Option Investor
Index Wrap

STRONG REBOUND TO DATE, BUT WHAT NEXT\?

HAVING TROUBLE PRINTING?
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THE BOTTOM LINE:
The S&P and to a somewhat lesser extent, the Nasdaq indexes, have had a substantial (e.g., S&P at 6%+) strong run up off the bottom and calls purchased especially at or near the recent upside reversal point closed on Friday with a good-sized profit. I think there's more to go on the upside but, like the minor pause and pullback seen at the beginning of this past week, I'm not anticipating resumption of a repeat of the super strong bull trend of August-October.

My projections for 'minimum' upside objectives are to around 1540 in SPX, OEX to 715 perhaps 720, the Dow to 13850-13900, COMP to 2750 and NDX back up to its early-November 'breakdown' point around 2168-2170.

Near-term I would look for a short-term, probably relatively minor, pullback, which is a similar pattern to that seen last week. There's anticipated Fed action to lower rates another notch in the coming week of course.

If you care to go back and see what combination of price patterns, such as the recent upside chart gaps, as well as indicator tip offs in combination, especially my 'sentiment' and Up volume model, I summarize what I was seeing in my mid-week (Wed, 12/5) 'Trader's Corner' column. This article can be seen by going back to your saved 12/5 e-mail OI Daily market letter, or online at the OI web site by clicking here.

Things have changed now in the longer-term economic outlook and of course this outlook tells us the most about overall earnings and hence stock prices. There are always companies with unique products and services that can buck the overall trend of course. Well, I should say the 6-month outlook, for this is about how far ahead that the market 'projects' out into the future; maybe we could say 6-9 months ahead.

You are probably aware or I can tell you now that I don't rely on 'fundamental' analysis to make market timing decisions as to when to go in, when to come out or stay out as far as index option strategy, but I do look at a lot of economic and market information relating to expectations for corporate earnings and stock trends. I especially like samplings of trader, investor and corporate opinion and I wrote recently on a possibly telling such survey for segment on technical analysis that I teach occasionally for a finance class.

I'll repeat here what I conveyed about the recently released Duke University/CFO Magazine year-end 2007 survey. Chief Financial Officers (CFO's) don't have to maintain the optimism that the more public CEO's tend toward and they have a good track record of accurately predicting future economic activity, often several months ahead of traditional indicators. Well it's their job to project earnings trends and future economic conditions at least for their industry.

From what the authors (one comment from me) of this survey wrote on the results and detailed findings:

"Optimism reached its lowest point since the 'optimism index' was launched 6 years ago (not shown here). Pessimists outnumber optimists by an 8-to-1 margin, with 72 percent of CFOs more pessimistic and only 9 percent more optimistic about the U.S. economy than they were last quarter. (Maybe from a contrarian opinion standpoint, we should assume that things won't get this bad! I'm not sure on this point.]

Weak consumer demand, high labor and fuel costs, and credit market turmoil are the top concerns of CFOs. Credit conditions have directly hurt one-third of companies, most through decreased availability of credit. Year-end bonuses will fall by 10% relative to last year.

Among firms with greater than one-fourth of sales in foreign locations, more than 60 percent have taken actions in response to the depreciated dollar by increasing hedging to reduce currency risk, or in changing the location of investments and by outsourcing employment.

Capital spending is expected to increase only 4.1%, and domestic employment will increase only 0.5%, though outsourced employment should rise 5.6 percent.

The survey is only 6 years old so as a study it doesn't have a long history over many business cycles. Still I find that this study is worth citing given who is surveyed... Leigh Stevens [leighstevens@msn.com]"

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 is bullish in its recovery pattern and the index could get to the 1540 area, my current technical target. To maintain a bullish chart it's important for SPX to hold the 1490-1492 area (of prior resistance) on pullbacks. A 1-day close at or just under 1490 wouldn't concern me all that much if the index rebounded the following day.

Resistance is suggested on my chart just over 1520 and much stronger resistance and potential selling pressure is likely at 1550-1552.

Near support is in the 1490 area, then around 1460. A close under the 21-day moving average, not reversed (back to the upside) the next day would suggest that SPX could fall back to 1433-1428.

I left the trendline highlights showing the bullish price/RSI divergence on the chart above. I can't emphasize enough that declining prices, during periods of rising 'relative strength' suggested by the rising relative lows in the Relative Strength Index indicator is a tip off to not overstay on the put side. Moreover, traders don't always have as much time to unwind/exit bearish strategies as in the bearish price/RSI divergent period shown above.

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

The S&P 100 (OEX) Index remains bullish in its recovery/rebound pattern and should climb higher on balance over the coming week. In the next couple (or 2-3) of trading sessions, a sideways to lower move would 'throw off' the near-term overbought condition; e.g., the 21-hour RSI is registering at or near 'overbought' levels in all the major indexes.

As I noted in my initial comments, I have an upside target in OEX to the 715 area, perhaps a bit higher to 720, but am in doubt that the index will exceed its late-October price peak at 726. Major resistance is at the prior 735 high.

I gauge near resistance at 710 and near support at 695, with key or pivotal support at 680, at the current 21-day moving average.

MARKET 'SENTIMENT':

Interestingly, November's low came within the 1-5 day lag time seen so often after a single day reading at or below 1.1 in my Call to Put (CPRATIO) sentiment indicator. The pullback into the mid-week (Wed) low coincided to the day with the most recent secondary low. As highlighted above, the pick up in put activity put Wednesday ratio at 1.16, which was close to being another buy 'signal'. Bullish sentiment shot up by Thursday, but isn't hit a dangerous (with high reversal potential) level to date.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Ditto the Dow 30 (INDU) as being in a bullish rebound pattern but INDU touched a level of significant technical resistance at 13670 and selling picked up there ahead of the weekend. A next level of important resistance comes in at the October high in the 13960 area. My current objective for INDU is for a move up to the 13850-13900 area and I don't have higher projections than that currently.

Ideally for the bulls, INDU wouldn't see a pullback to more than near technical support around 13500. Next support comes in around 13400. 13240 is a key 'must hold' level in order to maintain a bullish chart; I should broaden this to say that key support is a zone from 13240 to 13180. A close under the 21-day moving average makes for a bearish alert; a second consecutive such close suggests an eventual retreat back toward 13000 to 12800.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart pattern suggests that the index can climb higher such as back to the 2750-2765 area. I don't have much higher objectives for the current move. Major resistance is in the 2825 to 2850 zone.

Near support is at 2650, down to 2615. A close below 2632 would be bearish especially if more than slightly under and for more than a single day. Major support begins around 2550 and extends down to the 2500 area.

NASDAQ 100 (NDX) DAILY CHART:

I noted last week that is would be important in maintaining a bullish pattern for the Nasdaq 100 (NDX) Index for it to find support in the 2050 area and to not break that level. There was another close below the 21-day moving average early in the week, so the Index looked like it was losing upside momentum, but prices only retreated into support implied by the earlier upside gap area and then took off again. Upside price gaps, once formed, tend to act as an area of support on subsequent pullbacks and that's just what happened with NDX.

2035-2056 is key support, with major support at 1980-2000.

Key overhead resistance is at 2168-2170.

As I noted in my initial (Bottom Line) comments, I think the Nas 100 can manage to climb back to its 'breakdown' point around 2170, but I don't give it a high chance to move up through this overhanging resistance; I'm not going to bet on a further climb back a re-test of the summer high for example.

My trade objective on NDX calls bought in the 2000 area was to 2150 and I'd be very happy with an underlying index gain of a 150 points. The risk to reward potential of NDX call purchases in the 2000 area (e.g., using a 1970 stop point) looked quite favorable given the combination of price and indicator patterns that suggested that NDX had bottomed, followed by its subsequent sideways ('basing') action.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I don't have more to say about the pattern and further upside potential for the Nasdaq 100 (QQQQ) tracking stock than indicated for the underlying index. Near support is at 51.0, then in the 50.5-50 area.

The Q's should be able to climb back to the 53 to 53.30 area which is a key/pivotal resistance, but I'm doubtful about the further upside potential beyond such a climb back up to its prior 'breakdown' point. Technical resistance then extends up to around 54.0.

Daily volume has been in a declining trend, while prices have been going up, which is normally thought as volume not 'confirming' price action, making the rally a bit suspect. I don't know quite how to assess the trends in daily volume LEVELS in QQQQ, but if the On Balance Volume (light blue) indicator line is going up, prices have good potential to continue higher and vice-versa; i.e., a declining OBV line suggests that prices will continue lower.

On 11/7, when QQQQ first closed below its 21-day average, the OBV line turned down in bearish 'confirming' technical action and this was a good further indication to exit long stock and get short if you wanted to maintain a position in the stock.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) has come right up to its trendline resistance around 790 and the stock looks like it may have stalled in this area. Next resistance is at 800.

While the last low, which formed a significant double bottom, suggested buying calls for a rebound, I don't rate the further upside potential in RUT as huge. The index could potentially get back up to the 825-830 area, if there was a strong overall rally in the market, but this index could as well just drift sideways to lower from the 800 area, if reached.

793 would represent resistance implied by a 50 percent retracement of the October-November decline. 807 represents potential resistance implied by a fibonacci 62% retracement and 812, resistance implied by a 2/3rds or 66 percent retracement.

765 is a first area of likely technical support, with 750 then a pivotal support below that; a close below 750 could lead to retest of last month's lows around 735.

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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