THE BOTTOM LINE:
The bullish view is that the market is in a sideways consolidation after a big and prolonged move. This is healthy and since the dominant or long-term trend tends to resume after such a consolidation more often than not, a next 'leg' or major move will be higher. The overall earnings trend is good; job growth is good, even though the housing sector is having a struggle.
Oil prices are coming down and of course that's a wet blanket for oil stocks that are a heavy component of the S&P. But lower gas and heating oil prices are good tonics for the Consumer. And, consumers still feel pretty well to do, as the bottom has not severely fallen out from under real estate prices. Our economy seems to be in no danger that the average consumer is going to get the religion of reining in their borrowing and spending, even if the new Congressional majority promises to rein in the government's drunken spending spree of the past few years.
What's a poor index option trader to do with such a mixed picture? If you are not selling premium in such a lateral trend, there is not much to do currently beyond very short-term, in and out type trades. As to taking more of a 'position' for the longer pull, I have taken a New Year's resolution to wait for the technical picture to clarify some more. I'm suspicious of this market suddenly taking off again while being in puts and conversely, am leery of being in calls, in case the market does its roll over routine; the 'roll over' routine is a slow movement, sideways to not a whole lot lower, but which is nevertheless ahead of a sudden and steep cascading 'waterfall' decline.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) Index did break down slightly this past week in that it closed under the prior 1410 low but not of course by much. The key support still looks to be the prior low around 1404. If there were a couple of back to back closes below 1404, then the chart pattern become one that looks the formation of an intermediate top, with further downside potential to the 1380-1385 area, perhaps to 1378-1375.
If such a move unfolded it would make for a kick-me feeling for not buying puts heavily on the last run up into resistance at 1427-1430. But, the feeling would pass; this is not an easy market to figure out in terms of how the next 50-point swing unfolds in SPX.
1420 is near resistance, at the 21-day moving average. Pivotal or key technical resistance has to be assumed as being at the prior 1432 high. I figure major resistance lies in the 1450 area.
The RSI is going steadily lower as prices go more or less sideways. This indicator is now in a neutral reading around 50. It hasn't shown an 'oversold' 30 reading in ages, typical of a prolonged bull move.
These type overbought/oversold indicators like the RSI (or Stochastics) are of little use in big move like we've had given the tendency for long periods in the so-called 'overbought' ranges, but the 3rd leg up associated (also) with an overbought RSI extreme reading, raises the probabilities are raised considerably for at least a sideways "time" correction developing thereafter.
Three's come into play fairly often. Before the bottom in June, the RSI had 3 separate oversold readings and the last one was the one to buy into; typical of declines, these extremes came more quickly one after another.
THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) has been trending sideways in a very narrow (price) range. 666 is so far, a potential double top and the key resistance. Major resistance comes in around 678-680.
650-649 is the possible low end of a trading range here. A close under that prior 649 low, not reversed back above this level the next day, suggests that the range will expand on the downside; such as in a move down toward next lower support at 640. The area around 640 is where I would be watching for an opportunity to get into calls; signs of buying interest in this area would get me in, with an exit point at 637 in case the prior low at 634 was the one to be 'tested'.
My potential interest in buying OEX calls also depends on what is seen on the call to put ratio (for equities options) ahead; a daily volume ratio suggesting a high level of bearishness as in a day of heavy put volume coming close to call volume, could be a key 'trigger' for a contrarian trade against the prevailing view. Especially if this dip into the 'oversold' zone on my indicator above was accompanied by signs of buying interest at a prior low or on signs of a key upside reversal; e.g., a new low, such as (especially) after a sharp 1-2 days fall, that was followed by a close above the prior 1-2 day's high.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Average (INDU) has resistance around 12,600 currently, with minor resistance around 12,480 at the down trendline that has formed over the past 3 trading sessions; not a major trendline at all of course, but if pierced to the upside and if INDU keeps going, this could be the igniter for a another upswing. 12,730 is estimated as a next technical resistance in the near-term.
The weekly close below the 21-day average was a tad bearish, but Monday-Tuesday should tell the story on whether there is going to be follow through selling. Traders are 'too' bullish for me to want to buy calls for further rallies ahead. I'd rather be a buyer of DJX puts on a move up to the aforementioned technical resistance (12,730 basis the Industrials).
Support in INDU is at 12,350, then at the prior (down) swing low around 12,243, with fairly major support pegged at the 12,075 double bottom.
The directional movement of the ADX line has been sideways, just as can be determined by eyeballing the chart. It was interesting to see this ADX indicator start moving lower after the late-November low, even though the Dow went to a nominal new high; this due simply to a slowing of upside momentum.
There are heavy hitter traders that will start shorting into rallies where this is true; e.g., on slowing momentum after a long run up. Since it takes some time to build a large short position, larger hedge funds won't typically wait until they see 'surrender' in the eyes of the bulls; it's then to late to short major blocks of stock given the rules on shorting only on upticks.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) is (guess what!) also locked into a relatively narrow 2470-2400 trading range. Such range bound trading could go on into and through this week. What with the bulk of earnings announcements not due just yet, I don't see what is going to pull this market well above or below this relatively narrow range, absent some shock event.
Reasonable guesses on upside potential on a breakout is to 2530; downside potential, if 2390 is pierced, is to 2340 or as low as 2316 at this prior (early-November) low. One thing that has tended to be true historically is that the longer a sideways trend extends after a major move, the bigger the potential for a good-sized price swing on a breakout above or below the boundaries of that sideways price range or 'rectangle' as Charles Dow named this pattern.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has more of a bearish pattern as its trend is lower, given the lower rally highs and lower downswing lows that have been seen. Based on this little downtrend channel you see outlined on the daily NDX chart below, 1728 looks like near support and 1809 as near resistance. 1824 is resistance implied by the rally high to date. 1693 is assumed to be an area of support or possible/likely buying interest based on the prior low in this area from early-November.
Nimble short-term traders in this Index, more than any of the other major trading indexes, could have made some profits trading the several 50 point price swings that have developed since the Thanksgiving top. Hey, we give thanks for what we want: movement! This hasn't quite been my game. I would like to take a ride on the wild side and buy calls if there's a dip to or just under 1700.
I like trading WITH the extremes in the RSI if there's a chart pattern that also lines up; there was an overbought reading with that late-November high on the daily charts (using a 13-day RSI). However, in a bull market you learn not to 'trust' overbought extremes for the most part.
However, at the next rally making an approximate DOUBLE TOP, it was hard to resist the 'defined' risk in NDX puts by setting an exit just over the prior 1824 top. Not a bad trade if the exit point was on the dip to, and just under, 1750. In this kind of market I strongly suggest use of the hourly charts (shown below the daily chart) as a trading guide, with an RSI indicator set to (length)'21'. The last oversold reading (at or below 30) on that basis with the hourly NDX was on 12/22 with the Nas 100 trading in the 1750 area.
NDX HOURLY CHART:
The problem of course with watching the hourly charts, such as the one above, is that you need to tune in to what's happening some DURING the day. Not always possible with a day job, and I have other work interests besides the markets. However, I can usually look at hourly and daily charts at least a couple of times daily. 'Pattern recognition' is NOT necessarily based on this report or that event.
You react (sucker bets usually) or anticipate (the smart money) what the market is doing. At least that was what I learned from the traders I hooked up with on the Street of Dreams. Not all trade that way of course, but I hated to be glued to the screen all day, even when I was a professional trader and analyst. End of my little soapbox oration! May we continue to live in interesting times.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) key resistance is at 44.5 at the top of the downtrend channel, on up to the prior top at 44.8. The 42.5 to 42.7 area is technical support; main support below 42.5 is at the prior 41.6 swing low. Equivalent pivotal resistance can only be guessed at, but I would estimate it for 45.25 on up to 45.5 over the coming 5 trading sessions.
Daily trading volume picked up over the past week and past the holiday doldrums, but the On Balance Volume had turned down by the end of the week. This doesn't make for a trend in volume but there's not much to go on with the price chart's mixed picture.
Good Trading Success!
Please send any technical and Index-related questions to me at firstname.lastname@example.org 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
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.