Option Investor
Index Wrap

DE-TRENDING

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THE BOTTOM LINE:
While all the major market indices managed to close up on the week and higher than the Friday close of the prior week to the one just ended, only the S&P 500 (SPX) managed to make to make a new high for the advance dating now from late-July. This rally is pretty 'old' now given the lack of much of a pullback to date. My view of last week of slowing momentum is unchanged. The market is no longer strongly trending. The trend may resume higher or strongly higher again of course; or, JUST turn sideways for a week or two and then turn up for a year-end rally.

If the trend is now going to be sideways for a while, the timing problem for those wanting to stay with index calls is (besides the erosion of time premiums) is that you never know when a sideways trend will turn into a sharp break one day. Bottoms are easier than tops, as there tends to be those 'spike' or 'V' bottom lows, followed by strong rallies. Tops tend to form over a longer period of time and when a break comes it can be fast and furious when there has been such a heady rise beforehand; and, when there are big profits to protect.

The bulls, especially fund managers who must keep buying stocks as long as the trend is up, may be running out of willing money to throw at stocks in a slowing economy. No doubt we're seeing a lot of thinking that the Fed not only has and will stop raising rates, but will turn on the money spigot again if necessary to keep the economy from doing more than the hoped for 'soft landing'. But with the major past fiscal stimulus of deficit spending grinding to a halt under the new Congress in 2007, who knows what set of factors will keep the economy chugging along with the housing market taking a sidelines breather. The piggy bank of home equity lines of credit not looking so fat is something to consider when thinking about consumer spending ahead.

Hold on here, could this be me speculating on the 'funny'mentals of the market? Of course! The 'indecision' pattern we see in the charts only REFLECTS what is out there in the 'real world' view of the Street of Dreams.

My thoughts on the market losing it's trend or 'de-trending' so to speak, is mathematically shown in an indicator called the Directional Movement Index (DMI) indicator, which I wrote about his past week in my Wednesday Trader's Corner article and which you'll see 'applied' to the Dow 30 (INDU) daily chart below.

MY WEDNESDAY TRADER'S CORNER COLUMN:

In a nutshell, the 3 components shown in the DMI indicator above are:
1. ADX: provides an indication of HOW MUCH directional movement (trend) is present in a market and provides a way to compare the trend in different markets. For a major stock market index like SPX, an ADX reading above 40 shows a very strong trend. (Volatile commodity markets can see ADX reach 70 or above.) An ADX line below 20 is usually defined as a 'non-trending market.
2. DMI plus or DMI+ is a measure of plus/upward movement.
3. DMI minus or DMI- measures minus/downward movement.

The DMI+ and DMI- lines are, not surprisingly, going sideways as seen in the INDU chart above, but if the Average continues to drift lower, the DMI+ line would cross BELOW the DMI- line which would be considered a 'sell signal' in terms of this particular technical indicator.

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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 trended higher in the past week. Prices have been going up on balance, on less 'relative strength' according to the RSI indicator which is trending lower. The divergent trends are highlighted by the two light blue trendlines on the SPX chart below; one line is sloping up, the other down. Such a potentially bearish price/RSI divergence has been seen before (late-Oct into mid-Nov), without a downside reversal developing afterwards.

Sometimes this kind of divergence forewarns a top, sometimes not. (Duh!) The second time a divergence like this sets up tends to increase the probabilities that it (the divergence) may preface a top so I pay attention to it. By paying attention I mean that I am doubly alert to any signs of a key reversal like a new high followed by a close under the prior 1-2 day's low, a trendline break, the 21-day moving average being pierced, etc.

Near support is at 1400, then 1380, with intermediate support in the 1360 area. Near-term resistance is at 1420, with intermediate resistance up in the 1440 area, at the top of the uptrend channel.


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

We continue to see a sideways move in the S&P 100 (OEX), at a 'line' of resistance that's developed at 655. Trendline resistance implied by the previously broken up trendline comes in not much higher, at 658-660. A close above 660, not reversed the next day, would suggest that the OEX uptrend was back on track; at that point a next upswing would look to have potential to 670 to 675.

Near support is at 650, then in the 640 area, with next significant technical support at the prior 634 low.

It looks like OEX could be building a top here. At a minimum this is the first time in many weeks when there was not new relative high made within a couple of weeks after any pause in the trend. I always look for changes in whatever pattern has gone before that might also suggest a trend reversal that I wouldn't want to be on the wrong side of.

Interestingly enough, the high to date occurred with the usual 1-5 trading days (3) after my call to put 'sentiment' reached an 'overbought' extreme in bullishness. OEX has since not gone higher.


DOW 30 (INDU) AVERAGE; DAILY CHART:

Near resistance is assumed to be at the line of prior intraday highs in the 12,360 area in the Dow 30 Industrials (INDU); above this level I anticipate next resistance to come in at the previously broken up trendline at 12,400. Near support is at 12,250, with the principal technical support being found in the 12,100-12,075 area.

As with the similar chart pattern in the OEX, INDU looks like it could be building a top; or, establishing a trading range for now between 12,360 and 12,100.


NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) is holding above its up trendline; for how much longer is the question. COMP would need to close above 2427 at the beginning of the week to maintain itself in this line of ascent. Near technical support is in the 2400 area, but if prices break again toward this area and I suspect they will, I see better than an even chance that the Composite starts heading toward the 2350 to 2315 area.

Near resistance is at 2450-2455 with pivotal next resistance at the prior 2468 high. A close above 2468, coupled with an ability to stay above this prior high, would suggest that COMP could again head up toward the upper end of its uptrend channel, which implies that technical resistance wouldn't be seen before the 2500-2530 area.


NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) again in the past week pulled back to the low end of its uptrend channel, but has maintained a close above its up trendline. This may not continue much longer judging by the recent pattern of a lower rally high than the prior high point for the move. However, so far NDX, like COMP, is hanging in there in terms of its uptrend.

Near resistance is at 1810. The prior high at 1824 then is the next level to watch for repeated resistance/selling interest if there's another rebound from trendline support. Higher resistance implied by NDX's upper trend channel boundary comes in at 1875 currently.

Near support is at 1760-1770; next support is at 1700-1693 but well under the Friday close; this being of course the area of the early-Nov lows.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

In the Nasdaq 100 tracking stock (QQQQ), near resistance is apparent at 44.5, then at the prior high at 44.86.

Unlike the underlying NDX index, based on the way the up trendline has developed, the Q's have closed under one line of technical support. Minor differences in chart patterns show up in the Index versus the stock, just as they do between the nearby futures contract and the S&P for example. Sometimes weakness in the stock (QQQQ) will tip off weakness to come in the Index.

The jump in volume upon prices tailing off near the end of the week, suggests that there are some nervous holders of the stock who don't like the slowing (upside) momentum. The chart looks more bearish than bullish for the near-term. I anticipate a further fall.

Support is at 43.30-43.35, then at 42.75-42.65; significant support is likely if there was another decline to the prior (down) swing low at 41.60.

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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