Option Investor
Index Wrap

NEW YEAR'S TREND QUESTIONS

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THE BOTTOM LINE:
The short-term (2-3 week) trend is now best seen as sideways. Is the market building a minor top? Consolidating, for a renewed push higher when new quarterly money comes into play in January? My crystal ball is hazy. The long-term and intermediate-term trends are up; two consecutive closes under the prior (down) swing lows around 1404 in the S&P 500 (SPX), 650 in the S&P 100 (OEX), 12,243 in the Dow 30 (INDU) would begin to turn the intermediate trends lower in these indexes.

A Nasdaq Composite (COMP) close below 2390 would turn the intermediate trend lower in the broadest Nasdaq index lower. The Nas 100 (NDX), with its inability to hold above 1760, may be pointing toward this trend change (up to down) already. Stay tuned on all this in the New Year!

Sentiment has gotten more bullish finally and two recent single day 'overbought' readings in my equities call to put ratio is suggesting that the market is getting vulnerable to a deeper correction.

Seasonally, there is a tendency for a major correction to hold off in the first couple of months in a new year due usually to added money becoming available in Q1 being put into equities.

It's hard to figure yet that a major correction is just ahead. I'll play the odds and wait for the market to get to a neutral to oversold reading again on the indicators like the Relative Strength Index (RSI) and my sentiment indicator. I'm not really eager to short this market and take out index puts. I would rather buy calls on the next downside correction and wait for a definite sign of a top in SPX to make a put play. The Nasdaq looks weak to be sure with a possible double top and with a dip below its weekly uptrend line as seen next on the weekly charts, but the S&P can still pull tech up again, at least another time.

S&P LONG-TERM CHART:
That steepest weekly uptrend line in SPX is holding and hasn't yet been pierced. This index is about as overbought as it gets on the longer-term (13-week, 1/4th of year) RSI, as noted on the weekly chart below, but you can't bet on just this indicator; it can fall back and flip up again. There's a tendency for an overbought market to stay overbought for some period of time; when the index in question is in a bull market especially of course.

NASDAQ LONG-TERM CHART:
A different picture is presented in the Nasdaq weekly chart pattern below relative to the S&P, in that COMP has pieced its steepest up trendline. However, this pattern can still be viewed as a sideways consolidation, prior to a resumption of the major (up) trend.

Technically, an index is strongest when, after pushing to a decisive new high, it then doesn't trade lower than its prior top; i.e., resistance, once broken, tends to 'become' later support. In COMP the prior weekly tops hit 2375; however, the prior high Close at 2343 is probably the more meaningful 'benchmark' support.

MY WEDNESDAY TRADER'S CORNER COLUMN:
I write this column weekly as an adjunct to this column, giving me a chance to explain technical aspects, patterns and indicators that are relevant to the current market trend(s) or as an explanation of technical market principles.

My past Wednesday Trader's Corner column, as seen in that day's (12/27) Option Investor Daily market letter, was on the subject of the On Balance Volume (OBV) indicator, which can often tip off upcoming trend reversals in stocks; this is often the case when "volume 'precedes' price". For those who missed this read, you can go to your saved OI Daily e-mail of 12/27 or view this article online by clicking here.

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 is still trending sideways. I construed the chart as looking potentially bearish last week. This week, a 'neutral' on the trend read is accurate to say, as SPX rebounded early the past week from support implied by the 21-day moving average. I also indicated last time that above 1410, SPX remained bullish in its pattern, below this level (1410) and then especially on a close below the prior 1404 low, the Index would look bearish short-term.

1378-1380 is the key major technical support. 1432 is pivotal near resistance and 1450 is my estimated major resistance, at the top end of the projected uptrend channel.

I have no strong take and outlook on what happens from here in SPX. Right now, it looks like a trading range and consolidation and we have to see whether prices stay in, or break out of a 1404-1432 range.

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

The S&P 100 (OEX) is also stuck in a sideways move, with 666 as top side near resistance, and 672-673 as resistance implied by the previously broken up trendline. 667, at the 21-day moving average is potential near support; OEX has had enough upward momentum and buying interest to have stayed on balance above this key trading average for some weeks now.

Technical support is evident or projected at the prior lows at 650, then at 640. A close below 650, not reversed (back to the upside) in the next day or two after would be bearish and suggest at least an interim top; OEX would have to pierce 640 decisively to suggest a major top might be in place. Stay tuned on all this conjecture! Somehow I don't think this market is done on the upside, which is maybe the perfect sell signal for you all!

There has been a build up in bullish sentiment in recent weeks as I discussed at top. Readings like the two 1-day spikes up to what I define as an 'overbought' level, as seen above in my call to put ratio on the CBOE, are often associated with the market running out of gas thereafter; its seen most recently in these instances. Option players can always find advantages when they have a good idea that the market is likely to go sideways for a time ahead.

The lack of any sharp pullbacks tends to keep the newly won over bulls confident that 'this time' again there will be another up leg to follow. Maybe, maybe not, after such a prolonged rise and after the market gets 'overbought' in this sense of the majority having finally and/or already bought into stocks in one way or another.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (INDU) is also struggling to make it to a decisive new high. The pundits made a big deal out of INDU being up 16 percent in 2006. I suppose there might be a few who made that return or better that were more or less 'passive' investors. So rarely however does anyone invest all that they are going to on the first trading day of the new year.

Still, not a bad year for the main stream big cap stocks on a year over year basis; not so great in Nasdaq but it was above inflation, at a 9 percent gain and in a sort of 'normal' historical spread over and above the long (Treasury) bond return.

Key near INDU resistance is in the 12,500 area, then up around 12,680/12,700. Support is in the 12,400 area, then at lower earlier lows in the 12,240 area. If INDU falls under this prior low and keeps declining, there is next apparent support at 12,075-12,100. I doubt currently that there will be an opportunity to buy DJX calls cheaper than in the 120.5-121 zone.

I've been keeping the DMI indicator on my INDU chart lately; it could have been as easily the S&P. What I find interesting is not so much the upside and downside crossovers of the DMI- and DMI+ lines, as they whip back and forth (too many 'signals') in a sideways move, but the direction of the blue ADX line. Only when the ADX line starts moving in an upward direction is the index, stock or commodity defined as 'trending'; this is the case whether the price trend is up OR down.

You can also see the trending/non-trending situation by a 'read' of the chart pattern, but the indicator is of interest as a visual reinforcement. Looking at the overbought/oversold indicators are is of limited interest here, being of most use in a market of more two-sided price swings. In a market that has mostly been strongly trending, then starts going sideways (loss of 'trend'), the DMI indicator is useful for the occasions when its ADX component line turns up again, 'confirming' a renewed directional momentum.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) remains bearish in its pattern, given the declining trend after the possible double top and the inability this past week for COMP to get back above its 21-day average.

There is of course the possibility that COMP has settled into a 2400-2470 trading range for awhile and will trade in this kind of range for a time before breaking out again to the upside and resuming its longer-term uptrend. However, if the prior 2390 low is pierced COMP could be headed to as low as 2315-2335.

All eyes should now be on 2390 as the nearby, pivotal prior (down) swing low. A new low can set up anywhere that sufficient buying interest develops of course, but there's no close by prior bottom shy of 2316 to suggest where that next low might set up; 2376-2368 represents the 62 to 66 percent retracement levels (and potential support points) relative to COMP's November advance.

Near resistance is 2432, then pivotal resistance at the line of prior highs around 2468-2471 in the Nas Composite. A close above 2468 would be bullish; next potential resistance then would look to be 2490-2500.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has the same bearish pattern as the broader Composite. If anything NDX looks weaker than COMP as NDX has taken out its prior swing low at 1760. 1741 is noted on the chart below as near support, based on it being at the low end of the downtrend channel outlined on the chart below; NDX will retrace between 62% and 2/3rds of its prior advance, at 1743 to 1738. Major support is suggested at the level of the prior 1693 low.

1780 is near resistance, then 1795. 1811 to 1824 is the pivotal overhead resistance zone if a good-sized rebound develops.

If 1740 gives way, I anticipate a further decline that would take NDX toward the 1700 area at some point; if so, it would also be likely to set up a fully oversold RSI reading for the first time in months and a possible call buying opportunity.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) support and resistance levels are noted at the up and down (green and red) arrows on the Q's daily chart below. Volume has been low so it doesn't look like there's been major liquidation such as in any kind of selling panic that's taken place. Potential new buyers are being cautious after the steep rise that's taken place in recent months.

I'm watching the 42.7-42.75 area as pivotal near support and it looks bullish if prices hold at or above this area; conversely, a decisive downside penetration of it suggest further downside potential, with a target to as low as 41.6.

Good Trading Success ... and a HAPPY NEW YEAR!

** SUBSCRIBER MAIL **
Please send any technical and Index-related questions to me at Contact Support 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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