Option Investor
Index Wrap

MARKET STUMBLES

HAVING TROUBLE PRINTING?
Printer friendly version

THE BOTTOM LINE:
Just when I was thinking that it was unpredictable as to WHEN the market was going to have the stumble that was being suggested by some of the Index charts and some of my indicators, it got whacked pretty good this past week. It's always the same way with tops after periods of what our leader (not the Bush man, but Alan the Greenspan man) has called "irrational exuberance". Those periods when you know the market outlook isn't THAT good or so outstanding that it's a strictly a one-way direction up ad infinitum.

However, it also could have been predicted that the first big correction wasn't just going to be straight down EITHER. Bullish sentiment has remained quite high through this recent shake out and the outlook of traders didn't just shift to let's buy puts and participate in this next big downswing. In fact, this same behavior suggests in its contrarian way that there is more downside to come yet.

On a long-term basis we are now of course also looking at the possibility of a major double top in the S&P 500 as you can see in the long-term charts such as shown here. A top made in the same area, assuming that SPX doesn't go on convincingly into new high ground, especially years apart is a quite potent sign of MAJOR resistance. Stay tuned on this outcome!

As can be seen with the 8-week RSI above, the Index hasn't gotten anywhere near an oversold reading, which I suspect it will before this recent and I think ongoing correction runs its course.

The S&P 500 (SPX) held, and rebounded from, its last (down) swing low where I had noted technical support last week, around 1490. The S&P 100 (OEX) rallied from the area of its prior swing low around 684 and the Dow 30 (INDU) actually reversed from above its prior low in the low-13,200 area. Prior lows like this being significant technically in terms of defining the trend: the trend is up as long as the prior correction bottom is not pierced.

I am not convinced that Friday's roller coaster ride and recovery rally is the end of the correction. What we would normally expect to see is a down-up-down corrective pattern, especially after how far we've come up and the rally's duration. A typical correction will see a first leg down, followed by a recovery rally, followed by a further drop that carries lower than the initial decline and to below the aforementioned prior Index lows,

I intended to write my normal Wednesday TRADER'S CORNER this past week but I was out for a few-day count with food poisoning, which is just horrible and I hope you never get! I've mostly recovered but am a big slower than my usually frisky self. Hey, I did lose weight and couldn't tolerate coffee after this episode, so am adjusting to life without caffeine which I happy to be without as it makes me kind of jittery, or so my significant others tell me. If I'm a trend, short coffee.

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 [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:

I said last time that the "the (S&P 500, SPX) Index may be getting a little 'tired' or running out of quite so many willing buyers in the 1540 to 1550 area. Support is apparent around 1515, then at 1500-1490. A close below 1490 would be bearish. 1460 is major support."

Well, 1540 as resistance turned out to be quite significant as a stopper and the other levels were pretty spot on, as gleaned from the charts.

Near resistance is likely in the 1516-1517 area of the 21-day moving average; major resistance is at 1540.

The 1490 area proved to be key support on the sell off this past week. 1480 is another area of near support or of likely buying interest. If 1480 gives way, I continue to see major technical support coming in around 1465-1460.

I also noted last week, but this had been the case for some weeks, that the RSI wasn't 'confirming' the new highs in SPX. This type oscillator/price divergence doesn't always pinpoint the TIMING of when a reversal is likely to occur as in a powerful trend the actual reversal appears to be almost 'random' and can come way later than expected. What is not random is that SHARP corrections almost always occur after such divergences go on for some time.

S&P 100 (OEX), DAILY CHART:

What has kept me especially wary of buying into this rally in the last 2-3 weeks was the return in the S&P 100 (OEX) to resistance implied by its previously broken up trendline; this, as noted at the first red down arrow on the daily OEX chart below. With the move to another new high and a second return to near that trendline, I noted last week that "it remains to be seen if this will also mark any significant resistance." Well, it did and wasn't really unpredictable.

I had the thought that the Index might climb up along this trendline for a while longer, but surely not break out ABOVE it. Actually, it's fairly unusual for a major index not to reverse course after a second touch to such a trendline; not for nothing is the nickname 'kiss of death' trendline in the case of rallies to a previously broken UP trendline.

Resistance implied by the aforementioned trendline was fully in force at 708 and OEX got to 706.6 at its peak. Near resistance now is in the 696 area, at the 21-day moving average.

Technical support areas can be figured as 684-685, at 680 and finally for 673-674.

MARKET 'SENTIMENT':
The trading day BEFORE this recent top was accompanied by another 'overbought' extreme bullish reading in my sentiment indicator as noted at the red down arrow above. This indicator has been like 'the boy who cried wolf' in that we saw a few such (bullish extreme) readings (3) before this last one, but the market kept climbing after those. Eventually such peaks are telling in the sense that they 'tell' you to be careful in overstaying in bullish strategies, there's risk ahead too because traders get so focused on the upside and lose sight of the downside risk factors.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) fell of course along with the other major indexes, but didn't correct as far as some other major indices. INDU reversed actually above support implied by its prior low in the 13,212 area. Near support is around 13,200 still, with next support in the low-13,000 area; e.g., at 13,041, the level hit on the Dow's early-May dip.

13,487 is near resistance implied by the 21-day moving average; I'd continue to peg fairly major selling interest or resistance as coming in around or just under 13,800.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) didn't go up as far and not surprisingly seemed to rebound better, getting quickly back above its 21-day moving average by week's end. Like the Dow, the Index managed to find buying interest before having fully tested a key technical support which (in the case of COMP) lies around 2530. Next support is in 2500 area, with major support at 2465 to 2450.

I look for some resistance now immediately overhead around 2585, then at 2600. Major resistance can be assumed for the intraday high to date at 2626.

NASDAQ 100 (NDX) DAILY CHART:

Last week I was talking about Nasdaq 100 Index (NDX) hitting resistance around 1940, and this is still the major resistance. Near resistance begins in the 1920 area.

Near technical support is around 1880 and extends from there down to 1868. Next support is in the 1850 area, with major support at 1840-1835.

NDX is maintaining a more bullish looking chart than the S&P and like the Composite of course rebounded back above its 21-day moving average at the end of this past week. Stay tuned however on how well it rallies from Friday's highs! NDX may also now go into a 1870-1940 trading range. Hey, I would love to trade it back and forth in that range a couple of times!

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) held the low end of the uptrend channel outlined on my chart below.

Support is around 827, then at 821-820, then in the 810 area.

The chart has not broken down into a bearish pattern. Downswing lows remain above the ones that came before. If I had to bet on some rally potential this might be the Index to bet it on. Certainly RUT is offering more two-sided trading opportunities. The last tops occurred from fairly predictable areas, so profits could have been had with puts. Same with recent lows, in that upside reversals came at the low end of its uptrend channel; or, from the area of a prior low.

Near support is at 830, then in the 820-821 area, with next important support at 810.

Good Trading Success!

** SUBSCRIBER MAIL **
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] 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.

Index Wrap Archives