Option Investor
Index Wrap

HOW MUCH OF A REBOUND\?

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THE BOTTOM LINE:
In a rally in a bear trend, my expectation is generally to look for a 'minimal' retracement of the last downswing. In terms of the fibonacci 38, 50 and 62 percent retracement levels, a minimum retracement is 38%, but with some potential to recover one-half or 50 percent of the last decline.

In some cases, a 62% retracement is seen or a bit more, such as a 66% retracement. If a retracement carries farther than 2/3rds, there's potential for a 100 percent retracement 'round-trip' back to the starting point of the last decline, which is not my current expectation in this market.

In the S&P and Nasdaq Composite, a 38% retracement has been seen, so I've noted the 50% level as both a next possible target and also as offering potential 'resistance'; this is close at hand in the case of the S&P 500 (SPX). Only the Dow and the Russell 2000 have, to date, exceeded 50% retracements. The Nasdaq 100 (NDX) has not yet achieved a 38 per cent 'minimal' retracement.

In some instances there are down trendlines that may signify technical resistance the further up we go also. Short-term there may be some weakness, probably not extreme. Looking out a few days to a couple of weeks, the major indexes may climb higher, but I think not a lot higher; e.g., a recovery rally that ends up equaling a 50 to 62 percent recovery of the prior decline at most. Specifics on this will be found in my highlights and comments for each index.

While I favored calls around the recent extreme lows, I also viewed this as a trade only; a good part of the gain that will be had from this rebound may have been realized already. I am inclined to hang in awhile longer in some long index call positions and in short index puts. Intermediate momentum is up, although short-term oscillators are overbought and prices should go sideways to lower near-term.

Sentiment has gotten 'too' bullish in my estimation too soon, so this pattern also fits with high potential for a near-term correction.

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:

The S&P 500 (SPX) cleared its first key technical resistance when it carried back up above its prior low at 1370, which was also the area of a 38% fibonacci (fib) retracement. SPX is close to achieving a 50 percent fib retracement at 1396.

Near resistance is in the 1396-1400 area, with even more pivotal resistance around 1425-1426; a move up to this area is my most bullish current expectation as to SPX's upside potential for this first rebound.

Near support is at 1376, then at 1336. A close below 1336 would suggest that 1300 might be seen again but this level should now offer major support.

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

The S&P 100 (OEX) Index is lagging a bit on the rebound relative to SPX in terms of its percentage retracement. OEX cleared 640, which was a key near resistance and which I've highlighted now as near-term support on the chart. The 620-622 area is the next lower anticipated support.

653 is resistance implied by an OEX 50 percent retracement and further resistance comes in around 667, as both the 62% fib retracement level and the current intersection of a down trendline drawn from the prior two (up) swing highs. The 667-672 zone is what I think is the current maximum upside potential for the S&P 100. Stay tuned on that!

SENTIMENT:

As I mentioned in my initial ('bottom line') commentary, a strong resurgence in bullish sentiment seen in my call/put daily readings, while consistent with the rally I suppose, looks to me to be overly optimistic relative to the slowing economy and the impact that is yet to be fully felt ahead.

I've found through many market cycles, that if bullish sentiment stays moderate on the first recovery rally after a big bear decline, the more prolonged and sustainable will be the advance. As it is, my sentiment indicator suggests that this advance may not carry all that far. Perhaps more so on a second rally phase, after a setback that dampens bullish expectations, which is a common pattern. Nothing like major interest rate cuts to generate the all-clear signal! Wishing that it be this simple but I have my doubts that it's going to be a smooth upward path.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) got way overdone on the downside and in true Dow fashion this was followed by a strong rebound. The 12725-127450 area may still be an area where more selling will come in if the market winds bring any bearish press. I wouldn't make any heavy bets on a continued climb in the early part of the coming week. This due to a near-term overbought condition suggested by the hourly chart 21-hour RSI indicator (not shown here).

Assuming INDU continues to hold above 12700, or doesn't close back below pivotal support at 12500, there's upside potential to the 12900-12960 area or a bit higher, but I don't envision much potential beyond this for a first rally. A close above 13000-13050 in the next 1-2 weeks would suggest a more bullish outlook then what I suggest however.

Conversely, a move back below 12500 in INDU sets up a potential test of technical support at 12400; significant support below 12400 is next to be found in the 12200 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Keying off the fibonacci retracement levels in the Nasdaq Composite (COMP) Index, as I have with the other major indexes, a next upside target and potential next resistance is in the 2468 area. Above this level, my maximum upside expectation is to 2530.

Near support is at 2385-2390, then at 2335.

The best play on the recovery rally has been in the S&P and Dow so far and this may be a time not to assume that because the Nasdaq has not had much of a rebound yet that this market segment WILL follow in move of a similar degree.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index is still overall bearish in its pattern. It has had a minimum recovery rally or near to a minimum fibonacci 38% retracement. Actually it's not quite there yet; it would be at the 1866 level. 1877 is also a near technical resistance suggested by the current 21-day moving average.

Assuming NDX closes above it's 21-day average, which would be a minor bullish plus, there is further upside potential to 1920, which would achieve a one-half/50% retracement of the December-January decline, with an outside shot of NDX climbing back to 1970 or so and achieving a fibonacci 62% retracement. I myself am at most looking for the Nasdaq 100 to recover half of its last decline. I think it's living on borrowed time after that.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

As to the QQQQ chart and the equivalent levels to NDX, 46 is near resistance implied by a fib 38% retracement; 47.2 then appears as both a potential next higher target and probable resistance implied by the stock having retraced half of its last big decline. 50% retracements in a market like this attracts selling.

Pivotal support is in the 43.75-44 area.

I mentioned last time how the sharp 'spike' low coming on that big volume day, had all the signs of a 'capitulation' type bottom and with more time passing, this seems to be obviously the case. Too bad it's not so obvious at the time when it seems only like the sky is falling. Panics seem perversely 'designed' to prevent clear thinking trading decisions.

I'm not one to play the first rally heavily after a wipeout type waterfall decline. Often the better moves come on the second rally. We'll see won't we!

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) has potential back up the 742-748 area. RUT might be even able to climb up to resistance at its down trendline, currently intersecting around 772; if so, this could be a put buyers delight! I'd take that trade, with a tight stop and exit point to 781. Downside potential at some point is back to the 700-680 area.

Support should be found in the 680-686 area.

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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