Option Investor
Index Wrap

RECENT 'BASING' ACTION

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THE BOTTOM LINE:

It's apparent from the charts of the major indexes that the recent trend is on balance, sideways. In an oversold market, such a lateral move often turns out to be 'basing' action for a future rally. As I noted in my recent (Wednesday, 2/20) "Trader's Corner" article, which can be reviewed by clicking here, stocks may have reached a point where they have discounted the bearish news that is going to come up for the immediate future.

Drying up of selling and a small amount of initial buying, followed by short covering type buying and then speculative/trader buying, is a common cause of bear market rallies. Besides the usual ways of measuring how 'oversold' a market is, one that I don't look at all that often, but featured here in the chart below is the recent very low percentage of NYSE stocks trading ABOVE their 200-day moving averages. It's not the best-produced chart as I couldn't use my charting application for this one, but you'll get what's happening well enough.

To date, the recent low extreme of just 10 percent of all (NYSE) stocks trading above (greater than: '>') each stock's 200-day average, has only been followed by just under a 10% rebound from the S&P 500 (1270) low up to the recent (1396) rally peak, before SPX fell back to 1317.

Relative to prior instances for the period shown, where the percentage of NYSE stocks trading above their 200-day averages got as low as it has recently, the SPX rebound to date is far under what happened in these past instances where rallies followed of +20 percent off the lows. Of course, history is not bound to repeat itself, but I would caution against hanging in too long to index puts. I don't like holding long index calls or puts anyway past the point where the trend stops 'running'. These sideways affairs are not for me in that regard.

ONE TREND TO TAKE TO THE BANK
If there has been anything approaching a 'sure thing', its the very strong uptrend seen in the Oil Index (OIX). For the multiyear period shown in its weekly chart below, every time OIX has dipped to or gotten close to its major up trendline, oil stocks have rallied.

Each occasion has also been a supportive factor for the S&P. If a dip to trendline support was also accompanied by an oversold extreme, as in the last OIX decline to the 700 area, it's been even more of a 'buy signal' for oil stocks.

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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) remains in a bearish downtrend but would begin to break out above technical resistance if SPX pierces the upper trend channel boundary at 1360 and then gets above and stays above the 'line' of recent highs around 1367. Next resistance then comes in at 1396-1400. There is rally potential to the 1426 are or a bit higher, but I don't see better upside than that and that's a stretch.

Conversely, if prices fall below recent support and buying interest seen previously around 1317, then the index is vulnerable to a decline to re-test the prior 1270 low.

The other possibility is that SPX remains in a trading range between 1400 and the low-1300 area.

I don't have a strong conviction on the trend direction ahead, but figure the surprises could come more on the upside given the pronounced bearishness that has taken hold.

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

The S&P 100 (OEX) Index chart pattern is bearish, absent a break out move above 640, assuming the index takes out immediate overhead resistance around 633. The next levels of resistance is at 648, then around 653, representing a 50 percent/one-half retracement of the December-January decline.

Support/buying interest has been established recently at 610, with more major support probably coming on any dips to and just under 600, such as to the prior intraday low at 595.

There have been now two instances since October to ride the trend hard and go in heavy in puts, but once that 595 low was made at the trend line extension, it was time to take the profits and run; and, to then go to the sidelines. After big blow out moves, many traders stay in or jump back in only to give back some gains when prices don't go anywhere.

SENTIMENT:

The dip in my sentiment indicator reflecting a pick up in put volume on Friday, during a day when there was a strong intraday rally off new recent lows, suggests what I've elsewhere have been saying: don't overstay on the short side of this market. Not wanting to press a bearish trading stance is not quite the same thing as wanting to get long and into calls, given the possibility that the indexes may just go mostly sideways.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) looks like it wants to rally, but significant resistance/selling interest in the 12500-12573 area is keeping a lid on the average so far. If there is a decisive upside penetration of this zone, further resistance is not far away: at 12706 to 12767. I would anticipate more major resistance and selling coming in if INDU approaches the 13000 area.

Near support remains at 12070 and Friday's intraday low turned up sharply intraday, fooling the bears as it looked like INDU was headed again to its prior recent low; instead the average turned up strongly after reaching 12155. I anticipate support also at and a bit under the 12000 level; major support has to be assumed as at the prior intraday low at 11635.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index continues to be relatively weaker than the S&P, but COMP doesn't have the big oil and energy stocks to buoy this index. Trendline resistance comes in around 2410. Resistance implied by a 50 percent retracement is at 2468.

That there is support on approaches to the recent 2253 low is reinforced by the rally on Friday that begin from the 2265 area.

Since I'm reluctant to make a speculative call buy in SPX, OEX or DJX, which act more buoyant, I am pretty much on the sidelines in the Nasdaq and the Composite still acts heavy. But again, the index is finding some support or is just too oversold to fall much further. After Q1 earnings the Nasdaq stocks could get whacked again or lift some, but those earnings announcements are some weeks away.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index is shown in a broad downtrend channel below, with overhead resistance coming in around 1900 currently. Near resistance is at 1793, then in the 1825 area and next at 1866. 1920 is resistance implied by a 50 percent retracement of the Dec-Jan downswing.

Near support has shown up on dips below 1750, and significant buying interest may again re-surface in the low-1700 area on down to the prior 1693 low.

I have no strong trading bias or suggestions, but some of the key Nasdaq biggies are acting just like NDX and appear to be 'basing'. The problem with this, from a trading perspective, is that this process can go on for some weeks, which is OK for selling puts. If I had to be on the long or short side of this index, I'd rather own at or slightly out of the money March calls, bought when NDX traded around 1750 or to the low end of its recent trading range.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I dont see a lot of risk to owning QQQQ on dips to at or near 42.5 down to the 42 level, with an exiting sell stop at 41.5, looking for a rally back up to the 45.5-46 area.

Resistance is in the 44.5-44.90 area, with trendline resistance suggested at 46.6 currently.

Near support is 42.6, then 42.2 and lastly at 41.6.

There's been a slight recent pick up in volume and On Balance Volume has turned up, which is a mild bullish plus.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) is stuck in a likely 680 to 725-730 trading range. I've noted resistance on the chart at 731, then at 742. Major resistance looks to be in the 760 area.

Near support is at 683-680, with next support down at the prior low at 650. I'd peg major support at 630 currently.

I have no trading suggestions. Take a trading break and pat yourself on the back if you bought puts on that last rally when a double top formed around 795, especially if you covered anywhere near the 650 low, when RUT hit support implied by the 3rd point forming a down trendline. Trading strategies that profit from a range-bound trade is another story.

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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