Option Investor
Index Wrap

IT'S BEGINNING TO LOOK A LOT LIKE X-MAS

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THE BOTTOM LINE:
The so-called 'Santa Claus rally' finally appeared to get underway at the end of this past week, coinciding with December expiration and right after equities call to put readings radically jumped to a bearish 2.39 (Thurs call volume was 2.39 times CBOE equities put volume), so I guess the old guy must be doing his magic. I can't figure why equities call volume shot up to 2.2 million on Thursday. Must have been something going on that I wasn't aware of and I've been away some. Anyone who knows anything, I'd love to hear. The retracement of the last run up (mid-Nov to early Dec) was around 2/3rds in the S&P and Dow and close to a 100% retracement in the Nasdaq. These recent lows were areas of technical support, as was the area of the late-November upside price gaps in the case of the S&P and Dow.

Not a bad buy if you jumped in on it. Never underestimate the willingness of our fellow citizens to spend spend spend, as they did in November! And of course a retrenchment of consumer spending has been a major worry, so there was (what else!) a buying spree on Wall Street. Main Street does have its serious worries however and we'll see how many make resolutions to be prudent and put away the plastic in the new year.

I don't have any overarching forecasts, except that the obvious upside targets in the major indexes will be the highs of earlier this month. I don't anticipate those highs getting pierced, just as I figured that the November lows would hold. Hey, a trading range outlook and one of my favorite conditions for trading index options since such markets tend to be somewhat predictable in so far as assessing areas to buy and sell; predicable like the long nights of winter but requiring more fortitude than surrendering to a long winter's nap.

Have a great holiday season!!

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:

As I indicated last week, the S&P 500 (SPX) Index chart turned bearish on the retreat below its 21-day moving average (around 1465) and that event lead to another 30 points decline. On balance, the exception being Tuesday's intraday spike low, SPX held support implied by a 66% retracement of the prior advance, as highlighted on the chart below.

At no time did support implied by the (late-November upside) price 'GAP' get tested or pierced and this was a key technical chart area I pointed to last week. Upside gaps tend to define areas of support that will often show up on subsequent pullbacks; such chart gap areas reveal a lot about whether buying interest is still present or has collapsed.

The bulls are alive to fight on to year's end and it looks like there should be upside follow through. A key test of buying strength (or renewed weakness) comes if the index rebounds back to the 1512-1520 area with the intraday peak at 1523. Close by/near resistance at 1490 should be mentioned also.

Near support is at 1470, around 1460 and finally in the 1445 area.

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

The S&P 100 (OEX) Index got down near but held above key support implied by the (upside) gap area of early last month. After that OEX started finding support around the lows of the start of last week, suggesting that further downside risk was limited. Run some stops, spread a little panic but with the index subsequently drifting sideways in 'basing' type action, the stage was set for Friday's strong rally. When the Index had a decisive upside penetration of its 21-day average and shot up through resistance implied by the downside chart gap of a week ago Friday, it was time to exit puts if you hadn't already.

Near resistance is at 696 on up to the 700 area, then at 710-711 on up to around 715. Near technical support is 687 to 683, then at 676 and finally in the 670 area. My thoughts on the sentiment indicator extreme are below.

I wrote last week that sentiment readings seemed to be reflecting an underlying expectation that the market would again challenge the December high. Traders got the rally part right, now stay tuned for whether there's a challenge of the December OEX high. As I alluded to in my initial (bottom line) comments, I don't quite know what to make of the sharp 1-day jump (of Thursday) in my CPRATIO indicator.

It's straightforward in that such extremes are generally a bearish forewarning of a next top occurring within 5 trading days thereafter. This recent jump is puzzling however given its occurrence near recent lows rather than the norm of such peaks coming AFTER strong rally periods! If there's a next top by this coming Friday, it will occur within the warning period signaled by this indicator.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) retraced almost exactly 66 percent of its last rally (late-November to early December) where it found buying interest/support; absent a 100% retracement back to a prior low, it's common to see retracements of one-half to 62-66 percent, followed by a next rally. Lows were established in the same area for Monday, Wednesday and Thursday, helping set the stage technically for the sharp recovery rally of Friday.

Near resistance is at 13500-13527, with the key resistance then coming in around 13750-13780.

Near support is at 13320, then 13150-13160. 13092 was the low of last week and if INDU was to sink below 13092-13080, especially on a closing basis, it would suggest downside potential back to the November lows below 12800.

It looks to me like INDU is headed to perhaps 13650-13700, but I don't have any solid current conviction that the Average will challenge or overcome resistance implied by the prior top at 13780.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Once the Nasdaq Composite (COMP) Index pierced its 21-day average, it then fell to near the key 2550 support I highlighted last week but one day was all and COMP was up from this area. Thursday's close back above the 21-day average, even though just above it, was a tip off to further rally potential ahead; just as the scant close BELOW this key trading average on the Friday before was a tip off to the weakness that came after.

Near support is at 2643, then at 2600-2580. Major technical support is at 2550.

Overhead resistance is 2728-2738, where it looks like COMP could get to next, with further resistance around 2770, which I don't think that the Index could pierce.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index the week prior looked like it might hold support implied by its 21-day average, but Monday and Tuesday brought a low of new selling, consistent with weakness being reflected in a number of the key big-cap tech stock charts. Buying interest came in finally around 2000, which was what was mostly also seen in November. It was fairly predictable as to where buying interest should show up, but NDX this time hovered only a very short time near 2000.

I thought that there might be another day spent testing this (2000) area, but also noted Tuesday that the 21-hour RSI (not shown) had already reached (on Monday) one reading at its oversold 30 extreme; one more dip to this 30 RSI level and then it was up, up and away! The last time the hourly chart RSI got to or under 30, was back in the 11/8 to 11/12 period.

I continue to suggest following an hourly chart, along with the daily chart action, with as much prior data as possible and paying close attention to the RSI ('length' = 21) indicator and 'overbought'/'oversold' readings at 65 (and above) and 30 (and below), respectively. The hourly chart and this indicator 'works' best in helping asses tops and bottoms of course in a trading range market, which we've been in for some weeks. By the way the 21-hour RSI in NDX closed Friday at a near-term overbought 65.18.

2147-2150 is the key or pivotal overhead resistance; above the area of the prior (December) high, resistance is at 2168-2170.
Near support in NDX is at 2075, then around 2040.

It looks to me like NDX may establish a trading range between 2150-2160 on the upside and the 2040-2000 area on the downside.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Near support for the Nasdaq 100 (QQQQ) tracking stock is again at the 21-day average at 51.0. Once pierced on the downside, it was pivotal near resistance last week. Now this key average represents a key near support again; resistance, once pierced, tends to 'become' support on subsequent pullbacks.

Overhead resistance is at 52.8, then at 53.3 and I don't anticipate a move to above this area, not in the near-term.
Near support below 51 is at 50.2, then at 49.6.

Volume was low on the sharp run up of Friday, suggesting that buyers didn't want to 'chase' the stock higher, which seems prudent. I myself don't anticipate that the Q's are going to have a big new up leg ahead. There is so much nervousness in the market and conflicting news that the volatility has gotten extreme at times. The low volumes will exacerbate the trading swings. I liked the stock under 50, but would be happy to exit with a $2-2.50 profit.

Sorry I had the prior (52.8) high mislabeled last week but the arrows suggesting resistance don't lie, only my typing sometimes!

RUSSELL 2000 (RUT) DAILY CHART:

You don't often get such trading 'gifts', but the Russell 2000 Index (RUT) was sort of a no-brainer buy on a risk to reward basis (exiting stop at 733) on its most recent dip below 740, ONCE it held above the 'line' of multimonth lows around 735 going back to August. True, it would have been nice to have also seen the RSI or other momentum type indicators registering an oversold condition, but we don't always get 'confirming' indicators to price action; price/chart action is always king so to speak.

The fast and sharp rebound from the Monday-Tuesday lows of this past week carried RUT back to trendline resistance around 784-785. Old trader's saying: take 'quick' profits! While there is a possibility that the Russell may get above next resistance at 793, on up to 796-800, and even climb back to 810-814, I rate the chances of a move back to the 827-830 area as low.

Near support is at 767, then at 750.

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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