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Index Wrap

S&P UPSIDE BREAKOUT ON SCHEDULE

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THE BOTTOM LINE:

Well, it had been looking increasingly 'due' and a breakout above the sideways consolidation type trading range came big time this past week. I wrote my Wednesday Trader's Corner on 'rectangle' patterns, which is what this lateral trend of the past two months was in terms of patterns. Chart patterns are generally of two types, continuation types that suggest a consolidation of an existing trend and ones that suggest trend reversals ahead; e.g., head & shoulder's bottoms and tops. The rectangle can be a consolidation pattern or a reversal pattern so it's a kind of hybrid so to speak.

Rectangles as consolidations are simply sideways price moves with tops that hit the same high or close to it, 2-3 times and bottoms that rebound from lows in the same area 2-3 times. Rectangle TOPS and rectangle BOTTOMS hit the same high or close to it, 2-3 times, with lows that occur in the same area 2-3 times. What's the difference? The outcomes.

An uptrend, followed by an eventual breakout of a sideways trading range, above the tops of that range (or rectangular pattern) turns out to be, in retrospect, a continuation pattern. An uptrend, followed by a sideways move or rectangle, that pierces the LOWER end of a rectangle, turns out to represent a rectangle top. A downtrend followed by a rectangle that ends up piercing the UPPER end of a rectangle, is described, after the breakout, as a rectangle bottom.

These various definitions don't mean overly much in terms of making trading decisions. What can be useful in trading strategy in estimating a possible trade objective, is the 'measuring' implications for the move that follows an upside breakout of a rectangle or the measuring implications for a move that follows a downside breakout of a rectangle.

From my Wednesday article; and to see it you can go back to the Wednesday (7/11) Option Investor Daily or click here.

"The 'measuring implication' is to calculate the height of the rectangle from (horizontal) trendline to trendline. For upside breakouts where prices pierce the upper line and keep going, add the height to the top trendline (for downside breakouts, subtract this distance from the bottom trendline). The result is the 'minimum' expected move. For a 'maximum' price target add the LENGTH left to right of the rectangle and extend it vertically above the top trendline (for upside breakouts) or below the bottom one (for downside breakouts); that price becomes a 'maximum' expected move.

This later rule of thumb is based on the analysis of WD Gann and is a bit more speculative as the time and price scales should be equal for this projection to be most accurate. However, it is an ok rule of thumb to give some idea about where an index or stock COULD get to if it's a new 'leg' or a major new move.

The minimum upside projection for the S&P 100 (OEX), assuming a decisive upside penetration of 707, is to 730 (707 684 = 23 + 707 = 730. (The maximum upside projection, assuming an upside breakout, is to approximately 780 currently.)"

The minimum upside projection for the S&P 500 (SPX) after this recent upside breakout, based on this rule of thumb I describe here, is to approximately 1590. The projected upside target for the Dow 30 (INDU) is to 14,117. I'm not giving the maximum targets, as they are more 'speculative' in a chart sense, especially when just working with standard bar charts and not special Gann type charts. I would just say that it looks like there is substantial upside potential from current levels.

The market is getting more risky in terms of a shake out as the market is moving back into an overbought extreme as measured by indicators like the RSI; this is most true of the Nasdaq currently. True of the overall market is another kind of 'overbought' situation that is seen in the bullish extremes registered by my 'sentiment' indicator on Thursday and Friday. Traders are on the biggest call-buying spree they've been on for some weeks. The risks of a shakeout should be factored into our outlook ahead: bullish, but cautious as to the bearish effects of negative news as the market gets more volatile.

Before I get into the individual index charts, I'd note a follow up to Index Trader comments I made last week: "it now looks like there's a breakout move going on in oil stocks. Whereas OIX (the CBOE Oil stock Index) has been in a certain well-defined weekly uptrend channel, it may be now be establishing a broader trend channel implying more upside potential to come. A rally in the S&P should last as long as the oils are also in the same trend. And, overbought markets sometimes hit more than one extreme reading as measured by the overbought/oversold indicators like RSI."

The OIX chart is impressive, showing strong upside acceleration. A major upside breakout, although the 8-week RSI is getting up into high readings suggesting OIX is reaching an overbought extreme again. Typically, this sector gets overbought and then corrects soon thereafter. However, it's these untypical occasional mega-bull moves that tend to throw these things out the window; for AWHILE anyway. This Index will be one to watch, as it's a definite driving element in the current S&P and Dow advance. That and other natural resource stocks! When this one (OIX) rolls over, I'd start to watch for an overall market correction.

ONE OTHER CHART:

Back when, I was projecting a 14,000 target on the Dow 30 (INDU), due to that being an area of intersection suggested by the top end of broad weekly uptrend channel in INDU where we could anticipate some potential technical resistance. As time has moved on, that upside target is a bit higher, as you can see on the weekly Dow chart below.

The upper end of this channel intersects very close to the 14,117 target implied by the upside rectangle breakout of INDU I discuss above. Nothing magical about such a trend channel; these upper channel lines can be pierced of course, but there are many instances to suggest that this type pattern bears watching for a faltering trend if/when the Dow reaches the upper trendline.

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) is very bullish in it's pattern with the recent decisive upside penetration of the upper end of its multiweek sideways trading range. A 'measured move' upside objective is to 1590. If SPX gets to the 1590 area, I would think that it could hit 1600.

The key near support now is at the 'line' of prior highs at 1540; what was resistance should now 'become' support. The next key support is at the 21-day average around 1520.

In new high ground, potential 'resistance' areas, on a technical basis, is not something that's hard to measure; maybe, if prices are approaching the top end of an uptrend channel. The top end of the weekly chart uptrend channel (not shown) suggests some potential for resistance around 1575-1577 in the coming week.

S&P 100 (OEX), DAILY CHART:

The S&P 100 (OEX) has seen the same bullish breakout of course as the broader SPX Index. An upside target I mentioned above is to the 730 area. This is consistent more or less with where the upper trendline seen below would be hit and is also where the 3 percent upper envelope intersects, which is a good benchmark for a price level that is pretty far extended relative to its 21-day average. These attempts to measure 'resistance' suggest 724-726 as an area, but this is a moving target. By the end of this coming week, the trendline intersection is up to around 728.

As with the S&P 500, OEX should now find support on pullbacks to its prior line of resistance around 707. Very key or pivotal support comes in at 700 in my estimation.

MARKET 'SENTIMENT':

We saw resurging bullish sentiment along with prices and it got more extreme this past week as you can see by the 'CPRATIO' indicator above, plotted below the OEX daily chart. Extreme readings like this, suggest that the market is also vulnerable to corrections, at least within 1-5 trading days typically. It's the 'untypical' mega-bull moves that tend to throw these type projections off, but there is a cautionary note about overstaying in calls if OEX gets up into the 725-728 to 730 area. I tend to work with certain trade objectives and not follow the trend to the end. But, that's not the way everyone is going to, or should, trade of course.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart pattern is very bullish and the Dow 30 (INDU) looks like its headed to the 14,100-14,125 area. I would take profits on DJX calls on such a move.

Key support is at the line of prior highs in the 13,690 area. Next key technical support is around 13,550.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

Well, we're almost there in terms of my targets for the Nasdaq Composite (COMP) Index. 2720 is an area where COMP could begin to run into some profit taking selling and potential resistance suggested by the top end of the well-defined uptrend channel. However, some other chart considerations suggest that COMP wouldn't see major resistance until reaching the 2800 area or a bit higher.

Near support is at 2652, then down in the 2635 area.

NASDAQ 100 (NDX) DAILY CHART:

In the case of the Nasdaq 100 Index (NDX), we're there in terms of the Index hitting some minor upside objectives. If NDX follows through on the very strong move seen on Thursday and Friday, and continues to power up to new highs, a next higher objective I could measure is to as high as 2080 to 2090.

Near support should be found at 1984, then at 1965 and finally at 1954.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) shouldn't hit any 'technical' resistance before reaching the upper end of its bullish rising price channel around 50.25. Given the relatively low volume on this most recent advance, I'm looking to do some profit taking on stock held through this last upswing, in the 50.25 area if reached.

The relatively low volume on this recent very strong move higher is a divergence from what we think of as the strongest technical picture. The On Balance Volume (OBV) study has however been the 'confirming' bullish volume indicator.

Near support is at 48.8, with pivotal support in the 48 area. I think that the Nasdaq 100 is getting overdone here on the upside. 'Irrational exuberance' anyone?

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) has a bullish chart but has now hit its prior high, so I'm watchful for any signs of topping out here. Assuming that the Index pierces 856 on a closing basis, then targets to as high at 885 are suggested. A key to the chart showing technical strength here is the ability for RUT to move not only above the prior 856 top, but to STAY above this level after moving above it.

Key near support is in the 840 to 835 area.

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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