Option Investor
Index Wrap

THE RECENT REVERSAL

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THE BOTTOM LINE:
The market moves are often viewed threw a rear-view mirror. If you were right on a turning point or reversal, you can look back in satisfaction; if you were wrong, you should look back and see what you missed. In my experience the signs, signals and clues to any significant trend reversal is ALWAYS there, but we don't always put those signs, signals or clues together correctly. Lesson I take is to look back often as a learning experience.

I wrote last week that: "The market may have bottomed on Wednesday, 3 trading days after the bearish extreme in 'sentiment shown by my (sentiment) indicator" .... and: "Knowing how a bottom will form in the first extended correction after a very strong multimonth advance can be tricky however." The bottom I was anticipating came 2 trading days later than Wednesday and there was one more minor dip in the S&P, Dow and Nasdaq Composite (just slightly), but not at all in the strong big cap Nas 100 (NDX). I never got my 'ideal' buy off in NDX in the 1970 area, but the continued basing action at 2000 convinced me it was a buy anyway.

I did get the price suggested to buy DXJ January calls when the Dow 30 (INDU) dipped to 12800 on 11/21 & 11/23, but the suggested close stop just 50 points below (12750, basis the Dow) that would have activated my suggested stop. I exited a few of those DJX calls on the weak Monday close (11/26), but kept most and waited to see what the next day brought (my '2-day confirming rule' re weakness or strength) as my key indicators were looking good.

My 3 key indicators that suggest a major or significant/tradable bottom are:

SENTIMENT
RSI
10-DAY UP VOLUME PATTERN

I noted last week that I would update my market view on Wednesday in my Trader's Corner column and what I wrote about was how these 3 indicators, used in tandem, appear again to have quite accurately forecast a bottom this past Monday; given that Monday was the 5th (trading) day from the bullish CPRATIO ('sentiment') reading I wrote about and especially as the bullish Sentiment and RSI indicators was joined by the bullish upturn in 10-day average of Nasdaq Up Volume after it dipped into and under the bullish bottom zone for Nasdaq.

My Wednesday Trader's Corner column can be seen online at the OI web site by clicking here.

I had the right text but a couple of the charts relating to my 3 key indicators had a couple incorrect notations that I will correct here and then move on to my individual index commentaries:

SENTIMENT INDICATOR
The peak reading in the lower part of the chart (the CPRATIO indicator) reflected a equities call to put ratio in the 'overbought' (extreme bullishness) zone in early-OCTOBER followed by a price PEAK 5 days later. I had the 5th day marked in the wrong place and this is better highlighted below. Then again at the recent UPSIDE reversal, the BOTTOM came 5 days after the 'oversold' (extreme bearishness) reading, again as noted on the chart below.

Reversals that tend to come 1-5 days AFTER these extremes is quite a leeway, but is also why I don't use this indicator by itself. I need look at the 2 other indicators to check for 'agreement' and of course price action is the other key.

In price action terms, a double bottom set up when the S&P 500 and 100 held their August closing lows and the Nasdaq Composite held the key 66% or 2/3rds retracement of its August to late-October advance. NDX was going sideways and didn't give back much more than half of its August-October advance and was finding good support on dips to the 2000 area on several occasions in the last two weeks after its 11/12 low at 1980, which was showing clearcut 'basing' or bottoming action.

One more indicator chart from my Wednesday (Trader's Corner) article showed the last of my 3 key indicators turning bullish in the Nasdaq as its 10-day Up volume average turned up on Tuesday, setting the stage for the big Wed-Fri rally. My comments on the chart in my mid-week article had two text lines reversed and the correct labeling is shown on the COMP chart below. (The NYSE 10-day up volume average turned higher some time before the Nasdaq and was in a bullish upward trend per the trendline shown in that chart on Wed.) Price tends to follow upside reversals in this measure of volume (daily advancing/UP volume) higher sooner or later, usually sooner, as seen in the Nasdaq.

I was anticipating an upside reversal for various reasons as outlined last week and I believe that the indexes will work higher on balance, but I also don't anticipate a straight up move by any means. There should be more gains however as the back drop of negatives gets discounted or trumped by the expectation that things are bad enough that the Fed has to stimulate the economy more than was thought just last month.

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 reversal to the upside prevented a close below its August closing low, which would have suggested that the intermediate-term trend had finally reversed from up to down. This recent strong rebound should lead to a further advance, such as back up to the 1520 to 1530 area.

Near support should be found around 1460, with quite pivotal next support at 1430. I thought last week that the Index might only be able to rebound back to the 1460-1465 area before coming back down, but this area becomes now a key near support area instead.

Near resistance is suggested at the prior upswing high at 1492, at 1520, and last at 1530 in terms of what I've noted on the SPX chart below.

I noted last week the bullish price/RSI divergence that had developed in SPX as prices were declining but on rising 'relative strength' as highlighted by the rising (green) up trendline drawn under the Relative Strength Index (RSI) indicator lows as seen above. The strong 'confirmation' of this bullish divergence was finally realized. It can take a few days to a couple of weeks, but the result is often the same: the index or stock in question has a sizable and sharp rally.

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

The S&P 100 (OEX) Index is bullish in its pattern with the formation, for now at least, of a double bottom in the area of the prior low close from August, as noted on the chart below. The Index had a strong rally this past week, which slowed only when it hit its first significant technical resistance, at the 'line' of prior support at 695; I view this level as a key/pivotal resistance to be overcome. Above 695, next OEX resistance is in the 710 to 715 zone.

OEX has support in the low-680's and then at 670.

MARKET 'SENTIMENT':

What looked bullish this past week in my sentiment indicator was that the reading fell on two different days, even though there was this strong rebound going on. This suggests trader 'caution' and is a plus for the rally continuing.

It turned out that the 'extreme' bearishness implied by the dip in my 'sentiment' indicator that occurred on Options expiration Friday 11/16 was, as I've seen before, not to be viewed simply as the effect of expiration-day distortions. This was suggested by the recent low occurring WITHIN the 1 to 5 trading days past the CPRATIO extreme where I would have expected to see a 'final' bottom.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I had been writing about key support in the Dow 30 (INDU) as in the 12,800 area and while there was one close below this level this past week, the next day (Tuesday) did not see downside follow through; fits with my '2-consecutive day confirming' rule about the validity or sustainability of new low closes or new closing highs, especially when occurring at oversold/overbought extremes.

My favored trade was to buy Dow Index calls with dips in the Average to the 12800 area but my suggested 12750 stop was too close to keep me in if strictly adhered to. It's now apparent it was better to suggest a stop further under 12800 in terms of an exit point. 50 points in the Dow being a small move, especially since I was thinking INDU had at least a 500 point upside potential from the 12800 area (I noted an objective on the trade for 12600). Relative to my 'reward' potential, 100 points was not too much to risk in terms of an exit/stop point. Live and learn on setting stops!

Key near INDU technical support is in the 13200 area, then at 13000.
Pivotal overhead resistance is around 13670, then at 13800.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index continued this past week to fulfill my expectation that the index would hold at or support implied by a 66 percent retracement of its August to late-October advance. Retracements that don't go beyond 2/3rds of the prior move suggest that an index or stock is still capable of resuming its prior trend.

I noted for two weeks running that a retreat in COMP to 2550-2545 was my lowest expectation for the Index and the likelihood of a big new leg down (e.g., back to 2400) was low in my estimation. What now!?

The rebound in COMP back to a first key technical resistance around 2700 showed selling coming in, probably having a lot to do with profit taking ahead of the weekend by short-term speculators and a near-term overbought condition. A close over 2700, with the ability of COMP to hold this area as support in the next day or two after that, would suggest further upside potential of another 100 points higher to around 2800.

Near support is 2660-2662, the area of the 21-day moving average currently, with a next lower and pivotal support at 2600 in terms of what support level should be held or maintained to keep this rally going.

NASDAQ 100 (NDX) DAILY CHART:

The upside potential in the Nasdaq 100 (NDX) Index suggested by the sideways type 'basing' action I've noted on the chart was realized to some degree, although the rally seen last week given this basing type action of 2+ weeks hasn't been exactly spectacular. From here it would be important in terms of a bullish chart for NDX to find support around 2050. The recent upside gap would be 'filled in' on a retreat back to 2035, so I would peg key near support as 2035-2050; upside gap areas tend to offer support on subsequent pullbacks.

Very near support should be found in the 2080 area, at the 21-day average. Near resistance as seen at the Friday high, is around 2120. Pivotal higher resistance comes in at 2168-2170, at the prior 'breakdown point' as noted on the chart below.

I'm anticipating higher levels will be seen then on this first rebound but in the very near-term (next 2-3 days), there may be drift lower first, such as back to the 2035 area I mentioned.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

After the bullish upside surge of last week, the Nas 100 tracking stock (QQQQ) should now have close by support at 51, with even more pivotal support and buying interest to be found around 50.

Near resistance is at 52.25 at Friday's high and above this recent rally peak, there's likely to be substantial supply of stock for sale (resistance) coming in at 53.25-53.30.

Volume didn't surge on this recent rebound as much as it expanded on the sell off and subsequent sideways trend leading into this past week. Unlike normal stocks of companies, the Q's don't always see volume substantially expand on rallies. I don't know that I learn much from looking at daily trading volume in QQQQ, but do keep an eye on the up or down direction taken by On Balance Volume (OBV). For example, the OBV line was rising before prices surged over 50. Little tip offs like that are worthwhile!

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) in its recent rally hasn't achieved a bullish upside 'breakout' technically, which it would do with a sustained move above 790. Its chart pattern looks like one of an oversold rebound. 780 is near resistance. 800 is pivotal technical resistance and a sustained move above 800 would suggest upside potential back to 830.

760 is near support, and 745 a key next lower support.

I respect the double bottom low that RUT has put in to date and the index may not retreat farther than its already done, but the fact that the index may have established a support floor doesn't yet suggest that it also has sizable upside potential. Stay tuned on that!

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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