Option Investor
Index Wrap

BEAR RUN

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THE BOTTOM LINE:
The market is likely at or near a short-term bottom, with the S&P 500 (SPX) having retraced a fibonacci 61.8 (62) percent retracement of the mid-August to mid-October advance (this could extend to around 66% as noted on the S&P charts) and is now at or near fully oversold on a short to intermediate-term basis while not yet on a long-term basis. The Nasdaq Composite, the recent rally leader, which can be anticipated to come down LESS than SPX, has retraced 50% of the summer rally; the Nas 100 (NDX) hasn't quite reached a 50% retracement.

Longer-term, prices may come down more. I wrote an important mid-week Trader's Corner article where I lined up 5 key technical aspects relating to the sharpness of the decline and spoke of projections to 238 or LOWER in NDX; right now I see little possibility of the big-cap NDX tech index retreating to more than to around 1950, equal to a 2/3rds (66%) retracement.

As I said in my mid-week (Trader's Corner) update, forewarning tips on the steepness of this overall decline were seen primarily in the mid-October weakness of the Dow Transports (TRAN) relative to the Dow 30 Industrials (INDU), resistance seen at the top end of the broad weekly channels, in the high degree of bullish sentiment occurring the day before (10/31/07) the onset of the most recent down leg, and in the Nasdaq leaders having traced out bearish rising wedge patterns. These bearish (rising wedge) chart patterns were a final tip off for a possible SHARP correction ahead, which I defined as between 9 and 15 percent in NDX; i.e., 2038 to 1903.

All the above points, with illustrations and other useful article links (e.g., constructing trend channels) can be seen in the Trader's Corner section in your saved Wed, 11/7 OI Daily market (e-mail) letter or by viewing it online by clicking here.

Where we are, where the major indexes may be headed next in my opinion, are covered in my individual index commentaries below.

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 chart turned intermediate-term bearish, when the prior line of lows at 1489-1490 was pierced. Until this triggering event (the move below prior intraday lows) previous corrections after the 1576 top were relatively shallow. The Thursday/Friday lows at 1449-1450 now translate into a fibonacci 61.8 percent retracement, which I habitually round off to 62. I anticipate at least interim support developing in the 1450 to 1440 area; this last level represents a 2/3rds, 66%, percent correction.

If SPX starts falling under 1440 (and not my expectation near-term), the Index is vulnerable to a 100 percent round-trip correction back to the 1400 area, and perhaps to 1370, its prior (mid-August) intraday low.

The long-term trend remains up as long as 1363-1368 is not pierced and/or the major SPX weekly chart (not shown) up trendline is not violated in the coming week by a weekly close below 1356.

I wrote last week that: "I anticipate that there's another shot down coming that will carry 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." The Index has exceeded my 1460 target by a bit and could go to 1440 before enough buying interest surfaces to generate a bounce/rebound.

I've noted near resistance, especially on a closing basis, as the prior 'line' of support at 1490. Next resistance is around 1520, at the current 21-day moving average; the key thing being the level of the Average from day to day, not with a specific number. A close back above this key trading average and not reversed (back to the downside) the next day, would suggest a bullish turnaround.

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

The S&P 100 (OEX) chart pattern turned bearish for the same reason as the S&P 500 (SPX), once support at its prior lows in the 696-700 area gave way. Friday's close not puts the index into its 62-66 percent retracement zone. Given how 'oversold' the index is on a price basis, and this amount of retracement, I anticipate near-term rally potential such as back up the 'breakdown' point at 696-700.

If 676 or the low-to-date for this move around 674 holds as a support, it would suggest that while a further sideways to lower move could still occur later one, OEX could maintain a low at or above 676 on a closing basis. Major support begins down in the 650 area, extending to 643.

Immediate overhead resistance is at 696, at the recent breakdown point, with key or pivotal resistance at the 21-day average, currently at 708.7 as can seen on the chart. Major resistance begins in the 716 area, extending up to 726.

MARKET 'SENTIMENT':
My 'sentiment' indicator hit the danger zone 1 day prior to the onset of this most recent correction; typically a bearish reversal begins within 1-2 trading days but not more than 5, which was the case the prior time that my indicator hit the 'overbought' sentiment level back on 10/4, 3 days before the 730 closing high and 5 days before the OEX intraday peak at 735 occurred.

You might think that my sentiment model would have gone to an even more bearish outlook on Friday, but my indicator actually popped up a bit. Already traders were anticipating the decline had about run its course. I would be more convinced of a sustained turnaround if I got a 1-day reading at or below the (green level) line that suggests an EXTREME in bearish sentiment; extremes in either bullishness or bearishness tending to occur BEFORE there is a substantial turnaround and trend reversal.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I wrote last Saturday that the Dow 30 (INDU) Average "... break of the prior 13400 low would suggest a trend reversal" and "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." Well, it all came true including a test of my expected 'major' support at 13000. What now?

My expectation is for at least a short-term 'oversold' rally developing in the next 1-2 sessions (Monday-Tuesday) and for the 13000 area to hold as support with rebound potential back up the 13400 area but probably not above it on a closing basis. Stay tuned on that! Resistance implied by the 21-day moving average comes in currently at 13679 as noted on my next chart.

While it's possible that the prior closing low at 12845 or even the intraday low around 12518, might be tested, I don't rate this so likely and especially not without at least a short-term rally and/or a sideways move of a few days to a couple of weeks.

A final note on the Dow 30 Average: if you really want to gauge its potential up or down (and hence often the S&P), you can flip through a look at all 30 Dow stock charts pretty quickly which is an interesting and telling exercise from time to time.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

What came true in spades from my commentary of last week was the bearish implication of the Nasdaq Composite (COMP) Index of "the pie or wedge shaped pattern made by extending the lower and upper trendlines ... a bearish rising 'wedge'. It's a somewhat unusual chart pattern not seen all that much, but in about half the instances I've witnessed 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."

The average or 'most likely' correction after formation of the rising wedge pattern of 'compression' (i.e., narrower and narrower price swings) and a confirming break of the lower trendline, is for a fall of around 15% from the highs; I also work with the expectation of a possible decline of 9 to 15 percent from the intraday high. A 9 percent correction from peak levels implies downside potential to 2603 and to 2431 if the correction equaled 15%; a decline of this magnitude would put COMP back in the area of its mid-August low.

I don't anticipate COMP falling below the 2550 area currently. Moreover, it may be that the Composite corrects just 50% of its prior move, not more, which implies that the low to date (2624) may hold. COMP is fully oversold on a short-term (2-3 days) and intermediate-term (2-3 week) basis.

I anticipate near resistance at the mid-October low at 2698 (call it the 2700 area); this level is not noted with my usual red down arrow. The next key resistance is at the 21-day average, currently at 2778. If COMP regained the 2700 level and then held this area on subsequent pullbacks, it would provide some evidence that the COMP retracement won't end up being more than 1/2 (50%) of the prior advance, which is a fairly 'normal' correction for stocks and the major stock indexes.

NASDAQ 100 (NDX) DAILY CHART:

How the mighty have fallen! By the end of this past week the former 'powerhouse' index, the Nasdaq 100 (NDX), had a sharp 3-day decline and a bearish close AT its intraday Friday low. Many scrambled to take profits and exit when Thursday's bounce from intraday lows saw no follow through the next day (Friday).

I've marked near resistance at 2117, at a prior key low at the trendline and noted expected support at 2021, representing a 50 percent fibonacci retracement pullback for the mid-August to late-October advance. At the 'outside' so to speak, COMP could rally to the 2175 area (unlikely) or fall to the 1950 area. [I'd buy NDX calls if the index did fall to the 1950 area; my exit (stop) point on such a trade would be at 1940, and my trade objective would be for a rebound to 2100 or close to it.]

Near-term, I anticipate a short-term (e.g., 2-3 day) 'oversold' rebound attempt setting up if NDX fell to the 2020 to 2000 area. A rally might also develop from at or above 2034, the low seen already (on Friday) in the recent sharp correction in the Nasdaq 100; especially since the Nasdaq Composite has already retraced 50% of its last big advance.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nas 100 tracking stock (QQQQ) turned bearish when the stock fell below its 21-day moving average and then especially when the prior low at 52 was pierced.

The decline to the 50 area is where I envisioned fairly major support and where buyers would find interest; I anticipate at least a short-term rally developing in the early going in the coming week. My bottom line expectation is that near support has been reached around 50, with probably major support and buying interest developing if there's a further fall to the low-48 area.

Resistance is at 52, then at the 21-day average around 53.5, as prior support 'becomes' resistance.

RUSSELL 2000 (RUT) DAILY CHART:

A bearish chart for the Russell 2000 Index (RUT) developed with its fall to below the 800 level. Now it appears that support/buying interest will come into play at or above 760. If 760 is pierced, likely next support comes in around 740-745.

RUT has not reached a 'fully' oversold reading on its 13-day RSI (Relative Strength Index) and I would like to see that happen before I'd be more inclined to buy RUT calls at least for a more sustained rebound or more than a short-term trading bounce.

Key near resistance is at 800, especially on a closing basis; even a 1-day close back above 800 was seen early in the past week, but the next day after that brought heavy renewed selling. The 2-day 'rule' applies in that it takes two consecutive days closing above or below key resistance levels to suggest that the trend is changing or reversing.

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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