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Index Wrap

DON'T PREDICT EXHAUSTION OF THE BULL

HAVING TROUBLE PRINTING?
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THE BOTTOM LINE:

The next time I feel like predicting and projecting any near-term end to a runaway bull market, I will go lay down until the feeling passes! It's dangerous territory to be sure in over-staying in such a straight up run, but (as is fairly common in these type markets) trader 'sentiment' has not reached even a 1-day bullish extreme in the past two weeks, so there's no warning of a top in that regard. There was a bullish extreme registered on expiration Friday on 4/20; this was when I exited 2/3rds of my OEX calls at 680 and I sort of miss those ones I let go even though my cost basis was around 630 basis the Index. I don't usually 'footnote' expiration days as to use of the equities call to put volume ratios for my sentiment indicator, but perhaps I should have noted that day as having some extra heavy call volume probably related to expiration.

The only 'resistance' I can see on my charts is basis the S&P 100 (OEX), which I highlighted last week at still above current levels, at 698. A move to the 700 area would offer 'natural' resistance (at the next even-100 level), but 698-700 would also mark a return to the previously broken July-Feb up trendline. A return to the line of prior ascent or upside rate-of-change often turns out to be a place where the market will correct.

To date however, this market is going up without apparent fear that stocks are getting overpriced relative to anything. Greed trumps fear as they say; that is until fear trumps greed. Traders I talk to are leery of being too heavily committed to stocks and index options; AND, THAT is part of the dynamic. Old saying: "the market climbs a 'wall of worry'"!

You may recall that my 'minimum' upside projection in the Dow 30 (INDU) was fulfilled when INDU made it to 13,175. This week it closed at 13,264 and it looks like it could get to near 14,000 if it were to make it to the top end of its broad weekly chart uptrend channel. Opps, there I go predicting again! I'll just show the INDU weekly chart. Note that it's pretty overbought by the lights of the RSI now but it can get higher on that indicator too.

What I look for more with the RSI is where it tops finally, then starts making lower relative highs, as the prices keep on trending higher; e.g., as seen above from mid-Nov to mid-Feb. That divergence didn't offer any precise timing of a top, but does warn of an eventual sharp correction typically. We're far from that. A top will come when it comes and probably be hard to predict. If in calls enjoy the ride, hold on tight but be ready to jump off. Hey, like a rodeo rider on a bucking bull!

My past Wednesday's (5/2) TRADER'S CORNER article was on Dow Theory as inspired in me by the dramas around the News Corp offer to Dow Jones & Co (an ex-employer) to the Bancroft family. The latest highs in the Industrials and the Transportation average have confirmed the still ongoing bull market; no surprise there! More interesting are some past Dow Average 'divergences'. This article can be seen by going to your 5/2 Option Investor Daily market letter or by clicking here.

Speaking of divergences of a sort, the Russell 2000 (RUT), as I've been noting for some time, is definitely lagging the rest of the market in that it has yet to make a new high for this move. This is perhaps simply a characteristic of less than robust individual participation in this market run or could mean more than that and provide a cautionary note. Or, just reflect the fact that RUT doesn't have big oil stocks in the Index!

Speaking of Oil and overbought/oversold indicators, buy oil stocks when they get oversold and sell them when they get overbought per the following chart and it's RSI indicator. The Oil Index (OIX) has been tracking back and forth in its amazingly well-defined bullish trend channel. The last low was the EIGHTH time that a trading bottom was made at the low end of this weekly price channel. If only the major indexes were so reliable...

MARKET NEWS and INFLUENCES:
Closing index prices, as well as the recap of market influences such as earnings, company and other economic news, government reports and activities, etc. 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 S&P 500 (SPX) exceeded my 1480 price target and expected resistance; a good sign of such a level being technically significant is when such a level shows itself later to have significant buying interest when prices drop back to it, as happened this past Tuesday. Very near support is at 1496. We've seen strong buying interest at 1480 and 1474 is a pivotal next lower support in SPX implied by the current level of the 21-day moving average.

Near resistance and some increased selling was seen at my 1510 SPX target once 1500 was exceeded. 1520-1522 or a bit higher is a next technical objective if buying takes the Index above 1510.

I'll repeat from last week that..."Anything above 1500 is a 'gift' to the bulls. The S&P will go until it stops, whether that's 1505 or 1510 or higher. Hey, slowing economic growth slam-dunk (thank you Mr. Tenet) NO problem! The Fed will HAVE to ease!"

With this last spurt higher in prices, the 13-day RSI has NOT also accompanied prices to a new relative high. Such an RSI/price divergence should be kept in mind; it can be viewed as prices going higher but on LESS 'relative strength'. This kind of lag in RSI is often the first sign of a top to come later. How much later is always the key question, as the lag time before an actual top can be considerable. It is for this reason especially that extremes in my sentiment indicator are often one of or the key 'timing' indicator, as such extremes can finally narrow down the window when a top sets up.

S&P 100 (OEX), DAILY CHART:

I would repeat again this week that "a key dynamic in keeping this market going is seen in my sentiment indicator shown below the S&P 100 (OEX) price chart, which continues to show a rather 'moderate' bullish outlook..." I've seen over and over, not always, but commonly the most surprising and prolonged run ups in the market come with a backdrop of worry and disbelief in the staying power of the rally. There are usually enough negatives out there to keep market participants cautious. Who drives these rallies then? Money managers! Just the ones who have your 401k stock fund money and the like have to keep up (in their percent in equities) with the indexes.

I anticipate that a retune to the previously broken up trendline now intersecting around 698 (call it 700), at the red down arrow on the S&P 100 (OEX) chart below, may offer some resistance. 700 is a natural place to expect some healthy profit taking also of course.

OEX near support is at 686, then at 680. Support implied by the 21-day average is at 675 and the line of prior highs at 670 is also a pivotal technical support; prior resistance 'becoming' later support on subsequent pullbacks.

MARKET 'SENTIMENT':
In a contrary fashion, bullish sentiment hasn't gone up with the rising trend. The last extreme in bullish sentiment, which was on the last expiration (4/20), was 11 points under Friday's close in terms of the OEX. How high does the market have to go before traders throw caution to the wind!? 700 ought to do it. At that point traders will have 720 in mind as a next target!! I'm anticipating the day when CBOE equities call volume is approximately double that of puts. At that point the odds greatly favor a tradable top within a few days; within 1-5 trading days to be accurate; according to my experience over the years with this indicator. Stay tuned on this prediction!


DOW 30 (INDU) AVERAGE; DAILY CHART:

I noted in my TRADER'S CORNER article this past Wednesday about keeping in mind that the Dow 30 (INDU) is an arithmetic (price) average and is not capitalization weighted like the S&P Index; this is contrary to the way my TradeStation application labels INDU. Any component-stock price rise puts the Average up the same as any other dollar increase. Of course a stock trading at 50 doesn't tend to go up by $2-3 dollars a day, relative to one trading over a $100. There is partly a 'structural' reason why the Dow keeps going to record highs. But the S&P 500 is not doing so badly either! It only has to best 1552 to make a new all-time high.

The Dow has potential as I discussed in my initial ('bottom line') comments with the weekly INDU chart, up to the 14000 area but I don't see how it could make that on this run; it's highly likely that INDU pulls back before this kind of a target. What is the next minor high will be is hard to project: next stop 13,300? I wish I could predict it. One thing you can say is that INDU is as 'overbought' as it ever gets on a 13-day basis, suggesting a sideways correction at least to 'throw off' some of that extreme. My best guess is some consolidation and a minor pullback over the next few days and then up again into the expiration.

Near technical support is in the 13,050 area, then at 12,900. 12,882 is 'pivotal' technical support, especially on a closing basis, as implied by the 21-day moving average.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is still on a run and could get to 2600 area next. The shorts scrambled for cover after the Monday-Tuesday sell off ended with a strong rebound on Tuesday. We also see the RSI starting to drop back; the indicator is not 'confirming' the most recent run up to a new high. This kind of divergence makes me suspicious as to the further staying power of this rally. But caution is not an indication to go in and short the market either. I have thoughts of buying NDX puts if COMP gets to 2600, but we'll see when and if it gets there what things look like.

Near support is at 2530, then at 2510 and a bit lower, at 2500.

NASDAQ 100 (NDX) DAILY CHART:

The chart of the Nasdaq 100 Index (NDX) remains bullish of course as prices snapped back sharply from a sell off in the early part of this past week. What a rise hey! You don't see such amazing runs all that often, which is why I like to get in the lower extremes of oversold and prices at the lower envelope lines; assuming other signs are also suggesting a tradable bottom.

If exit was simply at the first run up to the UPPER 3% envelope it was a heckava trade. Who cares if it runs up again? Well, I hate to leave money on the table too, but I also like to play the percentages so to speak. Where we go from here? Follow that upper red line and look for prices to advance along it at best I think. I don't anticipate a breakout above that line. A practical consideration for those in the NDX calls, assuming the rate of further price increase is moderate which I think it may be, is how much time premiums are eroding as we get closer to expiration.

Near support is in the 1850 area, then at 1840.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Resistance may come in at 47 in the Nasdaq 100 tracking stock (QQQQ), but beyond that is a guess on the daily chart; as it usually is when an index is at a new high for a move. On the long-term weekly charts (not shown), major resistance can be assumed to come in around some prior highs in the 49.5-50 area.

Support in QQQQ is at 45.5-45.45. A close below the 21-moving average, not reversed the next day (to back above the average), would be bearish and suggest that the stock was vulnerable to a pullback to the $44 area.

As is very apparent on the daily volume bars, the Q's have been going on very light volume. However, the On Balance Volume (OBV) indicator, which adds ALL the day's volume to the OBV line on up days, has been going up strongly. The trend n volume is ok, not great, relative to the strong advance. This rally is a bit suspect on a volume basis or volume is not strongly 'confirming' the price advance. Still, the stock has been going up and I'd rather be long than short of course!

RUSSELL 2000 (RUT) DAILY CHART:

The previously broken up trendline in the Russell 2000 Index (RUT) still looks like the key technical resistance and this now intersects in the 840 area at the red down arrow. The 1-day dip under the 21-day moving average, followed by a rebound, is why I usually like to wait a day to see before deciding that the near-term trend has reversed.

Near support is at 808 to 803, with next support around 791-790.

The RSI is in a downtrend and is unlikely to 'confirm' a new high for this move. RUT puts could be considered on a move up to the 840 area, with a close by exit point above entry; e.g., 843.

Good Trading Success!

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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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