, is a single day where CBOE total call volume is more than double put volume in EQUITIES. Hey, wait long enough and it finally happens, as seen above by the spike up in the 'CPRATIO' portion of the chart above.

My indicator, in response to a couple of e-mail inquiries is alas, one that I have to keep up by hand and input the daily ratio into my TradeStation software. Have been doing this for years. I hope no one puts it in their charting application as another indicator! Having to do this little calculation every day is enough to keep most traders from charting it and, more importantly, from acting on it. By the way, in a someone related vein: in case you think that someone will SELL a truly profitable trading system that you can just buy and it will also make YOU rich, let me know and I will start leaving cookies and milk again for Santa Claus.

DOW 30 (INDU) AVERAGE; DAILY CHART:

12452 is next key resistance in the Dow 30 Industrials (INDU). The strong week into expiration took INDU above the prior 12,186 top which is now highlighted at near support below. 12,152 is the current intersection of the bullish up trendline and the pivotal near technical support; a break of this level suggests further downside, perhaps to the prior swing low at 11965. Stay tuned on that!

The Dow 30, whose 30 stocks tend to be institutional darlings, especially because they can absorb a lot of money, is in a very strong move. Check out the close on the Friday high. We'll see if the coming holiday week will slow it down.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) broke out above minor resistance around 2400 and powered higher. COMP has consolidated in a minor bull flag pattern and look poised to move up again, probably or quite possibly to its upper channel line which intersects at 2483 at the beginning of the week and which extends over time up the 2500 area. Where this rally stops or pauses no one knows. A number of key tech stocks are in strong up trends, so this index can just keep rolling higher.

Trendline support is at 2375 currently. Next support is down in the 2316 area. This move will end when it ends. The Nasdaq 100 has maybe not as bullish a chart as the Composite and that's next up.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) daily chart has perhaps minor resistance at the upper channel line at 1823. I thought that 1800 would offer some resistance based on it being (finally) a quarter or 25% retracement of the 2002-2004 bear market decline; can you believe that NDX has only retraced 25% of that fall!.

However, as you'll see on the weekly NDX chart following this one, the most significant technical development has to be seen as NDX being back above it prior uptrend line; meaning, that it is down back into the SAME upside rate of change that it was in previously. Hey, tech stocks are rocking again! Can a new mega-bull market in tech be far behind!? Yeah! But, a plain old bull market in technology would be dandy.

1730 is pivotal technical support at the trendline. One more shot up and this Index may start retreating again to the lower end of its channel. These channels have been pretty accurate for many weeks now.

NASDAQ 100 (NDX): WEEKLY CHART:

The weekly chart shows the 25% retracement matched by this latest NDX weekly close and the move back ABOVE the 2002-2005 up trendline. A 38% retracement is a LONG ways off still, but stay tuned!

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The same pattern exists in the Nasdaq 100 tracking stock (QQQQ), and a move to 44.8 will hit the upper channel line and possible minor resistance. The 42.5 level intersects at trendline support currently.

The Money Flow indicator suggests some less bucks going into these stocks, suggesting a bearish divergence and a cautionary note to the bulls, but On Balance Volume is very strongly pointed higher. I don't like the declining daily volume trend however. I'm cautious on the 100 Nas Index.

NASDAQ 100 TRACKING STOCK (QQQQ): WEEKLY CHART ASPECTS:

If the same pattern as in prior interim and tradable tops holds true, look for the Q's to hit the top end of its weekly uptrend channel for 1-2 more weeks, then come down. It's also remarkably consistent for tops when the 13-week RSI hits the 70 area. I would like to short this stock at some point, but I'm in also giving the strong trend sway over all other considerations for now.

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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