Option Investor
Index Wrap

NEW ALL-TIME HIGHS IN THE S&P 500

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THE BOTTOM LINE:
I described in a recent Trader's Corner article. Not this past week, when I was AWOL, but on Wed, 9/26, when I noted that the initial sharp run up of 9/18-9/19 of the major indexes, followed by relatively narrow back and forth price action up near the 9/19 high, traced out what looked like bull 'flag' patterns. When prices then pierce the upper end of these prior highs, there's a way to measure how high a next rally may carry.

As I noted in my 9/26 Trader's Corner, potential minimum upside targets implied by the upside breakouts, resulted in price projections to 1580 in the S&P 500 (SPX), to around 742-744 in the S&P 100 (OEX), to the 14300 area in the Dow 30 (INDU), to 2128 in the Nasdaq 100 (NDX) and for a possible move back to its 856 summer high in the Russell 2000 (RUT). The explanation of the flag pattern and how to measure these objectives can be seen online at the OI web site by clicking here.

Based on the aforementioned price targets, there's more upside potential suggested for:
-SPX, from the 1562 Fri. high, to around 1580;
-OEX, from 728, to the 740 area;
-INDU, from 14125, to 14300;

-NDX has exceeded my initial 2128 target at Friday's 2152 high and is a reminder that such breakout targets are minimum objectives ONLY.
-COMP has also exceeded its minimum upside objective to 2758 with its Friday close at 2779.
Even RUT has caught the bullish bug, with its sharp advance on Friday up to an 845 Close, well over a next resistance I had pegged at 835.

Besides the hype of the very narrowly based INDU going to new all-time highs, what has really caught the eye of money managers and some media talking heads is that SPX has exceeded its 2000 weekly closing high of 1553 and its mid-July peak high of 1555; Fri. close: 1557.6
The Nasdaq appears to be in a runaway bull market. I'm somewhat leery of tech leadership being what will now power the overall market. Moreover, NDX has what have significant resistance around 2162, at the top end of its weekly uptrend channel. Stay tuned on that!

Given a bullish extreme sentiment reading of this past week, I can envision SPX hitting 1580, resistance implied by the top end of it's long-term uptrend channel, then coming down. New highs and high bullishness, followed by a tradable downside correction, wouldn't be surprising. I would not get complacent in holding long index calls. We're nearing overbought extremes in the S&P and Dow and the Nasdaq is at or close to such extremes already in terms of the daily and weekly charts.

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 has gained a new bullish footing in its move to an all-time record high. I said last week: "SPX is in a good position to challenge its previous all time high in the 1555-1556 area." This was fairly apparent from the chart pattern. It's rare that the charts don't tip us off to what lies ahead. I'm maintaining my outlook for "1580 as a next objective and possible strong resistance as I noted in my initial comments." If SPX gets to the 1580 area, it could go on to touch 1600 but I'd be surprised to see a close that is over 1580 at the end of the coming week.

The most bullish chart picture is maintained if the S&P can in the next few days trade or mostly trade above its 1556 prior high. Near SPX support is now at 1535, with next support at 1520 and main support at 1507-1500. A close below the 21-day moving average, currently at 1511, would be bearish, especially if the Index didn't rebound back above this key trading average the next day.

SPX, as with the other NYSE related indexes, hasn't quite gotten into 'overbought' territory, as suggested by the 13-day RSI graph seen above.

S&P 100 (OEX), DAILY CHART:

The S&P 100 (OEX) chart continued to follow through on its slight upside breakout of the week before and the chart looks quite bullish currently. The only particular resistance I can point to in the coming week (or two) comes in around 742, at the high end of the long-term weekly chart uptrend channel (not shown).

The key near resistance at 720 was pierced and you'll note that I've now marked this area as immediate/near support in that prior resistance, once pierced, tends to become subsequent support. The next lower level of buying interest lies in the 708 to 705 area. A close below 690 would be bearish.

Based on the chart, I'd anticipate prices continuing to work higher, but would exit calls in the 740-742 area, if reached and would consider buying some puts in this area as well.

MARKET 'SENTIMENT':

Bullish sentiment finally reached the overbought extreme that has forecast downside reversals within 1-5 trading days on many occasions. Not always of course as no one indicator is 100 per cent reliable for picking a top and it's inherently tricky to get the exact timing of market tops based on any one technical indicator. But, these extreme sentiment readings have been highly reliable in at least forecasting a pullback of 15-20 points, if not necessarily an intermediate trend reversal of 50-60 or more points basis the OEX.

DOW 30 (INDU) AVERAGE; DAILY CHART:

As I noted last week about the Dow 30 (INDU) Average, it had "managed to creep past resistance in the 13870 area, which gave the appearance of an upside breakout above a bull flag consolidation." There was decent upside follow through as INDU closed the week above 14000. Based on this past week's price action and the way INDU went out on Friday, the Average looks like it should continue to work higher, such as to 14200 and above. I have had a possible further upside objective to around 14300.

The Dow chart will look the most bullish if it can now maintain closes above 14000, which I've noted as very near support on the chart below. The 13950 area is a next slightly lower support, with even more pivotal support anticipated around 13870. 13696 is also a key level to watch or at 21-day moving average, which is lagging well behind current levels but will be moving up fast in the next few days.

NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:

As anticipated, the Nasdaq Composite (COMP) Index took out its previous 2725 high. Last week I rated the odds of COMP forming a double top as slim and the upside gap of Friday, with a daily close near the high, suggests a runaway type move. Seems hard to believe that tech has shifted into high gear but there are tech stocks that look like good prospects to money managers, with decent remaining upside potential relative to the S&P. Money managers tend to be lemming like anyway and it looks like individual investors are piling in also.

I noted last week an upside target for COMP as being to 2775-2780 (done!), with 2835 as a maximum upside objective; I still have this view as to further upside potential in the near-term, relative to Friday's 2780 close.

No surprise that I figure the prior high at 2725 as near support as noted on the COMP chart below. Next technical support is at 2700-2690 and 2663 after that or wherever the 21-day moving average is on any given day in the coming week. 2650 looks like major support currently.

NASDAQ 100 (NDX) DAILY CHART:

Wow, what a move. Arent you glad you own the Nasdaq 100 Index (NDX) calls! Hope you own some, or traded out on the Friday close. I didn't want to stick around myself given that the Index has had such a run. 2150-2160 was my 'most bullish' price projection of last week. Where NDX can or will go above highs already seen is hard to gauge.

As I noted in my initial ('bottom line') comments, 2162 is resistance implied by the top end of the weekly chart uptrend channel. Stay tuned on that!

NDX is now fully 'overbought' according to the 13-day RSI and nearly so on an 8-week basis. Indexes and stocks of course can continue to get more overbought but there tends to be a limit as to how long this situation goes on before there's a good sized correction.

Near support is at 2089, then at 2050, with major support down in the 1950 area.

I took a look at how much NDX has retraced of its massive 2000-2002 decline; using a 'semi-log' scale, which makes sense given how far NDX fell from its 2000 high, Friday's close has now retraced more than 50 percent (of the 2000-2002 decline). By the 'linear' or arithmetic scale, the retracement to date is only 33 percent.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

My objective for the Nasdaq 100 Index tracking stock (QQQQ) to 52-52.5 has been met with apparent ease. Relatively low daily volumes have been a hallmark of the run up of recent weeks, but On Balance Volume (Joe Granville's great contribution) has been pointing the way higher for some time!

Resistance? If QQQQ advances to the top end of its weekly chart uptrend channel (not shown) it could reach 54.25 before hitting resistance implied by the top end of its broadest bull channel; the lower end of this channel or the dominant up trendline, dates from the 2002 low at 19.76. Nice run!!

Near support is likely to be found around 51.25, then in the area of the prior 50.66 high, with pivotal or key support at 50.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) broke out big time this past week, which is the way the chart looked once there was that decisive upside penetration of resistance at 820. Rut sailed through any resistance that might have been at 835 and the Index looks headed to a re-test of its July peak at 856. This area of the prior highs was also the 'minimum' upside objective based on the measuring implications of the 'bull flag' that formed in mid-Sept. The subsequent pullback to the 800 area was a bit of bearish fake out but we can usually rule out 1-day slippages when there's no follow through.

It looks like RUT is going for its prior high. I have no further near-term upside objectives beyond this, but a move to the 900 area is possible based on its long-term weekly chart trajectory. We'll see on that!

Very near support is at 823 down to 820 with fairly major support at 800.

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.

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