Option Investor
Index Wrap

BIG BEAR SENTIMENT

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THE BOTTOM LINE:
While perhaps tempered a bit by Friday being expiration, the end of the week saw the most bullish call to put ratio on my sentiment indicator then has been seen since the period just prior to the mid-August bottom. 'Bullish' in a contrarian sense here means that total CBOE equities put volume came close to equaling call volume on Friday.

The second, of three, of my other key market timing indicators related to the NYSE, the 10-day moving average of daily NYSE Up Volume looks like it has bottomed; the 10-day average of daily Up Volume in the Nasdaq, has a bit lower to go to suggest that we are at or near a bottom, but this indicator could also line up bullishly with 1-3 low-volume days in the upcoming shortened holiday week.

My third key indicator for suggesting a bottom, a fully oversold 13-day Relative Strength Index (RSI) and this has occurred in the S&P, Dow and Nasdaq. Only the RSI applied to the longer-range weekly charts is not yet showing a similar oversold condition in the Nasdaq; such an oversold reading is at hand in OEX, nearly there in SPX, not quite reached in the Dow.

By the way, the Dow Industrials (INDU) had one week (week before last) where the Friday close fell to below the summer weekly closing low. In order to not generate a Dow theory 'sell signal', INDU weekly closes going forward should hold at or above 13079.

I said last week that I the "market is likely at or near a short-term bottom" and that it looked like a rebound would set up by Monday-Tuesday. It was a quite tradable rally if you were nimble on getting out and especially profitable if you got IN before it started that Tuesday sky shoot up such as by buying the Monday close (be brave!). The resistance and deflection point was at the area where it could be expected technically: where prior key support, once broken, 'became' later resistance. This was the case with the S&P (both indexes) and the Nas Composite as you can see on the charts below.

The sole profit opportunity in calls doesn't look to be just in the strong but short-lived rebound of this past week, as the market appears to be 'basing' and recent lows are not that far above the Monday low of the week just ended.

I want to be on the long side of this market and to buy dips. If there was a shot down to lower lows in the Nasdaq 100 (NDX) that took the index to the 1970-1950 area, I'd especially like to be long those calls for a December (Santa Claus) rally. It NDX started falling below 1950 or the S&P 100 (OEX) to below 670 for more than a day, I'd be taking a close second look at whether to stay with my position.

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 appears to have fulfilled what is typically a 'maximum' retracement (at 66% at 1440) and still remain within an overall uptrend. The chart pattern of the past 7-8 trading sessions looks like basing action to me. A close below 1440 that didn't see a rebound back above this key support area the next day would however suggest that SPX could be headed to the 1420 area or for a possible test of support at 1400.

Key near resistance is at the line of prior lows at 1490. A close above 1500, not reversed the next day, would get things moving on the upside most likely. I also however, would be surprised to see prices moving sideways in the next few trading sessions. In fact, the longer that prices move sideways, the bigger the 'base' so to speak and the bigger the base, the stronger the chart 'foundation' for a later move up.

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

The S&P 100 (OEX) chart pattern looks the same as SPX in that it appears to be bottoming. Key near support is at 676 to 670. A close below 670 would be bearish, as long as it wasn't just a 1-day affair caused by stops being run and a final wave of selling before the index was ready to mount a sustained rally. Support below 670-676 should be found in the 665-660 area, with major support in the 650 to 640 zone.

Key near resistance is at 696-700. A close above 700 or the 21-day moving average would be an initial bullish start to a possible next sustained move higher, perhaps also just a gradual and slow such advance.

It was not surprising that the failure of the first strong rally brought about a jump in bearish sentiment by the end of this past week, as traders can tend toward an unrealistic expectation that the prior bull trend should reassert itself straight away. When a decline has brought a deep retracement, market conditions have often shifted such that the bulls are standing back and not ready to jump into wholesale buying.

MARKET 'SENTIMENT':
I talked in my initial (bottom line) comments that the this recent dip in bullish sentiment into what I call the 'oversold' bullish territory suggested a recent 'extreme' in a bearish market outlook; even though seen on an expiration Friday, it nevertheless looks to be an initial indication that a substantial rally is coming.

The lag time for such a rally is what can be tricky as (low or high) extremes in this indicator most often precede a strong reversal type move by anywhere from 1 to 5 trading sessions. A second such daily reading in the oversold area (daily total CBOE equities put volume nearly equal call volume) would strongly suggest that a sustained rebound was not far off.

DOW 30 (INDU) AVERAGE; DAILY CHART:

13000 not surprisingly, has been a key support in the Dow (INDU) Average. Most recently INDU has been holding above 13090 support implied by its 66 percent retracement of the mid-August to early-October advance. Key support below 13000, is at 12,850 to 12,800. If there was a shot down into this area, I'd like to buy such a dip and purchase DJX January calls, with a stop or exit point at 12,750 and with a trade objective to 13600 or higher. Stay tuned on all this!

Also, not surprisingly, prior support in the 13400 area looks like it will mark near resistance; I assume that the most pivotal next resistance in INDU comes at around 13400-13490.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The decline following the bearish 'rising wedge' pattern outlined on the Nasdaq Composite (COMP) Index chart has fulfilled what is an 'average' decline of 10 to 15 percent (from the peak level) after prices break below the low end of such a pie-shaped pattern.

This is not to say that COMP can't or won't go somewhat lower than it already has and the Index could complete its correction by falling to support implied by a 62 percent Fibonacci retracement at 2567 or to a 66% retracement near 2550. Currently, a retreat to the 2550-2545 zone is my lowest expectation for COMP and I rate the likelihood of a big new leg down, such as back to the 2400 area again, as low.

Key near resistance remains at 2698-2700, the same as I anticipated last week, with next overhead resistance around 2750.

NASDAQ 100 (NDX) DAILY CHART:

To date, the Nasdaq 100 (NDX) Index has completed a 11.5 percent correction from intraday peak to its recent intraday low, within the range of expectations for an average 10-15 percent decline after a break below a rising wedge pattern. As to whether NDX might retreat to sharply substantially lower lows such as back to the 1850 area, I'd rate it unlikely given its current oversold condition on a short to intermediate-term basis.

1970 is support suggested by a retracement of a Fibonacci 62% and 1950, support implied by a 2/3rds or 66 percent correction from the October peak high at 2239. As I noted in my initial comments, I anticipate being a buyer of NDX (January) calls if the index fell to the 1950-1970 area. If there was some calamity going on that's a new factor, but given the current climate where bearishness has replaced somewhat 'mindless' bullishness, a rally can be anticipated given the 'normal' nature of the major indexes swinging from 'extreme' to extreme in terms of outlook.

I've marked near resistance at 2100, down just a bit from the 2117 level I suggested as near resistance last week, with a next higher resistance coming in at the current intersection of the 21-day moving average (2142). If I could buy NDX calls in the 1950 area, one pre-set objective, assuming I wasn't stopped out at 1940, would be for the Index to rally back up to the area of its the 21-day average, where I'd likely sell half of my position. I love playing with the 'house's' money so to speak!

I wrote last week: "I anticipate a short-term (e.g., 2-3 day) 'oversold' rebound attempt setting up if NDX fell to the 2020 to 2000 area." Sorry, I can't do better than that! I didn't give a specific objective for a trade on this rally, but the rally unfolded exactly in the 2-3 day time frame, so I did half the job for you I suppose.

Trading the 2-3 day price swings used to be my thing, but I've been less attracted to such short-term trading in recent years. However, buying the Monday NDX close was somewhat irresistible as I watched the 21-hour RSI (not shown) reach a fully oversold below 30 reading, its first time since mid-August.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nas 100 tracking stock (QQQQ) has support beginning at 49.0, extending down to the 48 area where I would be a buyer of the stock if reached, with an exit point at 47.5 on a closing basis.

Near resistance is at 51.35, then at 52.00, with next pivotal resistance coming in most likely at the 21-day moving average, which currently is at 52.65. The way that volume has jumped on this recent decline suggests that QQQQ may be at or near a bottom judging by the amount of speculative money that has left the stage.

A break below 48 might convince many long-term holders that they should give up some of their stock too. I rate it unlikely that there'll be such a break, but it's always advisable to consider all possibilities. Major support is in the 45.5-45.0 area.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) found support where I anticipated it would or should, at 760 setting up a potential minor double bottom. Unchanged from last week, I'd continue to suggest that if 760 is pierced, next best support comes in around 740-745.

RUT still has not reached a 'fully' oversold reading on its 13-day RSI (Relative Strength Index) and maybe that won't happen, but I would be more inclined to buy RUT calls if it did. This is not my favored index to buy for a rebound but the pattern that has unfolded looks to be a 'normal' correction in that the second leg down (70 points) was longer than the first (of 64 points). Sometimes the second leg down will end up being a fibonacci 1.6 times the first. 730 anyone? Well RUT fell to 736 in mid-August. I don't see such a 100% or more retracement currently but that's an outside possibility.

795 is near resistance, then 805 to 810 is a pivotal technical resistance area. A rally that pierced the down trendline (currently) intersecting around 810, would suggest an upside breakout. Such a move doesn't look to be in the cards based on inherent strength in the Russell stock group but this Index would have decent upside potential based on a strong rally in the S&P and especially the Nasdaq.

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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