Option Investor
Index Wrap

SLOWING (UPSIDE) MOMENTUM

HAVING TROUBLE PRINTING?
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THE BOTTOM LINE:
The market may have begun a correction that may turn out to be of a duration and length that is more than the very short-lived ones we have seen in the last 5 months. We've been in an unusually strong uptrend, but only recently has trader 'sentiment' also been catching up to the strong trend so to speak; this, as seen in the greater bullishness suggested by the equities call to put ratio I rely on as a read on the market outlook evidenced by options activity. So often, the market doesn't correct until there are more people on board buying into the rally. This also then sets up greater potential selling when the market does start to correct.

The summary of the chart and technical patterns that look relevant here are: the S&P 500 (SPX) closed the week still above its weekly up trendline, but with the suggestion of a 'rounding top' on the daily chart. The S&P 100 (OEX) and the Dow 30 (INDU) closed below the same up trendlines as drawn on their daily and weekly charts.

The uptrend of the broadest benchmark measure for big cap stocks is intact, but upside price momentum is slowing. Moreover, SPX, OEX and INDU got as 'overbought' recently on a 13-week basis (as measured by the Relative Strength Index or RSI) as these indices tend to get without at least a period of sideways to lower movement that is more than short-term; i.e., greater than just 1-2 weeks.

Last week I gave some levels on ALL the indices that would suggest the beginnings of downside reversals, but estimating closes that would be below the dominant trendlines a week ahead is tricky. The charts and their trendlines will be seen below and now reflect a more precise picture of the technical patterns.

As for the S&P, bellwether stock General Electric (GE) is languishing and appears to be hitting resistance implied by its 50-day moving average. GE looks more and more to have a double top formation. Oil stocks, as measured by the OIX (the CBOE Oil Stock Index), are resurging and is supporting SPX. However, resurging oil prices, as we go into the cold weather heating oil season, is not especially good news for overall market trend.

The Nasdaq has also maintained a weekly close above its weekly up trendline, but below and outside its daily chart uptrend channel. Nasdaq 100 (NDX) has so far held the low end of its uptrend channel, but on a weekly chart basis has now slipped below its prior 2005-2006 up trendline. Nasdaq is probably not going to 'carry' the market higher here. To do so would require the Semiconductor sector to continue to rally and the Semiconductor Index (SOX) has to date met resistance right at its 62 percent retracement line, suggesting the rally may have run out of steam; i.e., its rebound is a partial retracement only of its prior decline, not a rally that will carry back to the prior top.

MY WEDNESDAY TRADER'S CORNER COLUMN:
Featured this past week was, besides my 'two-day' rule, on bullish sentiment finally jumping to an extreme seen typically before tops or interim tops, as well as speculation on the shape and duration of a correction if it was of the typical 'a-b-c' or down-up-down variety; e.g., one that would see OEX fall back to the 627 area potentially.

My regular Wednesday 'Trader's Corner' column that appears in your Wednesday e-mailed Option Investor Daily newsletter 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 11/29 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 has been drifting sideways to lower but hasn't yet fallen to a close anyway that is under its long-standing up trendline. However, there is the outline of a possible 'rounding top' as seen below. Given the relatively steep slope of the up trendline seen on the chart, a close below 1389 in SPX in the near term would put the Index below and outside its uptrend channel, as well as under the trading-significant 21-day moving average.

Support is first seen in the 1378-1380 area; pivotal support is suggested by the prior intraday low at 1361. Near-term resistance is at 1406-1408, then estimated for the 1420-1422 area.


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

What I've noticed over the years is a tendency for tops in the market to develop within 1-5 days after a 1-day 'overbought' reading in my sentiment (CPRATIO) indicator. The recent high in the market came 3 days after the extreme in the my indicator.

Last week's sideways to lower drift in the S&P 100 (OEX) has kept prices from regaining the uptrend channel and what was a line of support (the up trendline) is now suggesting an area of near resistance at 653 as noted at the red down arrow on the OEX chart below. Above 653 I've long seen 660 as a possible pivotal resistance based on some other technical measurements not seen here; resistance suggested by the upper end of the uptrend channel (as seen below) is at 670.

Near support is at 642; next support and more key technically if it was pierced, is at 634, at the last downswing low. I'm looking for another move lower, possibly even to somewhat below 630. However, if OEX can get back above 653 and stay there, the long-standing powerful advance looks to be back on track.

S&P 100 (OEX) INDEX; WEEKLY CHART:

Unlike the S&P 500 Weekly chart (not shown), the S&P 100 has closed below its weekly up trendline as has the Dow 30 (INDU); since its pattern is the same, its redundant to also show its weekly chart. The rally or rate of ascent has been very steep over the recent months; it's unusual to see a major market index going up at that angle of ascent for so many weeks in such a powerful advance.

These kind of up 'legs' tend to only go on so long before, at some point, there being a correction of at least a quarter to a third or so (up to one-half) of the prior advance. However tops can take a long time to form and it can be some time before there is a price 'collapse' or sharp decline. Stay tuned on this for next week's action!

An indicator factor suggesting there may not be much further upside progress without at least a sideways ('time') correction, is the extreme seen on the 13-week RSI above. I've rarely seen this indicator on a quarter year, 13-week basis, get above 70 and have a rally keep going much beyond that point.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Resistance implied by the previously pierced up trendline in the Dow 30 Industrials (INDU) comes in around 12,300 in the next few trading sessions and the Average would need to get back above this area to suggest that the bull was again charging onwards and upwards.

12,356 is where the recent rally ran out of steam. 12,075 is the 'line' of prior support seen on the INDU chart below. Below this level, support is implied by the prior swing low at 11965. The pattern to me suggests another downswing ahead, one that could carry to perhaps 119 in the Dow Index.


NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) has closed below its up trendline and the low end of its uptrend channel, suggesting to me that COMP is headed lower; 2400 on a closing basis looks to be the level to watch ahead. A decisive downside penetration of 2400 or just a close below 2400, that was not regained the next day, would suggest that a move to the 2360 area would be next, with COMP perhaps falling to around 2340-2342; or, even re-testing the prior downswing low around 2316.

This more bearish view would be negated if COMP regains the 2423 to 2340 area and starts climbing above 2340; expected resistance would then be seen at the prior high at 2468. Major resistance is anticipated next if there was a climb to new highs around 2500-2506.


THE NASDAQ COMPOSITE (COMP) INDEX, WEEKLY CHART:

As can be seen on the weekly chart next, COMP did maintain a Close above its steep up trendline. Besides watching the trendline, I would point out the prior 2383 high as a level to watch on a closing weekly basis. Inability for the Composite to stay above the prior high (resistance, once penetrated, 'becomes' future support) would suggest that the upside price momentum in the tech-heavy Nasdaq market was faltering.

As with the S&P indices, the Nas Composite, on a 13-week basis, got as 'overbought' as I've typically seen it without a significant correction to follow per the weekly RSI indicator on the chart above. This is not a sure bet on a top as the past has shown us at times; but, as a guideline for the probabilities of COMP tacking on another 100 points versus dropping back a 100 points, the directional 'odds' here favor 2300 more than 2500-2550.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) daily chart has now pulled back to the lower end of its uptrend (price) channel at the green up arrow seen below. It would be fairly common for a move still lower, but we'll see on that. A rebound from recent lows keeps the NDX uptrend pattern intact. A close above 1800 would suggest that the Index might again reach the upper end of its uptrend channel, continuing the patter of the past many weeks.

1760, then 1735, are support levels to watch in the Nas 100. The last downswing low at 1693 is a pivotal point; 1700-1690 is the most significant/'pivotal' support currently on a technical basis; a close below a prior downswing low suggesting a potential reversal in the intermediate trend.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The same technical pattern exists of course in the Nasdaq 100 tracking stock (QQQQ) as in the underlying NDX index. The Q's should hold 43.5-43.6 and start rallying again to suggest that the stock was going to maintain itself within its uptrend channel and its prior upward rate of momentum. 41.6, at the prior low, is a potential downside target if near support at 42.7 gives way.

Daily trading volume jumped on the recent declines, suggesting that more liquation may be ahead and an increase in selling pressures.

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.

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