Option Investor
Index Wrap

STILL FLOUNDERING

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THE BOTTOM LINE:
This past week saw a further extension of the recent rally but only into Monday-Tuesday, after which the major indexes turned down again.

I had held somewhat contradictory views coming into this past week:

On the bullish side, I figured that the market could continue higher per my interpretation of its 'basing' action and at least get back up to recent highs to establish the high end of a trading range; e.g. near 1400 in the S&P 500 (SPX) and the 12700-12760 area in the Dow 30 (INDU).

On the bearish side, upside extremes in the 21-hour RSI applied to the INDU and OEX hourly charts had been quite accurately pinpointing prior tops and short-term opportunities in puts. My comments of LAST WEEK speak to this point. The updated hourly INDU chart, with the 21-hour RSI is found below those comments:

"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 made only when high or low extremes have set up in the 21-period 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...which was ideal for suggesting put entry in a dominant bearish period. The most recent high extreme (NOTE: in the week BEFORE last) 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 ... 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."

Sure enough, the further extension of INDU's advance taking it up to just over 12600 led to the 21-hour RSI climbing to a 'fully' overbought reading near 65, per the hourly Dow chart below. That development again was a kind of 'kiss of death' for the most recent stock market advance. Moreover, the Nasdaq 100 index (NDX) followed suit with the 21-hour Relative Strength Index (RSI) getting to the same overbought readings at 65 on its hourly chart as was apparent with the Dow and the S&P 100 (OEX).

After such consistency with these indicator extremes ('too simple' right?) in 'signaling' tradable tops and (one) bottoms, I was a bit leary as to whether the same pattern was going to 'work' again.

I also had some potentially bullish considerations relating to the high degree of bearishness seen with my 'sentiment' indicator and by the fact that SPX was still maintaining its LONG-TERM up trendline. These chart and indicator considerations were highlighted in my mid-week (Wed, 3/26) Trader's Corner article and there's little point in repeating that analysis here, as you can review the same by clicking here.

As to where we go from here, the chart pattern is still bearish, as EACH rally has failed at a point LOWER than the previous advance, which is the definition of a downtrend. The questions now are:
1.) Can the major indexes break out above any previous high and break the bearish pattern?
AND
2.) Will the prior recent lows give way?

I think the prior lows can hold and thereby establish/maintain the low end of a trading range, but that the upside potential may not be all that great either, if there's an SPX 1260-1360 price range.

Bottom line, be prepared to do relatively short-term trading only if thinking of being long options, or to adopt trading strategies that rely on the continuation of the range-bound market that seems increasingly apparent. The strong TRENDING periods have been getting shorter, per the Average Directional Index (ADX) indicator on the SPX chart below; ADX measures whether there's a strong (either up OR down) or weak trend.

There is a tendency for a strong trend (even though brief) to develop after weak trending periods (i.e., mostly sideways) as measured by ADX above and what we've seen for some time already. Best guess on direction is that that the next strong trend, after this lengthy prior sideways to lower drift, could be UP and would also be the norm for a trading range market: once prices approach the LOW end of a trading range (and the hourly RSI indicator gets low also), a rally can be anticipated.

QUESTIONS/COMMENTS:
Please e-mail me at Click here to email Leigh Stevens support@optioninvestor.com with 'Leigh Stevens' in the Subject line.

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:

As I noted last week and will repeat, the overall S&P 500 (SPX) index chart pattern is bearish as long as the pattern of declining rally peaks continues. There is also of course still the same possibility that we've seen a double bottom that has formed around 1260-1270. An alternative development is that another low or more lows get established in this area, establishing a 1260-1360 trading range in the weeks ahead.

The recent move that took prices above the December-February down trendline turned out to be a false breakout. As soon as the index got overbought on an hourly basis per my initial (bottom line) discussion, there wasn't the buying interest to carry the S&P stocks any higher. Not a great trading market except for skilled and nimble short-term traders.

The strong and more prolonged price swings have come on the downside, but this may not continue to the pattern, as I don't see a major prospect for another down 'leg'. The market appears to be too oversold now on a long-term basis to see sellers push the market a whole lot lower, at least not in the S&P and probably not in the Nasdaq either.

I would also note again that I see little prospect of a move above 1400 anytime soon and probably not much of a chance that SPX will fall under 1270 for any period of time.

Near resistance is at 1360, then up in the 1285-1290 area, extending to 1400. With the close below the 21-day moving average, next support is 1296 to 1287, then at 1270, extending to the prior 1257 intraday low.

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

Not surprisingly, the S&P 100 (OEX) Index is in the same bearish pattern as big brother S&P 500, as its recent 633 rally high fell short of its prior (638) swing high. This same bearish pattern continues, but the 585-595 area may also get established as the low end of an upcoming trading range.

Near resistance is at 633-638, then at 648 at that prior top, which also represents potential resistance implied by a 50 percent retracement of the January-March decline. It would be less than a 50% fibonacci retracement if measured from the 735 October price peak, but I chose to initially measure the retracement values for this year alone and from the (Jan.) secondary high as the bigger down leg started from there.

Although SPX has closed below ITS 21-day average, if OEX rallied from the 610 area it could suggest that this key average defined some near-term technical support/buying interest. Stay tuned on that, as more likely support lies in the 598-602 area, then at the prior lows at 595 to 583.

SENTIMENT:
Sentiment seems now to be turning more bearish more quickly after rally failures, which I take as an indication that the view of the prospects for stocks is getting bleaker. This may turn out to the correct stance to take, at least for a time. You would assume logically that sentiment could remain quite bearish for a lengthily period in the same way as extremes in bullish sentiment can go on for a LONG time.

However, the pattern of extended BEARISH sentiment isn't so common anymore, unlike 30-50 or more years ago when there were more extended bear markets. I suspect that we'll see a decent rally set up if there's another dip to the 595-600 area that finds selling drying up; a 50 point or more rally could set up from there.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I'm beginning to feel like a broken record, but the Dow 30 (INDU) chart pattern is nearly identical to those of the S&P indexes in its pattern of successively lower rally highs. Minor differences: unlike the S&P 500, INDU held at its 21-day average, but it also closed near its intraday (Friday)low and consistent with current downside momentum. INDU did make a slightly higher relative low early this month than in January, which suggested that there may be more buying interest in the biggest cap Dow stocks.

As with the S&P, the Friday close was right at the pivotal 21-day moving average and we'll find out if there's support in this area soon enough, but the momentum was clearly down recently so I'm not holding my breath for a rebound until/unless INDU goes lower still.

I anticipate near support as coming in around 12100 to 12070, with fairly major support beginning in the 11800 area, extending to 11732 to 11635, at the prior intraday lows.

Technical resistance levels should lie at the intraday peaks at 12622, then 12757-12767.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index is bearish in its pattern as upside momentum hasn't been great on each succeeding rally. More gain has come from waiting to buy puts after the rallies have run out of steam and it's been tougher to make money in the occasional rally.

COMP appears to me overdue for a stronger rally than seen to date and the chart has traced out what could be a saucer or rounding bottom pattern; this view would be enhanced if the low-2200 area again proves to be support and prices begin working higher again.

Near resistance is in the area of recent high, around 2347, then at 2363 on up to 2419, at its prior intraday rally peaks.

Very near support could develop at the 21-day average at 2258, but better technical support should lie in the low-2200 area, then around 2170, extending down to 2155.

NASDAQ 100 (NDX) DAILY CHART:

The recent Nasdaq 100 (NDX) Index appears headed to a test of near support at 1750. Next support could come in the 1712 area, then at 1690 to 1670. A recent double top was seen at 1824-1832, suggesting this that the next decline could carry toward prior lows and it seems more likely that there'll be a retreat to closer to 1700 then 1750.

The unfolding daily chart pattern could be a rounding type bottom and I'm not looking for a significant new down 'leg' below 1700 or at most (and temporarily) 1670. NDX looks to me like it could be tracing out a rounding bottom or is undergoing sideways type 'basing' action. More time is needed to see if that interpretation is the right one. It may take awhile for a good-sized rally to develop.

I have little compulsion to jump into any trade here as the price swings are smallish and my style of trading is to anticipate bigger moves and to be long calls or puts. The market is probably too oversold (on a long-term basis) to suggest that there will be a major new down leg. This doesn't mean that there will be a substantial rally anytime soon but the longer that prices go sideways, with low bullish sentiment, the more likely is an eventual sizable rebound.

Regarding the prospects for a bigger move, remember that the market is attempting to judge earnings prospects some months ahead; and why Fed actions move the market so much. I've made more by waiting than jumping into trades frequently. Waiting is a virtue as long I can also ACT when the right moment comes.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

With the Nasdaq 100 tracking stock (QQQQ), a broad downtrend channel can be traced out as seen below, which gives some idea of the broadest likely trading parameters; e.g., 48 on the upside, 38 on the downside.

Near resistance in the Q's is 44.9, then around 45.9-46.0.

Near support is 43.2, then 42.25, 41.6 and at 41.0. Major support is estimated to be 38.5-38.0.

Daily trade volume stayed low on the last run up, suggesting a weak rally or one involving limited buying. Volume is a secondary indicator, but it should expand in the direction of the price trend.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) also can be seen as within a broad downtrend channel such as highlighted on the daily chart below.

Near support is at 660, then at 643-645, with fairly major support anticipated if RUT retreats to the 620-610 area. Resistance developed on the recent move above 700. Key resistance points now are the rally highs at 706, 724 and 731.

I have no specific trading suggestions. Selling rallies above 700 has been working and I imagine that buying declines to the 650-640 area may continue to also provide a short-term trading opportunity.

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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