Option Investor
Index Wrap

TWO MARKETS

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THE BOTTOM LINE:
The S&P 500 (SPX) and the Dow 30 (INDU) finally achieved what looked like decisive upside penetrations of their previous highs; SPX on the move above 1440 and the Dow above 12,600.

Nothing doing with the S&P 100 (OEX), which didn't quite make it to a new closing and intraday high; and especially not so with the seriously lagging Nasdaq Composite (COMP) and the Nas 100 (NDX), raising the question whether we could really be in a sustained bull market without tech stocks doing better than this. As the Nasdaq could be tracing out a 'broadening top' pattern, it's a question in my mind how much staying power this slow-mo rally will have in the NYSE stocks.

It's not been a particularly good market for option traders since mid-December with its slow and mostly meandering trading range; not like the 5-month blast up from mid-July. Trading opportunities recently haven't been stellar, but index funds are still ticking off some gains of course.

As far as further upside potential, there is an upside projection to around 1480 or higher in the S&P 500 at some point and with potential to 688-690 in the OEX. If the Dow reached the top of its broad uptrend channel again, INDU could see 12925.

If the Nasdaq caught fire again, it could reach 2525 and NDX get to the 1860-1865 area. Clearly the best relative strength is seen in the S&P 500 and in the narrow INDU average. A question is whether this market will get substantially higher by the February expiration. And by March ... well, there has been a seasonal tendency for a sell off in March in 2 of last 3 years; there wasn't a big sell-off until May last year.

Meanwhile traders have been consistently on the bullish side in terms of their outlook/'sentiment', without even any 1-day over-weighting in puts. In the market's perverse way, the tendency for traders to finally have a predominately bullish view has been part of the dynamic of limited gains in the past few weeks, unlike the 5-month monster rally that was accompanied by caution and apparent 'disbelief' in how high stocks could go, seen from mid-July to mid-December.

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.

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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The chart of the S&P 500 (SPX) is bullish with the breakout to new highs after the strong past 3-day rally. Again, prices held in the area of the 21-day moving average; there was just a minor dip below this key trading average before the Index rebounded again.

Near support should now be found in the 1435-1440 area of prior resistance, as resistance, once exceeded, tends to 'become' support. Next lower support can be anticipated around the previous lows in the 1420 area.

Resistance is a guess as the current rally is into new high ground for the move. Based on a study of the long-term hourly chart (not shown), there could be some selling pressure that will start to come in around 1450. Longer-range resistance implied by the high end of the broad uptrend channel seen on the daily chart below is at 1480.


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

Unlike the broader 500 index, the S&P 100 (OEX) didn't yet exceed its prior high. In the near-term the 670 area is the place to watch to asses the staying power of this recent rally. The chart meanwhile has to be read as bullish, but just pending the ability for OEX to make a decisive new high. This especially, given the picture perfect rebound over several sessions, from the lower boundary of an uptrend channel dating back to last summer.

There is also an uptrend channel that has been traced out over the past several weeks in the hourly chart (not shown) that suggest potential near resistance at 671-672. The 21-hour oscillator is closing in on an overbought reading; similar readings since mid-December have preceded 5-7 point pullbacks.

682 is at the upper envelope line and OEX would be abnormally extended (above) its 21-day moving average at that juncture. Major resistance implied by the top end of the broad daily chart uptrend channel intersects in the 690 area currently.

Near support can be expected on pullbacks to recent lows in the 658 area, with next support around 654-655.

There has been a very long period since there was any kind of an 'oversold' reading on the Relative Strength Index, which has been associated in the past with strong bull market phases, sometimes lasting many months. 6-7 months of this begins to stretch the probabilities of continued shallow corrections only.

There have been no extremes showing up on my sentiment indicator, at least since early-January which coincided with a low. My indicator has been pretty much in mid-range, which is when it fluctuates between 1.4 and 1.8. It appears that there is a significant wait and see attitude among traders given the uncertainties about the next Fed moves in coming months. Ever the same story: when the earnings trend looks decent, but with an uncertain inflation outlook, the worried about 'spoiler' is the Federal Reserve in its interest rate policy.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30(INDU) tracked the S&P 500 higher and took out resistance in the 12,600 area. The further rally above this prior top hasn't been spectacular but the 3-day rebound in total was impressive. The same rebound as SPX was seen from the INDU up trendline; this trendline was even more defined in the Dow chart, with many lows falling along a line forming its up trendline and lower end of its uptrend channel.

Near technical support is in the 12,530-12,465 zone; then expected pivotal support at 12,400. Near resistance may come into play around 12,785 to 12,800, with major resistance at 12,925-12,955.


NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

It's still possible that a broad Head & Shoulder's (H&S) top pattern could be forming, but the Nasdaq Composite (COMP) would need to start reversing lower soon for this interpretation to have much credence. What is also clear in the chart formation is COMP's broad uptrend channel.

COMP stays bullish in its pattern as long as there is an eventual move to a new high, which means taking out resistance implied by the previous 2509 peak at some point; next resistance then comes in around 2525, at the current top end of the uptrend channel seen on the daily chart below.

Very near support is at 2460, with the next significant technical support in the 2440 to 2427 area, at the present intersection of its up trendline. Major support is implied by the multiple lows that have occurred in the 2400 to 2390 zone.

NASDAQ 100 (NDX) DAILY CHART:

I continue to assess the chart pattern being traced out by the Nas 100 Index (NDX) as potentially that of a top formation. This view is becomes a far less likely interpretation if NDX continues on up above 1800 and establishes this area as a support. In that event, a further advance to the prior high at 1848 becomes a definite possibility.

If the Index starts falling again and especially if there's a close below near support at the prior 1763 low that is not reversed the next day, a further downside objective becomes 1725 at the green up arrow.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Last week I assessed the Nas 100 tracking stock, QQQQ, as tracing out a possible top formation. My view of this is still more or less the same, mostly based on the tendency for lower lows to be made on the corrective pullbacks that have occurred after November; this pattern is most suggestive of a broadening top. However, like my commentary on NDX, watch for a bullish ability of the Q's to climb to and stay above, 44.5. In this event, upside potential is again back to the 45.5 area.

Conversely, a drop below 43.3, not reversed (back to the upside) the next day would be bearish and suggest downside potential to 42.25 or lower.

The last 2 days of the 3-day advance was a lower succeeding daily volume levels, which means that volume is not 'confirming' price action. This is not a major technical negative as volume is a secondary indicator, but the divergence here doesn't help support a solidly bullish interpretation for what lies ahead. Stay tuned on this!

Good Trading Success!

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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