Option Investor
Index Wrap

STILL LOCKED IN A RANGE

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THE BOTTOM LINE:
I thought last week that the sideways movement of the major indexes from late-January into the week prior to this past 5-day trading period could set the stage for a break out move to the upside; especially given 1) how oversold the market is and 2) given the fact that the Dow 30 (INDU) and the big-cap Nasdaq 100 (NDX) have held their long-term up trendlines.

There was a surge to the upside on Mon-Wed but the key breakout, which would be to ABOVE the early-February highs (the top end of the trading range), not only didn't happen, but the indexes again were retreating toward the low end of the Jan-Feb trading range by the close of the very weak Friday session.

Bottom line, the major indexes remain locked in a relatively narrow range; e.g., INDU: 12760-12070. I don't have a strong conviction this week that their will be either a breakout to the upside OR the downside. We have to just wait and see how it plays out. An oversold market may limit the downside, but it doesn't mean that this condition will help fuel a SUSTAINED rally.

There isn't a whole lot more to say than what is apparent at this juncture in the market: there's a standoff between willing buyers and sellers willing to press this market down much more than has been seen already.

This locked-in trading range situation favors strategies of selling premium, as in short straddles for example. This is not my usual style of trading as I tend to sit out these period of narrow-range trendless periods or, if I can manage the closer attention I have to pay to intraday price action in doing shorter-term trading, will buy calls at the low end of an apparent price range and puts at the high end; with tight stop or exit points just beyond the prior 'line' of highs or lows.

A key question also remains. Just as bull market tops develop after the major indexes hit highs in the same area a second time, or repeated times, in the same area, bear market bottoms may make double bottom lows or a 'line' of lows in the same area, before mounting a sustained rally (or at least stop going to new lows).
So, the question remains whether the prior lows will be retested; i.e., SPX at 1270, OEX at 595, INDU at 11635, COMP at 2203, NDX at 1693, QQQQ at 41.6 and RUT at 650. Lows again made in the same area, followed by a rally, would be an indication of at least an interim, if not, final bottom.

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) remains in a bearish downtrend and would only definitively achieve a decisive upside technical break out if SPX pierced its prior high in the 1400 area.

The upper parallel trendline (to the dominant down trendline) that would have defined a downtrend trend CHANNEL hasn't developed. Instead the recent high reversed right in the area of an extension of the down trendline drawn through the two December upswing highs.

Until and unless there's a close above 1400 (and not reversed the next day) or below 1315, the short-term trend will remain neutral. If there was a close below the prior 1317 intraday low, expect 1270 to be approached or re-tested; i.e., prices get to 1270 again with its potential for a double bottom low OR a new down 'leg'. A renewed down leg, assuming there was a decisive downside penetration of 1270, could lead to a move to the 1200 area or perhaps to around 1180.

Above 1400, the next resistance I estimate is 1426, representing a fibonacci 62% retracement of the steep December to January decline.

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

The S&P 100 (OEX) Index chart pattern remains bearish on an intermediate to long-term basis, but the short-term trend is neutral given the sideways trend.

Near resistance is 635-640, with next resistance at 648 to 653. This 648-653 area is the likely top end of the trading range that it looks like OEX may be locked into for awhile. The low end of the anticipated range is at 610, with the bottom of a possible broader range at the prior 595 intraday low.

A close below the 595-600 level, not reversed (back to the upside in the following 1-2 days, would suggest downside potential to 560. This is lower than my expectations, but that is where OEX would again reach its down trendline in the period ahead.

SENTIMENT:
Sentiment was getting bearish again at the end of this past week as seen in my indicator above, but hasn't yet reached the kind of bearish 1-day or more extreme where I would then be looking for significant upside reversal potential. A move back to the 600-595 area might see such extremes (in bearishness).

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart pattern looked to me last week like a rally would develop and it did, but briefly only. That rally faltered at technical resistance suggested by the (upper) down trendline highlighted on the INDU daily chart below and after INDU made a minor double top around 12760.

The reversal led to a very weak Friday trade on renewed recession fears. The Dow appears headed again toward the low end of its recent trading range around 12070. Figure that 12000 may provide some support and see some buying interest coming in. The prior intraday low at 11635 has to be viewed currently as major support.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index on its most recent rally attempt failed to get even close to piercing its prior recent highs or its early February high in the 2400 area and continues to be the weaker market.

A key near-term test will be whether the prior 2253 low is exceeded, which seem quite possible if not likely, setting up a test of the 2203 low. If there was a decisive downside penetration of 2200, especially on a closing basis, COMP might be headed, eventually, to the 2000 area. Right now I don't envision such a major new down 'leg' based on what I see in the chart patterns of key Nasdaq stocks, but I'm laying out all possibilities if the weak economy makes a bigger negative impact on earnings ahead than factored into stock prices to date.

On the upside, 2330 is near resistance, the 2400 area remains the pivotal/key resistance (at the 38% fibonacci retracement level), with important resistance above that coming in around 2470.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index has near resistance at 1800-1806, and key/pivotal resistance at 1866, with fairly major resistance at 1920.

Near support is at 1715, then in the 1693-1690 area. 1600 could offer significant support if NDX started to really break down below 1700 and 1530 to 1500 is support implied if there was a return to down to the November-January down trendline.

NDX may simply remain in a relatively narrow trading range and drift sideways some more, in a 1700 to 1800 price range.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Near resistance in the Nasdaq 100 tracking stock (QQQQ) comes in the 44.5 area, with pivotal resistance at 45.9-46.0 and major resistance around 47.25.

Near support is at 42.6, at 42.2 and the very key support at the prior 41.6 low.

QQQQ is holding up a bit better than the underlying index, but on low volume so far. Another shot down, should bring in some more liquidation and may lead to a retest of at least of the prior low at 41.6.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) is approaching support at its 'line' of prior lows around 680, with 650 as the most significant technical support, followed by trendline support around 625.

Near resistance is at 722-724, with next resistance at 742, then around 760. A decisive upside penetration of 760 could lead to an advance back up to the 800 area.

RUT may remain in the narrow trading range it has been in, or expand that range on the downside to the prior 650 low. Right now it looks like 680 may be pierced and the prior low re-tested.

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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