Option Investor
Index Wrap

BULLISH VERSUS BEARISH TECHNICAL ASPECTS

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THE BOTTOM LINE:
While I'd like to believe in the magic powers of the Fed and that lower interest rates are all the stock market needs to go to ever higher highs, I mostly rely on what the market is presenting now in terms of it's technical patterns. And, there are bullish and bearish aspects.

By the way for the week, the dollar fell a further 1%, crude oil gained 4.4%, gold was up 2.7%, and the largest loss in the major stock indexes was the Russell 2000 (RUT), which was down approximately 2.9 percent.

For the major indexes, I'll line up the different chart/indicator aspects, each on the bull or bear side and wait and see how things unfold from here of course. There are some definite cautionary notes to the bull case. On the other hand the intermediate and long-term trends remain up and we need give the benefit of the doubt to the dominant trend until or unless a prior key downswing low is pierced.

Because the signs are mixed; you know, could go up or could go down, the suggested trading strategy for long puts or calls is to trade for short-term price swings or not at all. Nothing wrong with standing aside and this can be a wise choice with a mixed picture.

I noted last week that "The following indexes would pierce the upper end of their weekly bull trend channels if they closed the week at or above: 1586 in SPX, 730 in OEX, 14250 in INDU, 2845 in COMP and 2190 in NDX". None did so but NDX. I revised the Nas 100 upper channel trendline slightly, but NDX still closed ABOVE the (revised) upper end of its long-term uptrend channel that intersected Friday at 2208; the NDX close was just under 2214.

BULLISH FACTORS:
#1: Tech leadership might pull the overall market higher, especially as seen with the big cap Nasdaq stocks. I mentioned already the close in the Nas 100 (NDX) above near resistance on a weekly closing basis. If NDX keeps advancing above 2200, it may provide the bullish leadership needed to at least provide a support floor for the NYSE-related indexes; i.e., SPX, OEX and INDU.
Also, NDX rebounded from the support area implied by its daily chart up trendline and its 21-day moving average.
And COMP did not pierce near support implied by ITS daily chart up trendline and managed to close above its 21-day average.

# 2: The S&P 500 (SPX), S&P 100 (OEX) and Dow 30 (INDU), held at or above their prior lows of 10/22-10/24 and so there no reversal of the intermediate-term uptrend on a technical/chart basis at this point.

BEARISH FACTORS:
#1: My 'sentiment' indicator shot to its highest bullish reading in some months on Wednesday and, at 2.2 was well above the 1.9 level which often points to a downside reversal coming within 1-5 trading sessions. The next day (a 1-day lag), Thursday, brought a sharp downside reversal. These extremes are not always worked out to speak in just a couple of days. It seems in general that too much faith is being placed in interest rate policy alone. On the bullish side is the still-strong economy and decent employment numbers just seen.

#2: Momentum indicators, especially the 13-day and 8-week Relative Strength Index (RSI) are either showing downside momentum (S&P and Dow) OR, in the Nasdaq, have hit 'overbought' highs; readings that in the past were associated either with a top OR at least a sideways trend to follow. If the recent RSI highs could predict that prices WOULD trend sideways, this would be useful for adopting strategies relying on the indexes remaining in a sideway trend. Mostly, we can predict that the odds of another big move higher near term in Nasdaq seems slim.

#3: The pattern in the two key Nasdaq indices is that of a bearish rising 'wedge'; i.e., an upward trend bounded by two intersecting, up-sloping, trendlines. This pattern sometimes points to a bearish short-term (up to 3 months) reversal, with decline potential of 15-19 percent. With stocks, the bearish wedge is one of poorer performing in predicting a trend reversal, but has a somewhat better predictive ability when seen in the indexes. I point it out here because it is considered a bearish chart pattern. Stay tuned on that!

Along with the above, note that with the powerhouse NDX price trend rising, it's 13-day RSI is falling, which is a bearish type divergence.

A background note is that the Dow Average of number two importance, the Dow Transports (TRAN), has been trading under its long-term up trendline for the past 3 weeks. Declining long-term momentum in TRAN could be suggesting that the economy will continue to weaken.

MARKET NEWS and INFLUENCES:
Closing index prices, as well as the recap of market influences such as earnings, company news, government reports and activities, 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 had key resistance in the 1540 area, a level which the index cleared twice on a closing basis, but only for a single day each time. I often talk about being wary of single day 'breakouts' or 'breakdowns' where there's no follow through the next day. SPX provided a good example of the validity of this. The new (intraday) high at 1552 was followed by a sharp retreat the next day and the day after; however, Friday saw a rebound that started from above the prior downswing low at 1489.

Are we locked in a 1490-1550 trading range for a while? I anticipate that there's another shot down coming that will carry this second downswing to a lower low than was seen in the first decline from 1576 to 1489). The second downswing in a typical corrective (down-up-down) pattern will often see the second down leg exceed that of the first. 1460 may be a next target.

I've noted expected first support on the SPX daily chart below at 1489 and next anticipated support below that for the 1460 area.

Near resistance is pegged around 1535-1536, or in the area of the 21-day moving average. Next resistance is assumed to be in the 1552 area. Interestingly, this area was the weekly high dating back to 2000. How time flies! The all-time 1576 recent peak is expected major resistance.

THE S&P 100 (OEX) INDEX; DAILY CHART:

The S&P 100 (OEX) chart is mixed in its pattern, but remains bullish if OEX does not fall to a lower low than the downside correction that ended at the recent 696 intraday low. So far so good, but Fridays can be a poor judge of what's what with the trend. 696 then is the near-term key/pivotal support. Below this area of the prior recent lows, I estimate downside potential (or 'support') to around 685.

As with the S&P 500 pattern (SPX), I'm anticipating that a lower low than made this past week will be seen in OEX, maybe in the 685 area as already noted. I especially would not play calls for much upside here given the bullish extreme seen mid-week in my ('contrarian') sentiment indicator.

Near resistance should come into play in the area of the 21-day average, currently at 717, with next resistance at 726.

MARKET 'SENTIMENT':
My 'sentiment' indicator plots the daily CBOE equities call to put ratio for total volume for each option type. When call volume exceeds a level 2 or more times daily put volume, it's typically a sign that there is 'too much' bullishness; i.e., that there's a perhaps unrealistic viewpoint on how much higher the market can go.

This ratio plotted as a technical indicator, has been very good in predicting a market reversal within 1-5 trading days; in this case a steep decline came the next day, mostly in the NYSE stocks, not so much in the tech-heavy Nasdaq. Often, the 'excessive' bullish (or bearish) sentiment indicated by this model marks a significant turning point; e.g., a 2-3 week correction, rather than 2-3 days.

I've plotted this indicator for 20 years and it's been remarkably consistent in its predictive value, relative to most any other single indicator I know of. Of course the lag time after high or low extremes of 1-5 days before a reversal, when there is a significant reversal, is a wide 'window' for options trading. Its value for me is to put me on HIGH alert for confirming price action that suggests a top (or bottom).

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average again found support and buying interest on its most recent decline toward 13400, thereby keeping the intermediate trend intact. Only a break of this prior (13400) low would suggest a possible intermediate trend reversal. If 13400 is pierced by another decline and I think that it may at some point ahead, my downside objective would be to the 13200 area. Major support is to be expected at 13000 or a bit above.

13848 is the level of the 21-day average currently and is an important resistance area. A close over the 21-day moving average WITH at least steady prices the following day would suggest that enough Dow stocks were in recovery mode to push the INDU Average higher, perhaps enough so as to again challenge or approach the 14000 level. Currently, most of the Dow stocks look too weak technically for that. The 13950-14000 zone is the next higher key resistance in INDU and not one I anticipate will be overcome anytime soon.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

My upside target in the Nasdaq Composite (COMP) Index to at least 2835 was finally met and then some, but not for long! The high occurred right at the trendline connecting 3 prior highs. The pie or wedge shaped pattern made by extending the lower and upper trendlines is what I referred to as a bearish rising 'wedge'. It's a somewhat unusual chart pattern not seen all that much, but in about half the instances I've seen of this formation in the major indexes, it's led to a steep correction later on. The trigger is a decisive downside penetration of the lower trendline. Certainly, the Nasdaq is very overbought currently.

This is NOT to say that the earnings trend for the tech sector isn't very good currently. My only question would be what happens if the current strong earning trend is called into question. When there's a rush to cash in on the fat profits made in many of these stocks, the reaction can be sharp and severe. Right now, tech is flying. The (P/E) multiples have way expanded. Irrational exuberance perhaps?! No doubt you've read that the current value of Google (GOOG) stock makes it the 5th biggest US company!

I've estimated next or near resistance at 2870, assuming of course the prior 2861 high gives way. 2920-2925 is a possible next target area if there's a breakout above the upper trendline.

Near support is noted at 2758 at the green up arrow below, at the current up trendline. 2700 is the next lower support area.

NASDAQ 100 (NDX) DAILY CHART:

The powerhouse continues to be the Nasdaq 100 Index (NDX), showing the result of everyone jumping on the same sector that's hot; e.g., energy, key tech stocks, etc. The pullbacks are getting shallower and making this pattern of two trendlines that are coming to a point as the distance between the lines gets narrower and narrower. Often this kind of pattern of 'compression' results in a sharp shakeout at some point, especially at or near the apex of the 'wedge'. Stay tuned on this brave prediction.

When I see this type rising wedge pattern I tend to want to dump any lead stocks of that index that I might own. No doubt these kind of hyper moves have 'too many' participants for me to feel that all the speculators and investors piling in/on are going to be right. Sometimes they are, but I get nervous with throwing pieces of paper with pictures of dead presidents into more of these high-flyers!

The ability of NDX to climb above 2200 was bullish, as was the ability to hold it's steep up trendline on this recent minor pullback. 2250 is possible next resistance.

Current near technical support, at the NDX up trendline, is at 2185, with next lower support at 2150, then key or pivotal support in the low-2100 area; I'm specifically watching the 2116 low made a couple of weeks back.

Prices are in a strong uptrend, but the RSI trend is a pattern of lower relative highs that are not 'confirming' the push to new highs in price. Such a price/RSI divergence often forms ahead of a sharp correction. The key is WHEN and it's very hard to gauge timing. What such divergences do for me is to get me very alert to a possible trend reversal. We did have a key 1-day downside reversal on Thursday. The fact that Friday saw a strong close relative to its intraday low doesn't yet mean that we may not have seen a high (at 2239) for a while.

I still see a longer-range possibility for an NDX advance to the 2400 area, but I also think that a steeper correction than seen to date is overdue and would come before such a new up leg.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The stock remains quite bullish in its pattern, just with the concerns expressed above about the underlying Nas 100 Index. Key near resistance in QQQQ is at 55.0, with next resistance projected at 56.

The volume patterns show that trade activity has finally been picking up considerably on the most recent up leg. This goes with the strong bullish upswing in the tech outlook and conviction that these stocks are going ever higher. When 'everyone' finally gets convinced of bullish potential, that's when I get somewhat nervous if I'm in that mob.

Support implied by the 21-day moving average comes in at 53.55, with perhaps substantial technical support at 52 implied by the prior low in that area. The 51 area looks like fairly major support currently.

A close below 53.55 or to below the 21-day moving average, would be bearish and suggest more weakness ahead; as always, the next day after such a close should be watched to gauge downside follow through selling, if any. We've seen the Q's sell off some, only to find buyers surging back in.

RUSSELL 2000 (RUT) DAILY CHART:

Key technical resistance in the Russell 2000 Index (RUT) looks now like it's at the emerging down trendline as noted by the red down arrow intersecting in the 825 area currently; the trendline representing a line of falling resistance. Nearby resistance is noted at the 55-day average, at 806. A close above the average would suggest potential to rally up toward a test of the bearish trendline. A close above 830, not reversed the next day, would be bullish.

Near support or buying interest has shown up around 787-788 and is the key near support to watch.

The RUT chart pattern is long-term neutral (a broad sideways trend) and near term bearish; it wouldn't be surprising to see a next decline that carried down toward 760 again.

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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