Option Investor
Index Wrap

NOTHING SETTLED

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THE BOTTOM LINE:
The market is still in an unresolved situation technically as to a possible bottom or establishment of the low end of a future trading range, but the S&P 500 (SPX) and the Dow 30 (INDU) continue to trade above their late-January lows. On the Nasdaq side of the ledger, the Nasdaq Composite (COMP) and the Nas 100 (NDX) have, with the exception of a 1-day close on Monday of this past week, maintained closing levels that are above their late-January intraday lows. Watch for a conclusive double bottom low in SPX (or not), which as is the key index to watch as to how the overall market will fare in this period ahead.

There reaches a point where the market is so oversold, has so discounted a tough recession, where so much bearishness has set in, that there are not a lot of sellers that will continue to drive prices lower. Of course there are not a lot of willing or potential buyers other than those short stocks who get spooked by some recent move by the Fed that might change the currently dismal economic outlook. Until we get another round of earnings being announced next month, disappointment with the next Federal Reserve rate cut (if smaller than expected) is the only thing I can envision currently that could set up enough of a panic to create another down leg in the market.

Right now, the recent sideways move looks most like 'basing' action. The problem for option traders who want to bet on the upside, versus those looking to profit from a stable TRADING RANGE, is that it's hard to know when any kind of a substantial or sustained rally phase might kick in.

In terms of the level of bearishness, it's high enough currently to suggest that, at a minimum, there is LIMITED downside. I noted in my Wednesday (3/12) 'Trader's Corner' article in the OI Daily newsletter the bullish convergence of 1.) the potential double bottom low in the S&P 500 AND 2.) the fact that a 5-day average of my call to put 'sentiment' indicator had reached the oversold level usually associated with a good-sized rally to follow (within 1-5 trading days), that occurred at the beginning of this past week. A sizable 1-day rally did follow on (trend 'change-day') Tuesday, but it lacked follow through as we know.

Yesterday (Friday), I could not get any CBOE volume numbers, which is what I base my bullish/bearish sentiment number on, but last night when checking, I bet myself that total Friday put volume would be well over call volume. I didn't guess the extent of it however, as today's (Saturday) post of those numbers showed that equities put volume was 1.366 million, versus call volume of 1.178, which, in my way of calculating the ratio, equaled .86 which is the lowest reading I've seen since February and March 2003, at the bottom of the 2002-2003 bear market.

I'm not suggesting that we're in the same situation as the aforementioned 2003 period, but the major market indexes, especially the S&P, could be getting close to a significant rally point and I would caution traders (unlike what was seen Friday) from loading up or over-staying in long index and stock puts, at least those that tend to trade in line with the market as in 'benchmark' type stocks. Short puts initiated around recent lows, look like they are in a lesser category of risk.

I'm a few hours behind 'mainland' time, 3 hours earlier than California and a whopping 6 hours relative to New York and the Street of Dreams. That means I only have to get up at 3:30 am to catch the opening. I don't think I'll be up quite then! However, the NYSE close here (Maui) is at 10 am and I can check in well before then and then go out to the beach or whale watching or something. Someone has to do it. When I was at UBS I met a few traders here who were up with the NY markets; they then took afternoon naps as I recall.

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:

There's not much change from last week in the S&P 500 (SPX) index except that this past week's low finally tested, or within a hair's breadth of it, the prior late-January 1270 intraday low. This pattern sets up a potential double bottom but this pattern would be negated of course by a decisive downside penetration of 1270, especially on a closing basis.

A double bottom would then be 'confirmed' if SPX climbed above the prior up swing high at 1388; before any such move, a close above 1355, at the current downtrend, would be an initial bullish plus technically.

So, initial evidence for a potential bottom OR to define the low end of trading range would be if the broader S&P 500 index holds above 1270 and doesn't fall below this level at least for not more than a day or so. Major support should be found in the 1200-1170 area; below this area, given the oversold extreme in terms of the daily and weekly charts, I don't anticipate a further substantial decline such as to below 1250 on a closing basis.

Initial resistance is in the 1330-1333 area, then at the down trendline as mentioned at 1355 currently. Pivotal resistance then comes at 1388-1400.

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

The S&P 100 (OEX) Index fell under its prior 595 low, but not by much and only one day on a closing basis; all other closes have been above the prior (late-January) 595 intraday low and not far under 600. While the chart can't be rated as bullish, a temporary bottom could be forming or at least the low end of a tradomg range setting up. If relentless bearish news can't take the market lower there is some potential for a rebound, assuming there is something for investors to cheer about, especially a substantial further rate cut.

I've noted support at the recent 589 low; where buying interest could surface below that is a guess, but perhaps next around 570-567 to 560.

Initial technical resistance comes in around 620 then next at the prior 638 (up) swing high with the 648 to 653 zone as a pivotal area of resistance above this.

SENTIMENT:
This is the second week running where high bearish sentiment predominated, as reflected in heavy put volume in CBOE equity options, which culminated on Friday with put volume running 188,000 ahead of trading in calls.

On a contrary opinion basis, this substantial shift in the typical call/put volume ratio causes me to at least exit remaining long puts and to NOT be lined up on the same side as this majority of options traders. Not that the majority opinion can't be right sometimes, but I'll tend to go the other way more often than not and be right more often than not.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) chart pattern is a tad more encouraging than the broader S&P for the bulls as INDU has held ABOVE its prior intraday low at 11635, which I've noted as support. Next lower support is probably around 11500.

Upside resistance is initially at 12300, then around 12560, at the intersection of the down trendline and finally, even more pivotal resistance is assumed to lie at the prior 12757-12767 highs from early and late-February.

I don't have a strong conviction about their being substantial upside potential for the Dow, but I don't see a big downside risk currently either. I'm not usually neutral, but a possible trendless/sideways move ahead leads me in that direction. Around 30 percent of the time or more, the trend is sideways or in a trading range. Currently, INDU's projected price range looks like 11600-11700 on the downside, to 12700-12800 on the upside.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index remains bearish and in a downtrend pattern, which would only begin to change if a rally pierced the 2275 to 2300 area. Next resistance above COMP's down trendline comes in at 2363, then at the prior rally peak around 2419 as noted on the chart below.

On the neutral to bullish side, COMP is finding some support or buying is showing up in the Composite when around 2200 down to the 2170 area. I'd estimate next lower support at 2125-2100 with the 2000 area as major support.

At the recent low, COMP got as oversold as it had been in recent months prior to a tradable rally, but it has been gotten to still lower oversold RSI readings in bear market periods if we go farther back than this more recent price chart for comparison.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) Index, could be bottoming in the 1700 area, but there is as of yet no sustained bullish ability for the index to get above its down trendline or its 21-day moving average. There has been buying interest showing up in NDX in the 1700 to 1673 zone. Perhaps the low end of an upcoming trading range at 1693-1673 is starting to form, but more price action is needed to suggest that the index has found a support floor for now. The 1600 area is probably a next lower support.

A sustained move above 1750 is needed to get something going on the upside. Next key resistance then comes in at 1800-1810. Pivotal resistance comes next in the 1850 area in NDX.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Near resistance in the Nasdaq 100 tracking stock (QQQQ) is at 43.36, with next resistance anticipated at the prior 44.5 swing high. A substantial amount of stock should be for sale if the Q's got up to the 45.9-46.0 area again. Stay tuned on that.

Near support and buying interest has been showing up in a zone between 41.6 and 41.2, with next anticipated support coming in at 40.15-40.0. I have no recommendation on the stock, except that downside is looking more limited with the sideways trend of recent weeks. If there was a new down 'leg' the stock could go to 37 I suppose.

QQQQ daily volume shot up even higher on this past Friday's weakness; more so than Monday when a lot of selling also came in. Buyers, when they are coming in, appear pretty nervous and are quick to exit on news like we saw at the end of this past week, when the Bear (Stearns) got rocked. I guess if you are big enough you can screw up and still get bailed out. Still, I wouldn't want to be in the shoes of an old friend of mine who toils there.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) is in a well-defined downtrend channel currently, as highlighted on the daily chart. Near support is in the 653 to 643 area, with technical support then implied around 620, at the low end of its price channel.

Substantial resistance can be anticipated in the 685 area, then in the 724-731 zone.

I'm inclined to buy the index in the 620 area, if reached, risking to 615, looking for a move up to 685 or higher.

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.

Index Wrap Archives