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Index Wrap

GETTING CLOSE TO NEW LOWS

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THE BOTTOM LINE:
Given the further decline of last week, taking some of the major indexes (OEX, COMP, NDX) back to the area of their lows of late-January, it's no longer the case that two key indexes (INDU and NDX) are still 'holding' their long-term weekly chart up trendlines. The major indexes continue to be very oversold on a long-term basis, but they can get more oversold of course. Markets are, almost by definition, quite oversold at major market bottoms but there's no real objective benchmark that says this or that degree of oversold is associated with a final low. This technical measurement is imprecise but nevertheless important to keep in mind.

Bottoming action in the area of a prior major bottom is another story as far as possibly 'signaling' a a upcoming turnaround. As I mentioned, the S&P 100 (OEX), the Nasdaq Composite (COMP) and the Nas 100 (NDX) should be watched closely for signs of buying interest around this past week's lows, given their potential of forming a double bottom. I would put MOST stock in the S&P 500 (SPX) making a double bottom low at or near ITS 1270 late-January low and it was getting close by the end of last week (Friday's low: 1282).

The Dow 30 (INDU) went to a new closing low for this move, but as of yet this new low is 'unconfirmed' by a similar move in the Dow Transports (TRAN) and this situation bears watching for signs of a possible bottom. TRAN would have to fall to a weekly close below 4179 to result in a Dow theory bearish 'confirmation' (TRAN closed at 4490 this past week).

Sooner or later the market will bottom of course and given the advance discounting mechanism of the stock market, this could be months ahead of an actual end to a recession. On the topic of the beginning and end of a recession, there is some likelihood that, down the road, a recessionary period will be determined to have started some weeks back.

One key question now is whether there will be a new down 'leg' even though the market is as oversold as it is, without an interim rally of some significance. A new down leg in such an oversold market can happen of course, but would be unusual. There have been 3 days with bearish extremes in my sentiment indicator in the past week, which also suggests a quite oversold market on a 'contrary opinion' basis.

The major trend is down no doubt. I don't usually publish graphs that are not price or (technical) indicator charts, but in terms of a TREND, the following is certainly clear cut. The long-term trend in jobs has been in a lengthily decline. This presents a bearish picture, but I should also note the lagging nature of the year over year change in non-farm payrolls as an indicator for equities. The payrolls decline was underway by the spring of 2006, whereas the stock market didn't peak until late-2007.

Lastly, as a backdrop to what is going on in the day-to-day, week to week battle for investment survival, the weekly charts of the two Dow averages is something I'm keeping in the back of my mind here. Just as the transportation stocks, as measured by the 20 Dow Transportation stock average (TRAN), started declining well before the rest of the market (particularly the Dow Industrials) the transports may be stabilizing well ahead of the overall market. As a possible, very early, indicator of a bottom, it's worth noting here.

I'm on the road this month, currently back in my prior home south of Carmel, overlooking the ocean and am next going to fly across a vast expense of that same Pacific on my way to Maui, where I wrote my first (and last) book (Essential Technical Analysis), but will be content this trip just to write to YOU all from there.

Hawaii is the perfect place to trade the market from if you don't mind getting up before the 5 am opening! But hey, it closes at 11 am... ah, maybe 10 am now as they don't go on daylight savings time as the mainland has done this weekend. If so, the opening will be 4 am I guess and maybe I won't do much if ANY short-term trading where I ought to be tuning in to the opening levels.

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) weakened further this past week and is coming close to its prior low in the 1270 area. The key technical question ahead is whether the index pierces or holds at or near its prior low. The S&P 100 (OEX) has already reached ITS prior low, setting up a possible double bottom. More convincing for a potential market bottom would be if the broader S&P 500 index does the same and doesn't start falling under 1270, at least for not more than a day or so.

1270 is about 5 percent under the current 21-day average (not shown), which has been an area of support in past months with the exception of late-January when the low represented a greater extreme (i.e., 9% under this key average). Major support should be found in the 1200-1170 area if a new down leg should develop. Given the oversold extreme both in terms of the daily chart and weekly charts, I'd be surprised if there was a further substantial decline such as to below 1250, especially on a closing basis, without at least an interim rally of 50-70 points or more.

Resistance is in the 1315 area, then around 1340 and next at the down trendline at 1365-1370. Fairly major resistance is at 1390-1400.

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

The S&P 100 (OEX) Index has fallen to the area of its prior 595 low and has the possibility of establishing a double bottom low. I could see OEX dipping to 585-580 however, before enough buying interest comes in to stabilize the S&P big cap stocks. The oil stocks lately are not keeping pace with the ever-surging crude oil contract and this key sector may be facing diminishing returns as gas approaches $4/$4+ and finally curtails driving in a significant way.

I noted last week that a close below 595 might suggest further downside potential to around 560 and that is also a possibility, but I'm a bit less bearish this week, buoyed by the high level of bearish sentiment as reflected in heavy put activity in stocks in recent days.

Resistance comes in around 609-610, at 618, in the 625 area and at the last upswing high at 638.

SENTIMENT:
As I noted already, there were 3 days last week with a bullish call to put ratio as can be seen above when the line falls under the bearish (green) level line; enough so that the 5-day average is at nearly the same low point that preceded the last rally of significance, a rebound of just over 50 points.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart pattern is of course similar to SPX as its recent lows are approaching the bottom make a few weeks back. From Friday's intraday low of 11819 to 11635 is just 184 points, not all that much these days. A successful re-test of the prior low would make for a good buying opportunity in Dow Index calls; 'good' on a risk to reward basis at least (e.g., risking to 115.9, with upside potential to 125).

Downside support can be assumed for the prior 11635 low, down to 11600 and probably can be assumed next for the 11500 area; further technical support is guesswork below this area, but I figure major support at 11250.

Upside resistance is at 12000-12025, then at 12340, with trendline resistance intersecting around 12600 currently.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index is bearish in its pattern, but with potential for a double bottom low if the index rallies from the 2200 area. Near resistance is 2250 on up to 2290 and 2300, a technical resistance implied by the down trendline. 2405-2420 is pivotal resistance implied by the fibonacci 38% retracement and the upswing high of early-February.

2187-2200 is near support, with next support estimated at 2125-2100 with the 2000 area as major support. As with the S&P, this index is as oversold as it has been in many months, but at the end of the last bear market in late-2001, it was significantly more oversold than recently, so this context needs to be kept in mind also.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index, while still bearish in its pattern, has not yet broken down below the low end of a potential 1690-1700 to 1810-1825 (to perhaps 1850-1860) trading range. I've pegged near resistance at the down trendline in the 1760 area; above 1760, there is a 'line' of hourly resistance highs at 1805 and then around 1821.

Near support is at 1700, then at 1693-1682 and next down around 1625.

I thought last week that NDX might stay in a relatively narrow 1700 to 1800 price range and this may still be what unfolds. If the index does dip to the low 1600 area, I'm anticipating that NDX calls would be attractive in this area, risking to 1590, with upside ('reward') potential to 1750, perhaps to the 1800 area again.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Near resistance in the Nasdaq 100 tracking stock (QQQQ) is now down to 43.5, at the trendline, with next resistance around 44.5. A significant resistance overhang (stock for sale) comes in at 45.9-46.0.

Support is at 41.6-41.5, with what could be fairly major support in the low-40 area; e.g., starting at 40.15.

QQQQ daily volume shot up on the Friday sell off, so it appears that owners of the stock may still be getting spooked out of their holdings. The late-January low has held so far, but we'll see what this coming week brings in that regard. I think it could (hold, that is), but if the S&P and Dow sells off some more, the Q's could dip to the low 41 area, if not back to what could be even more significant support around $40.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) is in a broad downtrend channel, which is outlined on the chart below. Significant support may come a second time if the 650 area is reached; potential support implied by the low end of the aforementioned downtrend channel is at 625 currently.

There may be a reasonable (in terms of risk-to-reward) speculative call buy in the 625 area, exiting at 615, with upside potential back to a 'line' of resistance indicated at 687-690, with some further potential for the index to make it back to the 725 area. At a minimum, if the low end of the channel was again reached or if a double bottom formed in the 650 area I would take profits on RUT puts.

I estimated last week, that support in the 680 area would be pierced and the prior low re-tested. Stay tuned on the prior low being tested, but this is often the way of these things as buyers often don't seriously come in unless selling dries up at a significant prior low.

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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