Option Investor
Index Wrap

BOTTOMING ACTION\?

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THE BOTTOM LINE:
Recent price action looks like bottoming action to me, although this isn't to say that there may not be a lengthily period of back and forth movement in the area of recent lows, and a period of the major indexes going sideways for a period of some 'base-building'.

There are however some key levels of long-term chart support that should be watched in the Dow and the Nasdaq 100 (including the QQQQ tracking stock at 42.0) in order to support this thesis that the market is finding a bottom.

As to the importance I'm attributing to the narrow Dow 30 (INDU) and the big cap Nasdaq 100 (NDX) index, unlike the other major indexes, INDU and NDX have NOT pierced the low end of their long-term uptrend channels. I rate the Dow as important in this regard because INDU tends to trade very 'technically' and it tends, more than some of the other indexes, to form well-defined support and resistance trendlines.

As to the Nas 100, NDX was the strongest index in recent months and had been until Tues-Wednesday resisting the decline more than the S&P and Dow for sure. IF NDX didn't hold long-term support, no other index was likely to maintain any long-term support trendline. Always look at what's been leading a rally and see how it fares on the decline, especially in the 'capitulation' phase of the 'panic selling' stage I talked about above.

The above on INDU and NDX was noted also in my Trader's Corner column of this past week. That article was meant to go in on it's usual Wednesday, but got delayed due to a technical snafu on the production side until Thursday (1/24) and can be seen online by clicking here.

Something that was my 'fault' however was that THIS column, normally up by Saturday night, didn't get written until Sunday afternoon. I was feeling a bit under the weather Saturday and now when it's sunny and warm Sunday in the Colorado Rockies or at least down here on the plains at their feet, I am toiling away on this column instead of playing outdoors.

TWO LEVELS TO WATCH THIS WEEK:

If the Dow Industrial Average (INDU) closes under 12133 this week, INDU falls below its long-term up trendline. This trendline is based on a close-only 'line' chart. On a bar chart, the past two weeks' lows were under this line and in the case of this past week, well under it. Sometimes it will appear that a line chart best defines a support or resistance trendline, sometimes a bar chart does that. In this case, per Charles Dow when he was around, closing weekly levels for his averages appear as the best gauge of the Dow's long-term trend.

At the risk of seeming inconsistent, whereas it's more a case of the using the trendline type that seems to best define the trend of a particular index (in most cases, a bar chart), the following weekly Nas 100 (NDX) bar chart is presented. There was a slight dip below the lower support trendline, but only a scant one. I've marked key weekly support at 1709, but really we can just say 1700. A weekly Close below 1700 especially would be bad news for a bullish case for NDX having seen either a final low or even its low for awhile.

QUESTIONS/COMMENTS:
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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:

Well, as has happened before in a panic selling phase, the S&P 500 (SPX) fell way under 4% of its 21-day day moving average, which has contained most declines in recent months and years, but not to or below major support I suggested should be found in the 1235-1220 area; the week's low was 1270 at mid-week. (You can see how far the S&P intraday decline was in terms of percentage reached below the key 21-day average on my next chart of the S&P 100.)

Not surprisingly on the oversold rebound, SPX reversed right at its prior (Aug.) low at 1370. A well-known technical principle is that support implied by prior lows, once pierced, 'becomes' resistance later on. Resistance is apparent then at 1370 and then is suggested at 1400 next.

Support looks like it will be found in the 1300 area, then at 1280-1270; major support I mentioned already at 1235-1220.
I anticipate that SPX will be confined to a narrow range in the near-term, between 1370, maybe 1400 on the upside and 1300 on the downside.

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

When the S&P trades as far below, on a percentage basis, it's 21-day moving average as occurred on Tuesday and Wednesday of this past week, it a symptom of a major downside blow-off. As noted on the chart below, we have to go back to the July '02 bottom to find an instance where the S&P 100 (OEX) Index traded so far under the average I key off from; 'normal' fluctuations are 4-5 percent above or below that line but so on Tues-Wed, when OEX traded 9.5 percent under the 21-day. Going back to '02 to find this much of a prior extreme! Well that was a recession!! It's uncertain yet if we got anything like that coming on this time around. But, panics are reason-proof.

So much for history, how about our future? As was the case with the S&P 500, OEX stopped dead in its tracks at the prior 640 low so it's easy to define near resistance. Next resistance is suggested at 655.

Near support could be 620, but I'd say 600 down to around recent lows in the 560 area, as the most key support and what I pegged as 'major' support last week. As long as the Index holds at or above its recent lows, and I think it will, then OEX could be a buy for a trade at some point. For those with OEX puts, your chief enemy is time, as the longer that OEX 'bases' (trends sideways) at or above recent lows, the more that put premiums will decay.

SENTIMENT:

Bearish sentiment registered high enough (depicted on my 'sentiment' graph above as LOW bullish sentiment) for enough days to take the 5-day average to my oversold line before the market was ready to bottom. Call activity popped up on Mon-Tues, which I took as mildly bullish as traders anticipated a bottom; especially that this indicator tends to bottom 1-5 days BEFORE an actual upside reversal.

I also think that bullish sentiment by Thursday got 'ahead' of what could be expected on the upside given such a huge prior drop. It takes time to work out such extremes and, unlike in bull markets, bear trends don't tend to see 'spike' lows.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) fell further then I certainly anticipated as I've long thought that 11800, if not 12000, would act as major support. On a weekly Closing basis, INDU has held above its long-term up trendline. A weekly close below 12133 ahead would suggest the possibility that the Dow eventually works its way down to the 10800 area or back to its July 2006 weekly closing low of 10739.

I've highlighted anticipated support coming in around 12075, then down at 11875; I didn't also note on my chart potential support again showing up if the Tues-Wed intraday lows (at 11634-11644) were seen again.

Near resistance is probably going to be seen at the prior low, at 12518. The Dow got almost back to this area before selling overwhelmed buying. Next resistance is 12708, at the 21-day average. As with all the indexes, a close over the key 21-day moving average, not reversed the next day, would suggest some further upside potential.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index not only took out support anticipated around 2300 but fell to nearly 2200. I've marked support on the COMP chart below again at 2300 and then in the 2200 area. The lows got to 11 percent under the 21-day moving average, so was very 'overdone' on a price basis, but not that untypical of a panic attack where things get very extreme indeed.

As I've said in general about the major indexes, I anticipate COMP working back down toward recent lows, but probably not below them. In bear markets, the patterns reverse relative to bull markets, as there tends to be 'spike' highs that see rapid reversals, followed by prices trending back down toward the lows again to do more 'work' in these areas.

Near resistance comes in just over the 2400 level, at the minor down trendline I've highlighted and resistance is next indicated in the 2479 area, at the moving average.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index did find significant buying interest and short-covering in the 1700 area which I've long highlighted as being the key area of major chart support per the chart above in my initial ('bottom line') commentary. The rebound from the 1700 area was rapid and sharp, but without follow through above 1850 as NDX hit the area of its minor near-term DOWN trendline. Short-covering rallies are sharp and prices run fast, but there is not the follow through of bull markets.

I anticipate a slide back down toward support I've noted in the 1750 area, perhaps back to near 1700, but most likely not to below this area. Traders have digested significant actual and a lot of anticipated, negative news but seem unlikely to keep selling this market down until more is known about our economic reality.

Near resistance is at 1860-1850, then at the 21-day average, beginning the week at 1942, but falling steeply as the closes back 21 trading days ago get dropped.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

So much for "key" support I talked up last week for the Nas 100 tracking stock (QQQQ) at the prior 44.4 August low! Guess I might have possibly been WRONG on that!!

I've noted 42.5 as near support on the QQQQ chart, but should also stress that 41.9-42.0 is quite an important technical support also, at the current intersection of the long-term weekly chart up trendline (not shown), notwithstanding that the Q's overshot this level and got to 41.61 at this past week's low. A close below this trendline at 42 this week would be a further bearish indication and suggest eventual further downside potential to 36-35.75. Not what I expect but I didn't expect 42 to be seen either!

Near resistance is at 46.0, then at 46.6, at the down trendline and next at 47.8, which is the current level of the 21-day moving average, with that 'moving' line still falling fast!

The volume spike on Wednesday looks like a 'capitulation' low type pattern, but we'll see.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) hit resistance/selling interest in the 703 area two days running last week and the index may be headed back down, such as back to support in the 670-669 area, which is, as noted on the chart below, where the July 2006 bottom was made.

Major support is should be found in the 650-640 price zone.

Resistance above the 703-704 area looks like 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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