Option Investor
Index Wrap

FED BESTOWS MARKET EARLY HOLIDAY GIFT

HAVING TROUBLE PRINTING?
Printer friendly version

THE BOTTOM LINE:
I was a disbeliever that the Fed would cut a full half percent point and that the major indexes probably would be able to rally back to their July peaks. Of course this hasn't happened yet either but we're getting close. In retrospect on just a technical basis (and putting my long-term 'fundamental' concerns aside), the pattern after the mid-August low when SPX reversed at 1371, was one of ever-higher pullback lows and in line with what a bullish trend is all about; i.e., ever higher reaction lows. Once prices achieved a decisive upside penetration of key resistance at 1500 in the S&P 500 (SPX), this was a definite bullish breakout signal.

I wrote my Trader's Corner article this past week examining what I was seeing that was mighty cause for worry on more that just an economic slowdown, but on the potential for recession. Not that I rate myself more perceptive than the Fed on the need for strong medicine and a bigger rate cut than a quarter of a percent, but it appeared to me and many observers that the Fed heads had too much concern for inflation to take the bigger plunge. WRONG! They saw the danger signals in both the inverted yield curve and, in what I think shocked them, the sharp dip in employment and jobs creation.

Venturing further afield than I usually do, I wrote my Wednesday article on technical AND more fundamental aspects in the 9/19 OI Daily; entitled "Chart patterns (support/resistance, gaps, a bull flag), inflation, employment and the yield curve", you see this column by clicking here.

I often find one chart for whatever index is 'leading' the market, that is THE ONE to watch so to speak and the bellwether chart for judging what's ahead for the overall market. The SPX weekly chart seen below has a well-defined uptrend channel that suggests resistance, not only at the prior all-time highs in the 1553-1555 area, but at the top end of the channel currently intersecting around 1580.

If SPX takes out the major double top that's been seen to date, SPX could still hit significant resistance around 25 points higher, at 1580. If 1580 was pierced decisively, it would suggest a new up leg and where that could go is hard to say. The next big resistance would likely come in around 1600. Major support is 1500. These look like the key levels (1500 and 1600) in terms of the major trend.

I'm doubtful that SPX will see a weekly close above 1580, although it could get to or near 1600 during the week; this assumes the index takes out its prior 1555 intraday high. It would make some sense that, to get everyone more bullish than they are now and to reach an extreme in contrarian terms, SPX would 'need' to exceed it's prior high before the index would make a next top and a place to exit calls and to consider buying puts.

Another aspect that bears (no pun intended!) watching is when there's a next extreme in the 8-week RSI shown above. Another 10 or so points higher puts this indicator into its 'overbought' 70-75 zone.

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.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) Index did of course achieve a decisive upside penetration of resistance in the 1489-1496 area that I talked about last week and then soared above the prior 1504 high. As I noted last week, this action suggested the strong possibility that SPX would again challenge it's mid-July top around 1556. A bullish case also based in the current chart pattern is that a strong advance above 1532 at this juncture not only signals that the 1555-1556 highs can be exceeded but that there's further upside potential to the 1585-1588 area.

Conversely, inability on a pullback for SPX support to develop in the 1500 area would suggest the possibility that a top has formed, although the chart picture wouldn't turn overly bearish unless there was a close below 1480. Major chart support looks like 1440.

S&P 100 (OEX), DAILY CHART:

The S&P 100 (OEX) chart turned strongly bullish when the prior upswing high at 700 was pierced followed by a fast surge higher of another 15 points. OEX is now so close to its prior peak that it's hard to believe that it won't exceed this high. A renewed thrust above 715 in fact suggests upside potential to around 740, which is where a next leg up would equal last week's sharp upside move on Tues-Wed.

Pivotal support is suggested at 700, as prior key resistance should now be a strong support and where significant buying would come in if reached. Next support is at 690 and bullish control would only look at risk if this level were pierced.

MARKET 'SENTIMENT':
Trader and investor sentiment continues to be quite bullish relative to the economy uncertainties that are out there, at least in my view of it. However, my sentiment indicator has yet to reach an 'overbought' bullish extreme and that trumps my opinion of whether traders are have yet arrived at a bullish 'extreme' as my indicator defines it above. Hope springs eternal! And where else are investors and traders going to put their money? Into bonds; real estate; into a bet on the upside for the dollar?! Well, as Alan Greenspan noted on one recent interview, some diversifying beyond dollar assets seems sound.

A bullish outlook for stocks is controlling the direction of where the money is flowing. Only if/when CBOE daily equities call volume gets to be double daily put volume would there be a suggestion for a possible top within 1-5 trading days; although usually sooner than 5.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average also of course pieced its prior rally high at 13696 and now looks to be in a good position to challenge and possibly exceed its previous top at 14022, per where resistance is highlighted on the INDU daily chart below. A move above Friday's high at 13877 in fact starts to suggest to me not only potential to reach a new all-time high (above 14022) but potential for a move to as high as the 14300-14330 area.

For the technical picture to remain bullish, best is that the 13696 high pierced on the strong recent rally, now becomes an area of technical support on any pullback. Below 13696, the next key technical support is 13400; a close below this level would suggest to me definite potential for further downside weakness.

I continue to monitor the Dow Transportation Average (TRAN) weekly close. TRAN is only barely holding above its long-term up trendline. If the Transports continue to lag and break the long-term support trendline I'm talking about, it becomes a warning that there could be a bear market in our future. I'll feature the weekly TRAN chart, relative to Dow Industrial Average (INDU), in an upcoming Index Trader column.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART::

The Nasdaq Composite (COMP) Index chart looks like the S&P in its pattern but COMP's further upside objectives don't measure as much beyond its mid-July peak. The index does appear to be in a good position to carry back to its prior top at 2725, and maybe beyond, to 2750 or even to the 2770 area. I would rate the potential for a double top as greater than the S&P. Stay tuned on that!

As with the other major indexes already looked at, the recent upswing high at 2644 ought now to act as near technical support assuming the index's upside potential I'm describing is going to be realized. Below 2644, next key support is at 2600.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 Index (NDX) is now within a hair's breath of exceeding its old high at 2060 and betting against that right now seems foolhardy. With a move above near resistance around 2054 to 2060, NDX looks to have potential to reach the 2100 area or a bit beyond.

Near support is anticipated to come in at the recent 2032 upswing high; i.e., resistance, once exceeded, often 'becoming' new support. Pivotal technical support implied by the current 21-day moving average is at 1985. 1950 looks like fairly major support currently.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

A breakout in the Nasdaq 100 Index stock (QQQQ) above it's prior summer peak at 50.66 and now so close at hand, suggest potential on up to the $52 area or a bit beyond.

The 50.0 level should be near support, with a next key technical support coming in around the starting point of the upside surge of this past week, and in the area of the 21-day moving average, at 48.85.

I continue to find that the volume levels stink relative to how prices have surged higher, always making such rallies a bit 'suspect' in my mind (where is the SURGE of buyers?!!), but the rally just keeps going and going and going. Batteries anyone!

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) broke out above what I was seeing as key resistance in the 800-803 area, which I thought was going also represent the upper end of its likely trading range. WRONG! RUT looks like it could reach 835 and 'fill in' the downside gap there, but I rate the likelihood of a further extension of any rally, such as back up to challenge its 856 high as slim.

The 800 level, prior key resistance and the 'breakout' point, should now offer support on pullbacks, assuming RUT is going to realize a further up leg. The 775 area is the next lower support if the pivotal 800 level gives way.

Good Trading Success!

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