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Index Wrap

TECHNICAL SIGNS OF A TOP

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THE BOTTOM LINE:
My Wednesday column in the Option Investor (OI) Daily Market Letter had a discussion on the possible top suggested by the S&P 500 (SPX) minor (price) spikes up above its upper Bollinger Band. My article was on the use of Bollinger Bands in general, plus one reference to the S&P 100 (OEX) finally hitting resistance implied by a return to the previous broken internal up trendline dating from last June or back nearly a year.

This return finally to the 'kiss of death' trendline may also have suggested a finale to the prolonged advance, along with the multiple 'overbought' (extreme bullishness) readings in my equities call to put 'sentiment' indicator, which will be updated below. I am reproducing the SPX daily chart in question from Wednesday in case you didnt see it. The up to date (THROUGH FRIDAY) SPX chart will be in its usual place and after this first chart, which only reflects through the Close on Wed, 5/23.

Of course Wednesday was a down day but the market hadn't seen the Greenspan-related China Market shock of Thursday. However, as you'll note in my mid-week commentary, the link to which follows one chart in that article, price action traced out a downside key reversal pattern; i.e., a move to a new high for the move followed by a close below the Close or the Low of the prior 1-2 days.

It looks to me like a top has formed and a downside reversal has begun and we'll see the S&P, Dow and Nas Composite piercing their 21-day averages (ONLY the Nas 100 closed below this key average), But, as usual in such strong bull market up swings, there was buying on the first sizable dip, making it look like there is just another minor correction going on this past week. Doubtful, but time will tell on any further breakdown and a more obvious correction; one that even the media talking heads might understand.


My Wednesday TRADER'S CORNER article on can be looked at in your Wednesday saved OI Daily Newsletter or may be seen by clicking here.

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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QUESTIONS/COMMENTS: Send any technical and Index-related e-mails to Click here to email Leigh Stevens Support [at] 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) has pulled back to support implied by its 21-day moving average, and may sink lower, such as to re-test the prior swing low in the 1490 area. One key to what comes next is whether the Index can hold above the 21-day average on balance. A close below this key trading average lasting more than a day would suggest more weakness to come. A close below 1490 would be bearish. 1460 is major support.

Overhead resistance is at 1530, then at 1540. I think that SPX will be headed lower, but probably not before a further attempt to rally back up to or toward recent highs.

RSI has been trending lower, when prices were still going up, which is normally bearish and suggests that a reversal or correction is coming; it may be underway now. I think it is but this market may not just break sharply, not yet. A sharp and steep price break, after the major advance we've seen to day, would usually not come before an attempt for prices to stabilize and the bulls to rally.

This same bearish price/RSI pattern is seen with the other major indexes and I don't think I need comment on it further.

S&P 100 (OEX), DAILY CHART:
If you read my Wednesday (5/23) Trader's Corner article, you may have noted that I modified my resistance/'kiss of death' trendline just a bit. Going back to last June I took out one low so that 4 out of 5 lows made the 'best fit' internal up trendline; this trendline was pierced on the sharp market break of February.

It is often the case that a rally will continue, even to new highs, UNTIL a previously broken trendline is touched and 'signals' the start of a reversal. I don't lose sleep over trying to figure out WHY this is so often the case. But my theory is that when prices come back to their prior rate of upside price increase/momentum (it's prior 'rate of change'), this becomes the juncture when buying force exhausts itself so to speak. Hey, we know the market can be a mystery at key points!

Support implied by the 21-day moving average is now at 692. 684 is next lower support implied by the prior down swing low. If the key 21-day average is pierced without a rebound back above it in the following trading session, such action would suggest still more downside to follow, such as in a move back to test support in the 670 area.

MARKET 'SENTIMENT':
Not much more to say than last week except that the rebound in my call to put ratio on Friday suggests that the market will go still lower ahead. Traders took the Thursday sell off as a buying opportunity more than not, suggesting to me a lot of complacency about the amount of market risk that may exist after such a prolonged run up. Hyper bullishness is not at hand, unlike China, but what is being seen is enough to suggest that this market will confound the majority, now focusing on how much money can be made, not on the risk of a shakeout.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) looks the least like its relentless upward momentum has been stopped, although INDU reversed from my next upside objective which was to the 13,600 area. I would peg 13,600 as resistance, then at 13,700.

Near support is in the 13,430-13,000 area; a close below its 21-day moving average at 13,350, that wasn't reversed the next day, would suggest more downside price action to come. Substantial support is suggested around 13,200, with major support in the 13,000 region.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) as I said last week was "being dragged to this party and is lagging the S&P big time." Sure enough, as soon as the S&P got whacked, COMP fell quickly and sharply back to its support at its prior 2530 high before it rebounded some.

Resistance is at 2580-2600. A close over 2580, followed by some further upside would be needed get the chart picture back on a bullish track; not only a close above 2580 but ability to hold this area to get COMP back on a bullish track.

A close below 2530-2510, certainly below 2500, would be bearish and suggest downside potential to around 2450.

NASDAQ 100 (NDX) DAILY CHART:

The chart remains mixed in its pattern since the last move to a new relative high didn't take in the Nasdaq 100 Index (NDX). Right now NDX is in a sideways trading range between 1910-1920 on the upside and 1870 on the downside.

NDX has closed below its 21-day average and further weakness ahead may be signaled because of it. A daily close below this key average, then to below 1870, would be bearish. Next pivotal support would lie at 1850.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) would have to get above 46.5 in the near term, then back above 47.3 to get back into a bullish chart pattern.

46 is the key support and if pierced, 45.5 is the next important technical support. I think the Nasdaq is headed lower but this sideways trend could go on for some time also. At least I can short the stock above 47.0 and not worry about the erosion of put time premiums if I chose to take that bet.

Volume jumped on the sell off and the rebound was lackluster in terms of price and volume considerations, which is suggests that the Index could be building a top or at least will move into a sideways trading range.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) is holding in this uptrend channel, but hasn't been able to regain the momentum it had. If 810 is pierced and the Index doesnt come back in the next day or two, I think RUT could then be headed to the 794-792 area again. Major support looks to be in the 770 area.

Good Trading Success!

** SUBSCRIBER MAIL **
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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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