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Index Wrap

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THE BOTTOM LINE:

All the media talking heads, even the mainstream not just the Wall stream, were perplexed and in some wonder as to why the market came down so sharply last week. I've been wondering the opposite for a while, which is how long market participants would keep buying stocks and so overlook (denial?) our major housing downturn and the relentless rise in energy costs. But, it's always the same on these hyper run ups; greed pushes aside fear. And, I find that I often get sucked into the last part of the rise, thinking there will be ONE more rally ahead before the market falls off a cliff. WRONG!

I wrote last week that the S&P and Dow might get all the way up to resistance implied by the upper boundary of their uptrend channels. They did in fact do that, but it was dependent on trendline construction as to the exactness of it. I did some trendline redrawing using 'internal' or 'best fit' up trendlines, connecting the most number of highs, not just the absolute highs. And bingo, it was clear that the key resistance was 14,000 in INDU, not any or much higher; this versus my thought that we might get to a final top around 14,100. Of course, the thing with bumping up against an upper trend channel boundary, is that this alone is not conclusive for an immediate top, as the rate of price increase may just slow down and prices continue to go up some more by hugging the upper end of its rising price channel.

I've seen so many of these sharp waterfall type declines come in the fall, I was also thinking about any major decline being out a few weeks. I concluded that thinking that a top (or bottom) is going to occur on a time/cyclical basis can contribute to complacency.

Always it is necessary to pull together multiple factors. Very telling at this recent top was that the breakout in the S&P above its trading range or the top of its 'rectangle' pattern quickly faded and the prior highs didn't become a new support. The other and perhaps most telling sign of at least a tradable top if not a major top, was seeing a second recent extreme on my sentiment indicator. This last peak again showed the high level of bullishness that's usually associated with an upcoming reversal, typically 1-5 days later. Both recent 'sentiment' extremes came within 3 days of significant tops, with the last one leading to a bunker-busting decline.

I tend to toward post mortems on which technical chart, indicator and sentiment aspects were conclusive for a top, mostly so as to recognize similar patterns next time. Next of course is to project possible further downside targets.

We're probably at or near a short-term low and rebound. However, the intermediate-term trend has reversed from up to down, given the fall to under the prior pivotal low made before the last top. In the case of SPX the recent top could be a major double top. The potential for such a double top got a bit obscured by the new closing highs being made in this Index. Many students of the market have Charles Dow's idea of paying most or sole attention to a new high Close. However, the prior all-time high is also very important and we have so far an exact SPX double top relative to the week of March 24, 2000.

S&P WEEKLY:

Which of the two parallel upper channel lines below would tell us the most about major S&P 500 (SPX) resistance? Well, the lower line (touching 3-4 prior widely separated weekly highs) intersected where recent weekly highs ALSO equaled the prior all-time SPX peak. This indicated double resistance, with the 3/24/00 weekly high being key.

I tend to look at both of the major S&P indexes to see if chart patterns on one reinforces what is seen on the other or a pattern is clearer on one versus the other. The S&P 100 (OEX) weekly chart below doesn't look at as long a time frame as the SPX chart above, but that OEX was hitting resistance was quite clear. Upcoming technical support implied by the low end of OEX's weekly uptrend channel is at 670.

I'm struck again and again over many market cycles at how MAJOR price breaks often occur after periods when indexes are trending higher over 4-8 weeks, but the 8 and 13-week RSI indicators are trending lower, as seen with the 8-week RSI above. This type divergence doesn't narrow down the timing of a reversal to the day of course, but it does alert to the prospect of a major break when it does come. Having some cause to anticipate that a next reversal could be big, can make for a bigger profit year by going 'heavier' in positions (still within what you can risk comfortably) when close-in analysis suggests a reversal is developing; best recognized BEFORE everyone else does too!

ONE OTHER CHART:

When I used an internal trendline for the upper trend channel line, cutting through some chart bars but touching the bulk of the highs, resistance came in right at the recent 14,000 peak. The Dow 30 (INDU) is a narrow big cap index and shouldn't be relied on to tell the full story of what's happening in the market, but on the other hand, it trades beautifully or very predictably on a 'technical' basis.

As with the S&P 500 chart and Relative Strength Index (RSI) indicator pairing, the Dow shows the same pattern of 4-8 weeks of price/RSI divergences (prices trending higher, RSI trending lower) ahead of most of the substantial declines that occurred in the multiyear period seen above. Again, the key importance of this type divergence is to alert us to the potential for a sharp correction ahead.

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) went from a decidedly 'mixed' to bearish chart pattern with the downside acceleration of this past week. Some drop!
SPX first showed weakness when it couldn't hold its 1540 supposed 'breakout' point. A further loss of upside momentum was then predicted when the index sliced below its 21-day average; and when it couldn't climb back to this key trading average the next day.

SPX has already completed a 50% retracement of its entire run up from March into this month. The S&P could stabilize, at least temporarily, in the 1460 area, but if not, a next lower target looks like 1437 to perhaps 1430.

Last week I suggested that "a close below 1506, if not reversed the next day, would suggest weakening upside momentum and a close under 1490 would reverse the medium-term trend from up to down...." The reverse, or the price action that could suggest a resumption of the prior bullish intermediate uptrend: an SPX Close above resistance at 1490, coupled with the ability to hold this level on subsequent pullbacks.

This market doesn't look likely to see more than a short-term rebound, possibly a rally back up to the 1485-1490 area. I anticipate 1490 on the upside, to 1430-1437 on the downside, will be the likely trading range for SPX in the near-term.

The S&P 500 is approaching an oversold 30 reading on the 13-day RSI as seen above. The last time the RSI dipped below 30 was in early March when this indicator got down to 24.5 before the Index turned up again.

S&P 100 (OEX), DAILY CHART:

The S&P 100 (OEX) retreated to below its prior trading range, suggesting a downside reversal of the intermediate trend.

684-685 is the pivotal near resistance; next resistance is at 692, then around 700.

Very near support may be found around 680, although Friday went out weak with the Close at the 679 Low. Weekends can lead to reevaluation on selling more. Potential buyers are going to be cautious no doubt.

Support, or at least a downside objective implied by a 50 percent retracement of the March-July advance is noted at the green up arrow, at 672. If OEX retreated to the 660 area, I anticipate an close look at buying OEX calls for a bounce, such as for a move back up to 685. I'd only want to risk 5 points on entry at 660 or under.

MARKET 'SENTIMENT':

REPEATING FROM LAST WEEK:
"My rule of thumb on extremes seen in my sentiment indicator that is above 2 AND where the major indexes are also in or close to overbought (RSI) readings, is to look for at least an interim top within 1-5 trading days after the 'CPRATIO' indicator registers such an extreme in bullishness; i.e., CBOE equities call volume is 2 or more times that of total put volume on that day (1.9 is my actual dividing line and is where the red 'overbought' line seen above is drawn). The real extremes tend to pop up above 2 as you can see above. In a bull market there can be a number of such extremes that may only point to minor pullbacks, if at all.

Interestingly, highs were made exactly 3 days after the last TWO bullish extreme readings noted at the red down arrows on my indicator, after which there have been substantial downside corrections. I like to buy puts if I see confirming topping signs in price action within the 1-5 trading day aftermath of such extremes. If such a put play works out, I hope that it turns into a prolonged move, but it may just be a 'trade' and I will be quick to exit if the dominant uptrend reasserts itself. Mostly it's easier to trade in the direction of the trend, but a trade is a trade."

Today's added comment:
A weakening trend was becoming apparent in the early part of this past week and the CBOE equities call to put daily volume ratio, measuring an 'overbought' extreme (and suggesting a put play), based on our collective behavior fellow option traders, was worth it's weight in (trading) gold!

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) topped out at 14,000. This was too 'easy' for me and I had a hard time believing it was that simple. Sometimes it is that simple! Making the market devilish hard to figure out sometimes. Watch, the next top will be real tricky to figure out!

The Dow has maintained a still-bullish chart in that it hasn't yet fallen under the low end of its recent trading range. Stay tuned on that, given the weak Friday close. A retreat to below 13,250, especially on a closing basis and not reversed (back to the upside) the next day, would suggest that the Dow was vulnerable to a further 200-250 point drop. If long DJX puts, I'd look at taking profits on a decline to the low 13,000 area.

Near resistance is 13,500, then, 13,600; fairly major resistance or selling interest is anticipated on a move back up to the 21-day moving average, currently at 13,690.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

The Nasdaq Composite (COMP) Index has turned bearish in its pattern, but the overall bullish trend wouldn't be considered to have reversed to down technically unless COMP falls below support implied by the last (down) swing low at 2560 as noted on the daily chart below.

A next lower downside price target is to around 2527, the low end of the price range of MayJuly and also representing a one-half retracement of the March-July advance.

Resistance can be expected on a move back up to 2630, next at the 21-day moving average at 2659 and with further overhead resistance coming in the 2673 area.

NASDAQ 100 (NDX) DAILY CHART:

How quickly they slide: faster than they 'glide'! The Nasdaq 100 Index (NDX) is back to possible support, at least that implied by its multimonth up trendline. The index might stabilize around the Friday close (1956) and hold its up trendline, especially on a closing basis. 1927 marks a fibonacci 38% retracement of the March-July advance and is a potential next lower target, with key support at 1900 as suggested by the last NDX bottom.

1885 represents a 50 percent retracement and is another potential downside objective for NDX. However, I would also note that a close below 1900, especially for a couple of days running, would suggest a bearish intermediate trend reversal.

Near resistance in the Nas 100 is at 2000, then at 2020. I don't look for a move above 2000 or below 1900 in the near-term.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Trading out of the stock I was long in the Nasdaq 100 (QQQQ) at an average price of 50.25 is looking better and better. Getting short the stock above 50 looks quite good too, just not a trade I took. The Q's reached potential support around 48, as implied by the low end of the uptrend channel it's been in. However, the Friday close at the low was a weak one. It looks like support may not be seen before 47.4 is reached, representing a 'minimal' 38 percent retracement of the March-July advance.

46.35 is another possible downside objective for QQQQ, based on it representing one-half or 50% of the prior major advance. However, if the recent correction is going to remain a normal one within a still overall uptrend, I wouldn't anticipate a decline below 47-46.7. A close below 46.7 or the last downswing low, would suggest that the intermediate trend has reversed from up to down.


RUSSELL 2000 (RUT) DAILY CHART:

A double top in the Russell 2000 Index (RUT) is 'confirmed' by the decline to below the 820 level of the prior lows. At 778 RUT has already reached a minimum downside objective. This is based on a 'measured move' target and subtracting the prior 36-point trading range from the 'breakdown' point at 820, to equal 784. This is of course a minimum objective only.

If the index continues lower, the next obvious technical support is at 760. The key overhanging resistance is 820, as prior support 'becomes' resistance.

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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