Option Investor
Index Wrap

A MIXED PICTURE

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THE BOTTOM LINE:
The technical outlook ahead looks somewhat mixed in terms of the risk to an uninterrupted continuation of the market's strong uptrend. I preface this with the fact that the major stock market indexes' bullish chart patterns remain intact and the market has now been basically in an uninterrupted advance for 19 weeks.

What makes the picture somewhat 'mixed' in its outlook technically and suggests an increased chance of a correction, is the degree to which the market can be considered 'overbought' in two ways: #1 is that bullish sentiment (since the week of 7/21) finally reached a recent 1-day 'warning' extreme on 11/17 in the extent of trader activity on the call side; one that is at/above the threshold level that typically precedes a top within 1-5 days.

My #2 consideration is the recent extreme high in the 13-week Relative Strength Index in the S&P indices and Dow, as well as the Nasdaq; highs in this indicator not seen since early-May, after which there was a 100+ point downside correction in the S&P 500. This is not to say that history will repeat itself in the same way, but these technical considerations are warning that the risk of a more substantial correction is at hand.

What we don't know is if a potential stock market 'correction' when it comes will be more of a sideways or lateral move for a period of time, say 2-3 weeks, rather than a deeper price pullback. Hard to say, but us index option traders have to be concerned either way if we're holding calls and expecting the same rate of price increase in their premiums as seen over the past weeks and months.

The S&P indexes look like they could have begun a correction that will lead to further slowing of upside momentum; perhaps mostly happening due to a rotation of more money going into tech stocks. Buying of the lagging tech sectors (e.g., Semiconductors) looks to be a result of S&P stocks looking 'fully' priced in the eyes of money managers. Since there are such well-defined up trendlines in the weekly charts, we can at least predict where the uptrends are reversed. Those levels are a WEEKLY close ahead in the S&P 500 (SPX) below 1386, below 647 in the S&P 100 (OEX) and under 12,190 in the Dow 30 (INDU).

The technology heavy Nasdaq, lead by the bellwether semiconductor sector, looks to be barely faltering in ITS uptrend to date. However, the volume trend in the Nas 100 tracking stock (QQQQ) is quite divergent from price action as the stock keeps going up on less and less daily trading volume. The numbers on downside penetrations of the Nasdaq weekly up trendlines are follows, again on a WEEKLY CLOSING basis: below 2400 in the Nasdaq Composite (COMP), below 1783 in the Nasdaq 100 (NDX) and to below 43.25 in the Nasdaq 100 Tracking Stock (QQQQ).

As to the RSI overbought extreme mentioned on a 13-week week or quarter of a year basis, the S&P 500 (SPX) weekly chart here is typical. I have also pointed out recently that SPX broke out above minor technical resistance implied by the upper end of its broad uptrend price channel so this other aspect has nothing to do with the strong price trend which remains intact; the RSI extreme seen is in fact a RESULT of the basically uninterrupted 19-week advance. Note the level of the Relative Strength Index (RSI) with the latest weekly close relative to any week in the past few months, at least since the mid-May peak:

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 has leveled out in the slower going of the holiday shortened week just past. Resistance implied by the upper SPX (uptrend) channel line comes into play around 1420. Support at the low end of the channel is at 1386 for the beginning of the week ahead.
A close under 1386, which is also the level of the 21-day moving average, not reversed the next day (by a move back above the trendline) would suggest that the uptrend was faltering. However, it would take a close below the prior downswing low at 1361 to suggest that at least the near-term trend had reversed.

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

I have thought for some time that the S&P 100 (OEX) Index would have trouble making it above 660, but maybe at least temporary resistance is coming in at 654-655. Resistance implied by the upper end of OEX's daily chart channel is at 665 currently. Key near-term technical support is at the lower channel line in my estimation, currently intersecting at 648. As with the broader SPX index, a close below 648, as well as a close below the 21-day moving average at 645, would suggest that the upward price momentum was turning down. A rebound back up into the mid-point or higher level of its uptrend channel would suggest renewed upside momentum. Only a close below the prior swing low at 634 however, would suggest on a technical basis that the short-term trend had reversed.

Since I have 'called' 3 of the last ZERO tops, my predictions of any imminent demise of this monster bull move is suspect, but a pullback at least is overdue and over-over due. What gives me more to go on now is the 1-day extreme in the recent equities call to put ratio of my 'sentiment' indicator; this, because it has a quite good record of predicting at least interim tops in the next few days after the kind of extreme that is seen on the lower portion of the OEX chart below:

DOW 30 (INDU) AVERAGE; DAILY CHART:

12528 is technical resistance in the Dow 30 Industrials (INDU) as judged by the upper channel line and the nearer-by lower trendline intersects at 12232 as noted by the first support up arrow on the INDU chart. 12,075, at the prior downswing low is pivotal support in the Dow.

INDU has formed a minor rounding top, which is more pronounced on the Hourly chart (not shown), but this has to be looked at also in the context of the low volume trading week just past. There wouldn't any mistaking of the significance for the near-term trend if 1. the Dow rebounded up toward the middle to high end of its uptrend channel again or 2. pierced its prior (12075) low.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has resistance just over 2500 and pivotal near support at 2400, at the low end of its uptrend channel. The most important lower anticipated support is at the prior 2316 low. A break of this level, especially on closing basis, would suggest that the near-term COMP trend had reversed lower. As always, on any such break I want to see that the following day brings as these things can also be driven by 'stops' that, once out of the way, brings more buyers in the next moring.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) daily chart is nearing the upper end of its price channel at the red down arrow seen below. It would be fairly typical for a pullback to develop from recent highs or after a touch to this upper channel line, that would carry the Index back toward the low end of its channel, currently intersecting at 1748. If so, a rebound from the 1748-1750 area would suggest another move higher. If not, 1693 at the last swing low is key and pivotal technical support.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The same pattern exists in the Nasdaq 100 tracking stock (QQQQ) and the levels for QQQQ are seen below.

I mentioned the 'overbought' condition and on the QQQQ chart above this is seen in the Money Flow indicator back up at an overbought 80 reading. The volume trend is diverging bearishly from the upward climb in prices.

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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