Option Investor
Index Wrap

OIL RULES

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THE BOTTOM LINE:
My feeling has been that the market would be up into expiration Friday. At midweek however it looked like the S&P 500 (SPX) was in a congestion phase and a 'solitary walk of the Dow' was going to be THE dynamic factor in the major indexes. The New York Stock Exchange (NYSE) Composite wasn't doing all that much; Nasdaq wasn't going anywhere, the small and mid cap Russell 2000 (RUT) was lagging and both these segments have looked (still do) like they were building a top. However, oil stocks took off like a rocket on Thursday and Friday and SPX broke out again to the upside with big oil being a monster sector in the cap-weighted S&P indexes.

I was speculating Wednesday on some technical aspects that were making me (and others) nervous: high bullish sentiment, lagging tech, an 'overbought' condition, lagging momentum indicators like RSI, etc. This per my TRADER'S CORNER article on Wednesday, seen by clicking here:

So it's not enough that we got record high gas prices due supposedly mostly to lagging refinery capacity, but we got new record high oil prices to play out at the pumps for maybe months after May! Hey, good if you own the stocks and/or their calls! The oil stocks have to be one of the most reliable option plays around as measured by the CBOE Oil Index (OIX).

If OIX tops out at the top end of its uptrend channel as noted at the red arrow on the weekly chart below (low-740 area), it will the 5th time that its done so, at the top end of this channel. The last bottom was the 8th time that OIX has bottomed at the low end of its well-defined uptrend channel. It's enough to get me off indexes to just speculate on oil stocks!!

It's also worth noting that extremes in the 8-week RSI as applied to the Oil Index has been a pretty good indicator for when the S&P would rally, correct or merely accelerate its existing trend.

The current strong trend can well continue, but we also should be thinking that this market is too hot NOT to cool down. Further upside potential doesn't look to be greater than downside risk. But I've been cautious for a while. These occasional sky shoots are outside of the risk to reward parameters that I usually play.

I've got some calls on oil patch stocks but exited my few remaining OEX calls on that lovely short-squeeze (if that's what it was) into expiration. I dont ask for more favors from the market for the foreseeable future. Now the trick is to NOT give back what the first half brought on a silver platter!!

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.

** SUBSCRIBER MAIL **
QUESTIONS/COMMENTS: Send any technical and Index-related e-mails to Click here to email Leigh Stevens support@optioninvestor.com with 'Leigh Stevens' in the subject line; not only for answer back to you, but also for possible use in my coming week's Trader's Corner article.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) finished strong on the week and looks like it may be heading to its prior all-time high in the 1553 area as a major objective. The question is whether it will get there on this advance or this current up leg.

Immediate overhead resistance looks like it could come around 1528-1530. Above 1528-1530, the 1540 area would be my next target for SPX.
Near support is in the 1500 area, with lower support in the 1480 area and major support at 1460.

I've been noting for a while that the RSI, a type of internal measure of technical strength, has been lagging price action. This kind of price/oscillator divergence tends to forecast an eventual reversal; the key word is 'eventual'! Price action is king and this type of powerful but relative rare trend, rewards those who stay with it: full speed ahead and never mind anything but the strong advance!

Staying with the trend has been working. Risk is also growing relative to the further reward potential in bullish strategies. Traders continuing to play for higher levels should keep a close eye on the market given the length of time now with only minor pullbacks.

S&P 100 (OEX), DAILY CHART:

I've been anticipating for some time that the S&P 100 (OEX) could get up to its previously broken up trendline before major selling came in; the intersection of this trendline is around 705 early this week; above 705, look for potential to 710.

Support implied by the 21-day moving average is at 687 currently. 680 is next technical support, with major support at 670.

As long as OEX continues to trade above its 21-day average, continued upside momentum is anticipated. If this key average is pierced, without a rebound back above it in the following trading session, a deeper correction such as seen in February may be underway.

MARKET 'SENTIMENT':
The number of recent readings at and above the bullish extreme reading of "2" or more in my sentiment indicator is suggesting that traders are finally going for the gold here, the brass ring. Given the tendency for bullish sentiment to finally get whipped to a frenzy in the phase of a major move, its appropriate to suggest exiting calls and other bullish strategies; or, to be very cautious and watchful in protecting profits in the same.

Having significant caution is not to say that I'm going to turn around and go against this super strong trend. I always suggest actual evidence of a top not just the ANTICIPATION of one, when looking to trade counter to the dominant trend. However, the odds of an actual trend reversal gets greater with 'sentiment' readings like seen in my "CPRATIO" indicator above.

DOW 30 (INDU) AVERAGE; DAILY CHART:

No stopping the Dow 30 (INDU) and it looks headed next to 13,600 or higher. It would take a close below 13,200 to suggest that this strong trend had reversed for now. Even then I would give it into the next day to see if INDU didn't rebound.

There are a major projections to Dow 14,000 based on INDU reaching the top end of its weekly chart uptrend channel. You can go to that chart and projection in my recent TRADER'S CORNER column by checking your Wednesday (5/16) OI Daily Newsletter for that chart or go to the link noted above.

When I started talking about the potential to 14,000 weeks ago, I thought it was somewhat far-fetched or too bullish of a projection, but just over 400 points higher doesn't seem too far away now!


NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) is being dragged to this party and is lagging the S&P big time. A 'rounding top' pattern had developed. Friday's has put COMP at least back above resistance implied by this curving trendline as you can see on my daily chart below. A move back above the previously pierced up trendline, currently intersecting at 2565 (at the red down arrow) is a key resistance ahead.

Resistance is at 2565, then at the minor double top at 2580. A close over 2580, followed by some further upside would get the chart picture back on a bullish track.

Conversely, a close again under 2530 would be bearish. I would just note the '2-day rule'. We saw with each COMP daily close below its 21-day average this past week, a rebound back above this key average the NEXT day. So too, we need to see downside follow through on an apparent break of a key technical support like 2530; if there's a DECISIVE downside penetration of 2530, that's another story. Below 2530, next pivotal support is 2510, then 2500.


NASDAQ 100 (NDX) DAILY CHART:

Substantial resistance still looks to lie in the Nasdaq 100 Index (NDX) 1900 area, just over the circle line of the rounding top pattern; pivotal resistance then lies at prior highs at 1906-1910.

Near support is at 1883-1880, then in the 1870 area. Major support is at 1850.

It's hard to tell if this pause and back and forth seesaw sideways move since early-May is congestion, as part of a building a top or if it's a pause on the way to another break out upside move. I lean to a bearish top-forming interpretation of the NDX chart, especially given the runaway uptrend in the S&P and Dow.


NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) would achieve a next 'breakout' by a move above 46.8-47.0. Conversely, a close below 46.0, not reversed the next day, would be a bearish 'breakdown' to the near-term trend.

Volume fell off on the most recent bounce. On Balance Volume (OBV) is going sideways along with the trend. It's not looking very certain that there is going to be a next 'leg' up in the Q's.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) held technical support and rebounded Friday along with the big-cap stocks. Pivotal or key near support is in the 810-812 area. The pivotal overhead 'line' of resistance is at 836. A close above 836 could mean a move that was headed to trendline resistance in the 850 area.

The RSI downtrend has been such that this indicator will soon reach an 'oversold' reading. Certainly, RUT is in a position to rally again, but the key will be if the Index can break out above 836.

Good Trading Success!

** SUBSCRIBER MAIL **
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens support@optioninvestor.com 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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