Option Investor
Index Wrap

TWO MARKETS (2) AND DON'T BE IN A 'RUT'

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THE BOTTOM LINE:
Last week I discussed the lagging Nasdaq relative to the S&P 500 and discussed the topic in terms of the lagging Nasdaq indices, relative to the S&P, especially the S&P 500 (SPX).

Talking about the even broader New York Stock Exchange Composite Index (Sym: NYA), this Index best reflects the strong long-term breadth we have been seeing for months and years in the stocks of the 'mainstream' economy so to speak. NYA has of course made a new all-time high some time ago (early 2005), which is worth noting when seeing that SPX still has some way to go in this regard. Will SPX inevitably follow? Seems that it should at some point.

The NYA futures contacts were fairly actively traded once upon a time and you would think that NYA options, such as on the CBOE which has the right to trade them, would have taken off. Nothing doing.

Not for nothing has the broader S&P 500, mostly comprised of New York Stock Exchange stocks, captured the index options volume prize. The Dow Jones Index options have more activity than the S&P 100 (OEX), perhaps because it's so widely known and I would say because it trades very 'technically' (as in lending itself especially well to technical analysis). Well actually SPX always traded fairly predictably in terms of its patterns if you knew how to read them.

At the end of this past week, the Chicago Board Options Exchange reports the following Index options OPEN INTEREST (OI) figures in descending order of size:

SPX: 7.9 million
QQQQ options: 6.6 million
NDX: 701K (thousand)
RUT: 640K
DJX: 663K
OEX: 328K

How the mighty have fallen in terms of the diminished number of outstanding contracts and average daily trading volume, in terms of OEX relative to SPX.

This all got me to thinking to, one, analyze the New York Stock Exchange Composite Index (NYA) chart and technical picture, since it may enhance a view regarding what's shaping up in SPX. Secondly, my thought is to examine the Russell 2000 (RUT) chart today and more often. I have always liked the RUT as a bellwether index and this index has gotten more and more traders buying and selling its options. Of course, the small to mid-cap 'theme' has been with us for some time as a productive investment vehicle.

NEW YORK STOCK EXCHANGE COMPOSITE INDEX (NYA):

The NYA is a measure of the changes in aggregate market value of all NYSE-listed common stocks, adjusted to eliminate the effects of capitalization changes, new listings and delistings. The index is weighted using 'free-float' market capitalization and calculated on both price and total return basis. NYA's long-term weekly PRICE chart is shown below; the trend channel lines are my addition of course:

I've been writing a bit in recent columns about the possibility that a seasonal correction might begin more toward March. Beware the "Ides of March"?! Well, the NYA is again up at resistance implied by the upper end of its broad weekly chart trend channel and at or near an 'overbought' extreme in terms of its 21-week RSI.

The last 3 corrections of any size have been preceded by the longer-term weekly RSI climbing to or above 70. The corrections were deepest when accompanied by prices climbing to near the top end of the bullish price channel seen on the NYA chart below. Somewhat incredibly, 'oversold' readings occurred from 2004 when the 21-week RSI dipped only down to 50 or a bit lower, not the '30' reading which is a traditional oversold benchmark.


My most recent TRADER'S CORNER article, seen in Wednesday's (2/7/07) Option Investor Daily newsletter was about how reliably price CHANNEL highs and lows have been corresponding with index option trading opportunities. In that article I especially highlighted longer-term HOURLY price channels seen in the major indexes. I will picture some of the currently hourly charts in select major indexes to follow. My Trader's Corner article of this past Wednesday can be seen in your saved 2/7 OI market letter or 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 and HOURLY CHARTs:

Is the third time also the charm in the S&P 500 (SPX)? SPX has for the third time retreated to the low end of its daily chart uptrend channel as noted at the green up arrow just under the Friday close. This is also the area of the 21-day moving average, which has been a fair harbinger of support in the Index. This measure of potential support (the up trendline) lies at 1433 approximately. Next lower support is in the 1420 area, then around 1405.

Near resistance is at the line of recent highs in the 1450 area. Major resistance begins around 1480 in my estimation. Major support is in the 1400 area.


THE S&P 500 (SPX) HOURLY CHART:
The hourly chart is of interest here. Unlike the daily chart indicators like the Relative Strength Index (RSI), there has been a tendency in recent weeks/months for the 21-hour RSI in SPX to reach an 'oversold' condition (at or under 35); one providing a 'signal' for good-sized rallies that followed. Friday saw SPX near this kind of oversold juncture and even more significantly technically, the Index reached the low end of its uptrend channel.

The two conditions: reaching the lower (or upper) end of the broad hourly channel accompanied by an oversold (or overbought) extreme has tended to precede price swings of 10-15 to 20 points or more in SPX. If the Index holds true to recent form a rally is not far off, such as by Tuesday. If prices instead retreated to the 1420 area and rallied from there, the uptrend remains basically intact still. A retreat below 1420, not reversed the next day, could set up a re-test of the low-1400 area as support.


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

The S&P 100 (OEX) is more or less mirroring in the S&P 500 only it's been weaker technically, having not moved to a new high for the recent move and having retreated to slightly below its uptrend channel. The 660 area is near support, 670 near resistance.

The OEX has been basically in a sideways trend since mid-December, tracing out a relatively narrow 655-670 range. Potential for a rally is near at hand but the Index will play follow the leader with the broader SPX. OEX needs to close above 670 for a couple days running to suggest a bullish new up leg, such as having potential to the upper end of its channel currently intersecting in the 695 area. Conversely, a couple of closes below 660/655 would suggest downside potential back to the low-640's.

SENTIMENT:
There's nothing extreme to report on trader 'sentiment'. Based on my indicator, traders have been viewing the market bullishly on balance this past week, but it appears that they are not throwing caution to the wind either. The bullish chart pattern of the S&P 500 or SPX is somewhat counterbalanced by the inability of the big cap S&P 100 and the monster cap Dow 30 to perform as well. Market fundamentals are mixed, so the technical measures of option volume ratios such as the 'CPRATIO' above tend also to show mid-range readings.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) has been tracking higher with a consistent pattern of higher rally highs and higher reaction (downswing) lows. The only thing disappointing to some is that INDU has not been able to maintain the blistering pace of its advance into December; but still a good performance all in all. If the market just tacked on small gains every month like this, stocks would continue to be the best performing asset class on a longer-term basis.

That is what was, what lies ahead? Most likely another rally attempt may be close at hand. Support seemed to be found around Friday's close at 12,580, at the low end of its uptrend channel and its 21-day moving average as indicated on the daily INDU chart below. Near resistance, at the red down arrow, intersects in the 12730-12,735 area; the Average would have to get above this level to break out into its broader uptrend channel and start another up 'leg' toward 13,000.

Next lower support levels, below 12580 are suggested by the prior lows, first in the 12,430 area then around a hundred points lower at 12,337.


NASDAQ COMPOSITE (COMP) INDEX, DAILY and HOURLY CHARTS:

I indicated last time that it was possible that a broad Head & Shoulder's (H&S) top might be forming, but the Nasdaq Composite (COMP) would need to start trending down soon to suggest it. Since the Composite reversed lower from the 2500 area last this past week, the bearish chart possibilities are still active so to speak. I would primarily emphasize the question of whether COMP can stay within its uptrend channel; an open question as the Index hasnt been able to get a sustained rally going, reflecting of course recent weakness in tech sectors.

The recent (up) swing high at 2509 in COMP is still unchallenged; I consider 2500-2510 to be the pivotal resistance zone.

Immediate support is at 2450-2452, then at 2425-2422. If I really had to or wanted to be positioned in this index and didn't consider anything but this chart, I would be on the short side with stop protection at 2503 currently.


THE HOURLY CHART: NASDAQ COMPOSITE (COMP):

The last rally from the low end of the broad hourly uptrend channel didn't carry very far before prices again retreated back to the up trendline. In recent weeks, after hitting overbought extremes, the declines have carried further than the rallies or the downside at least seemed like the path of least resistance in Nasdaq. If 2450 gives way in COMP, next support is assumed for prior hourly lows at 2428 to 2420.

Near resistance is at 2495-2500, then at the prior high for this move at 2509. Major resistance is at 2600, major support is in the 2315-2325 area.


NASDAQ 100 (NDX) DAILY CHART:

Friday saw a 2-day key reversal in the Nasdaq 100 Index (NDX), with the move to a new high for the move followed by a close under the prior two days low. This may or not lead to anything major as the Index just has again dropped back to technical support. Near resistance in NDX is at 1810-1815, with next resistance at 1845-1850.

Near support at the trendline, as noted by the green up arrow is at Friday's low around 1780. Pivotal or key technical support is noted at 1750. NDX has been recently hugging its up trendline or the low end of the uptrend channel the Index has been in for some months, as seen in the daily chart below. It's also possible that NDX is going to trade back and forth in a 100-point range, between 1750-1850.

The bearish chart interpretation of a possible top, either of a complex Head and Shoulder's variety or that of a broadening top can't be ruled out here. Of course, this speculation remains still within the context of the Nasdaq being in a long-term uptrend. Only a decisive downside penetration of 1750 would begin to suggest a reversal in the intermediate-term trend to down.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) chart pattern has been one, as suggested last week, that looked like it was going to have trouble maintaining an advance. The 'reverse megaphone' shape of higher highs and lower lows could be a broadening top. It would depend on whether there was a close below 42.25 ahead or not.

Broadening tops, when they occur don't usually suggest minor tops, but more major ones. I don't see this on the horizon in what is being talked about in the current market, but I also keep thinking of the possibility that the leading 'mother of all (current) indexes', the NYSE Composite, hitting possible major resistance, per my starting discussion.

Near support is at 43.3; this is unchanged. Pivotal resistance is at 45.5, then at 45.75, at the red down arrow noted on the next chart. A level to watch is the 'line' of prior lows at 43.30. If there was a daily close under this level, not reversed (back to the upside) the next day, I would anticipate further downside potential to the 42.25 area.

I indicated last time that volume patterns were not particularly bullish, as there wasn't much expansion of daily trading activity on the recent rally. Friday's jump in volume on the 1-day (price) key reversal tended to confirm this view.

RUSSELL 2000 (RUT) DAILY CHART:

Taking a final look-see at a different index than I usually include in my regular commentary, but do follow closely, is the Russell 2000 Index (RUT). This index has a bullish chart, but could be running into some resistance around recent highs and just a bit higher; at the trendline as noted at the red down arrow at 820. The broad 2 plus year uptrend channel dates back to early-2004. If the Index moved to the upper end of this broad channel again, it would see levels near 845-850.

Pivotal near support is in at 790, at the up trendline and in the area of its 55-day moving average; next support is anticipated in the 775-768 zone. I would anticipate RUT getting knocked lower still, at least to a test of technical support noted around 790. Next lower support is around 778 to 775, then at 770-769, must hold support if the intermediate-term uptrend is to be maintained.

Good Trading Success!

** SUBSCRIBER MAIL **
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens 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's up out there with our subscribers.

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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