THE BOTTOM LINE:
The 'problem' remains for those looking to (or have already) buy calls. While the downside looks limited, this doesn't mean that the reverse is true, that there is substantial upside. Further price action is needed, specifically the question of whether the S&P 500 (SPX) can break out above its prior double top at 1388-1395 and the Dow 30 (INDU) above 12757-12767; these two key indexes of the NYSE could of course just get back up to that prior 'line' of resistance and stop there again, establishing even more firmly that the S&P is in a relatively narrow trading range.
In terms of Nasdaq, the chart picture looks more bearish still although the Nasdaq Composite (COMP), along with the S&P 100 (OEX), have just poked above down trendlines. Bullish possibilities ahead are also suggested by the very HIGH level of bearishness (a 'contrary opinion' type indicator) that has set in as will be seen on my sentiment indicator shown with the OEX chart. Still, all in all, there are more unknowns and guesses than answers!
A reliable TRADING guide and this does appear to be a time to do 'MORE' short-term trading OR to stay out until the next intermediate-term (2-3 week or longer) move looks clearer or more predictable, is seen in one technical tool: trade entry only when high or low extremes have set up in the 21-hour RSI on the hourly charts, especially in INDU and the OEX, per the INDU hourly chart below. The OEX shows the same high and low extremes, so the Dow chart alone will serve as for illustration:
More RSI extremes (with the '21' length setting) were seen on the upside for the period shown with the chart above, which was ideal for suggesting put entry in a dominate bearish period. The most recent high extreme was just barely in the 'overbought' (60-65) RSI zone, suggesting that prices and this indicator might inch still higher on a next rally before INDU comes down substantially.
Whether the Dow and overall market moves higher than its most recent advance or not (when INDU also hit resistance implied by a daily chart down trendline, as seen in the SPX section below), it seems doubtful based on the pattern of highs and lows so well forecast by the recent RSI extreme for INDU (and OEX) that stocks are going much higher without another downside correction setting in.
Based on the pattern seen so far this year anyway, when the 21-hour RSI has gotten into the 60-65 area its been the time to get into puts. Patterns are 'made' to be broken at some point, but it's hard to argue with the predictive value of the hourly RSI extremes for a trend change, at least so far this year.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index chart pattern remains bearish as long as the pattern of lower rally lows continues, but there is the possibility that an approximate double bottom has formed. Initially, a close above 1350, at the down trendline, would be a minor bullish plus. Potential 'confirmation' of a double bottom is suggested if SPX closed above its prior 1388 high and then above its prior high at 1395; such an advance would suggest that the near to intermediate trend was turning up.
On balance I don't currently rate the prospects of SPX managing a weekly close above 1400 as very high. I see 1400 as psychologically important; plus, a weekly close over 1400 would put the index within a hair's breadth of climbing above its November closing low, before so much recession talk took hold.
Near support is in the 1287-1296 zone, then at the prior 1257 intraday low.
S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) Index will remain in a bearish pattern as long as the peak of each rebound attempt falls below its previous rally high. A downtrend is never reversed until the pattern of ever-lower relative lows starts to change. There is a minor bullish plus with the weekly close above 620 resistance; it's not by much, but worth noting all the same.
Near support comes in around 600, then at the 583 prior low. Conversely, near resistance is assumed to lie at the previous 638 high, on up to the 648 (up) swing high. 648 also represents potential resistance implied by that level being a 50 percent retracement of the December-March decline.
I looks to me like OEX could get up to around 640 again, possibly close to 650, but I also think that the index is unlikely to manage a close over 650 for two consecutive days and/or not on a weekly closing basis.
Any technical indicator, by itself, is not enough to go on to assume major risk; e.g., such as in going overboard in buying calls. However, this factor along with apparent bottoming action on the recent dip to and under 590, were complementary trading considerations and I suggest hanging in with calls to see how things unfold here as long as you are also adhering to at least a break-even exit/stop point.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart pattern with its higher recent low than in January more clearly suggested a bottom than the other major indexes and presents a more encouraging picture for those who bought Dow index calls around the recent lows
I thought buying when INDU found a secondary two-pronged bottom above its prior (January) intraday low at 11635 offered a favorable risk-to-reward proposition. Staying with the trade to see whether the Dow can penetrate resistance in the 12500 area is a bit more dicey.
Above the down trendline intersecting around 12500, the obvious resistances are the two rally peaks at 12757 and 12767.
Near support lies at 12100 and the next technical support isn't really apparent until the 12800 area in the Dow. The January intraday low at 11635 has to be assumed as major support at this juncture.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index has a more bearish technical pattern than the S&P and Dow, as each rally falls well short of the previous one.
Near resistance is at 2280-2300, then at each of the prior rally highs at 2363 and 2419. A rally that carried above 2363-2373 would be an initial bullish change that would turn the short-term trend up.
Near support is in the low-2200 area, then around 2150.
NASDAQ 100 (NDX) DAILY CHART:
The recent Nasdaq 100 (NDX) Index close above its 21-day moving average was a bullish plus, as was the recent minor double bottom low that formed in the 1270 area. Now, the question becomes whether NDX can get back above 1800 and above the prior 1808 high or above further resistance around 1850.
The chart looks like there could be basing action going on and a move back up to the 1850 area looks quite possible. The 1900 area should offer tough resistance if the index can climb above 1850. Stay tuned on that!
Near support is 1705-1712, with next support at 1690 then around 1670.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) remains in its well-defined broad downtrend channel. Near support is at 643-645, with fairly major support expected in the 620-615 area.
Near resistance/selling interest has been showing up in the 685 area, then is apparent at 724 to around 731. Major resistance begins around 745.
I indicated last week that I would have been a buyer of RUT calls in the 620 area. I still like the idea although it may be wishful thinking that I could catch the index that low. Like all the other indexes, I know that I DON'T want to buy calls or puts in what I think could be mid-range; i.e., the middle of a likely trading range.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
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.