Option Investor
Index Wrap

POTENTIAL TO BREAKOUT

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THE BOTTOM LINE:
Anyone trading in the current market environment has to be cautious here about whether this latest rally is going to see further upside and a breakout above the February highs, or not. After all the chart pattern looks like similar to the late-January rally, a subsequent retracement (of about half) of the first rebound, followed by another rally in late-February that did not see a new upswing high and led to a renewed decline.

The most significant difference between then and now is that the rally off the most recent mid-March low was followed by a shallower retracement, which then led to a rally that has exceeded the first upswing, followed by a 'bull flag' consolidation; i.e., a sharp run up followed by a slight pullback and sideways move of 3-5 days. This more bullish technical pattern was also accompanied by a GREATER level of bearishness around the time of the lower mid-March low. Moreover, bullish sentiment has not increased nearly as much on this latest advance relative to the January rally that I take, in a 'contrary opinion' sense, as bullish for a continuation of this most recent rally.

In my mid-week Trader's Corner article in the Wednesday 4/2 Option Investor Daily e-mail, I wrote about some of the more intermediate to long-term bullish technical aspects of this current market, although a cautionary note was about a recent short-term overbought condition suggested by a 21-hour RSI extreme on the hourly charts that has here-to-fore been a kind of 'kiss of death' to all rallies since December. The same 'overbought' extreme doesn't become infallible however just because there has been a series of repeated instances where that type RSI pattern signaled an impending and significant trend reversal. We shall see won't we!

On the one hand you could make a case that now that the S&P 500 (SPX) is for the third time approaching the high end of a trading range at 1388-1395 (twice the low end of this possible range was established around 1270) and the market will AGAIN come down from there.

On the other hand, this sideways action of recent months could also be 'basing' action that would 'support' a breakout above the January-February highs and a further (new) up leg. I think that the high level of bearishness, doubts and worries about the economy may set the stage for a further advance.

A close over 1400 in SPX, not reversed significantly after such a close, would be a technical bullish plus. In which case this would suggest looking for a further SPX advance of 40-50 points. Beyond a move of that degree it's hard to predict what comes next, given at least my expectation that there's substantial stock (supply) for sale around 1445-1450, on up to 1453 to 1466.

One technical indicator that I haven't always used that much but have featured recently and discussed in my Trader's Corner column this past week, is the Average Directional Index (ADX). The ADX attempts to show whether any given trend, up or down, is strong or weak. A weak trend is one that is 'non-trending' or basically is sideways on an intermediate-term (2-3 weeks or longer) basis. I'll update this indicator next, as applied to the SPX daily chart, without repeating my prior (Trader's Corner) discussion on ADX as it's easily seen online by clicking here.

The ADX indicator is shown under the S&P 500 (SPX) daily line chart below. Based on similar patterns when the ADX line has gotten to readings as low as seen recently, movement has typically continued in the direction of the short-term trend, suggesting that that prices could continue to climb. ADX attempts to highlight upside or downside breakouts from 'congestion' areas.

There are a few technical factors that suggest the major indexes could continue to move higher and this indicator may also point to that potential. We'll see ahead how valuable (or not) ADX is in suggesting that the trend could strengthen ahead and my assessment that trend direction will (continue to) be UP, with an initial objective for SPX to test resistance in the 1395-1400 area.

The reverse could happen of course and the market gets slammed lower again and the trend gets strong in THAT direction, especially as SPX approaches resistance implied by prior highs. How things develop from here is not easy to call.

My view is the market continues higher, climbing a "wall of worry" as we used to say. Putting on my fundamental 'hat' here (I have one that I slap on once in a while!), more negative/bearish news at this point could just lead investors to think that the Fed will have to keep easing and work its recovery magic and that the prospects for stocks out a few months is good relative to where prices are NOW.

On the subject of market momentum, the S&P (500) is trading above its 50-day average for the first time since late-December. The 1450 area in SPX mentioned as representing a significant supply area/resistance, is also the current intersection of the 200-day moving average, the key (almost only) average that fund managers pay attention to. It can be a buying trigger if there's a daily/weekly close above it or have an opposite effect as funds and other investors view a rebound back to the 200-day average as an opportunity to exit less favored stocks.

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 another possibility ahead that the S&P 500 (SPX) breaks out of its bearish pattern of declining highs for each rally attempt. The initial false and short-lived upside breakout above the December-March down trendline led only to a pullback to support in the area of the 21-day average, which was followed by another stronger surge higher.

Support has developed over recent days on just minor pullbacks from the recent new high achieved on SPX's rally off its mid-March (1257) low. A bullish chart breakout would come on an advance above 1388 and then 1395. A close over 1400 not reversed after 1-2 days, would suggest upside potential to the 1430 area and then to 1445-1450, which may offer major resistance.

In this volatile market, you have to plan for a move in either direction and the bearish possibility is that renewed selling pulls the key SPX index lower again and a 1270 to 1370 (maybe 1390) price range continues to define trading parameters. Support is expected around 1325, with major support in the 1270 area.

My take on this and the other major index charts is that of a bullish double and even hints of a 'rounding' type bottom, and that the S&P will work higher and break out above 1395-1400. Stay tuned on that!

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

The S&P 100 (OEX) Index has the same recent bullish pattern as SPX given its sharp rebound from its 21-day average and the new rally high for this current rally phase, continuing the advance that began from the 3/17 bottom.

The initial sharp rally from the average, followed by only minor dips from recent highs at 638 has the appearance of a bull 'flag' consolidation, which suggests good potential for a breakout above 638 and then 648. A further move to what is probably tougher resistance at 660 is a possibility also.

Near support is in the 614-610 area, then at 600, with major support around 585. A decisive downside penetration of 629, the low end of the recent narrow consolidation would cancel out the bullish chart possibilities described in reference to the bull flag pattern.

SENTIMENT:
Further bullish potential for the major indexes after the most recent rally, which looked good technically, was suggested by almost no increase in bullish sentiment as seen above. I take this lack of an increase in bullish sentiment as an indication that the recent rally will carry higher.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Pretty much the same bullish pattern repeats in the recent price action for the Dow 30 (INDU). 'Minimum' upside potential implied by a break out above 12685 (the minor resistance implied by the top end of the highlighted bull flag pattern), is to around 13055 as noted at the higher of the two red down arrows on the chart below. Other levels that should be noted as potential resistances are the prior INDU highs at 12757 and 12767.

Potential support on pullbacks, assuming there's a slide below 12550-12500 instead of an upward glide, is at 12270, then 12200, with major support in the 11700 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index has reverted from a bearish to potentially bullish chart pattern, as COMP managed to close above its 2274 closing high from its mid-February rally attempt. A next test would be at the prior 2419 intraday high and it that level is pierced it's possible that COMP could eventually work back to the 2500 area, but that looms as major resistance.

On balance, if COMP can climb (and stay) above 2400, it looks good for a further advance. A retreat to below 2340 would turn the chart in a bearish direction again.

Near support is at 2300, then at 2275, at the key 21-day moving average that so well defined support on the last pullback. Major support begins in the 2200 area.

NASDAQ 100 (NDX) DAILY CHART:

The recent Nasdaq 100 (NDX) Index has completed a bullish week and it looks like NDX could be headed to the 1900 area next and possibly to the 1950 area after that, where the index would hit resistance implied by the down trendline.

I noted last week that a..."next decline could carry toward prior lows and it seems more likely that there'll be a retreat to closer to 1700 then 1750." I wasn't looking for a big new sell off below 1700, but I was WRONG on the near-term direction as NDX broke out above near resistance at 1800 instead of even retreating to near support at 1750.

Support levels are: the 1800 area, then at 1760-1770, with 1700 now appearing to offer the beginnings of major support.

Some happy times for those holding calls, but traders as a bunch are quite cautious and for this reason especially I think there could be more upside to come.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I haven't much more to say on the prospects for the Nasdaq 100 tracking stock (QQQQ). Just the support/resistance levels are different and to say that I estimate that the stock could reach 48 on an extension of its recent rally, but I don't currently have higher bullish expectations.

Near resistance is at 46.0, then at 46.8 and finally in the 48 area. Near support is 44.0, extending to 43.5, with fairly major support beginning around 42.0.

No real pick up in the daily trade volume on this last rally and this shows a minor bearish divergence. With the Q's, as long as On Balance Volume or OBV is pointed in the same direction as its recent price trend, that is often all the volume 'confirmation' that we get.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) hasn't yet challenged significant technical resistance implied by its down trendline but it's nearing that key area, as highlighted on the daily chart below.

Near support is now at 680, then at 660, with major support at 645-650. Near resistance is at the prior swing highs at 724 and 731. Trendline resistance also comes in around 730 also.

I said last week that..."Selling rallies above 700 has been 'working'..." but holding puts bought on the move above 700 looks like a losing proposition near-term especially, as RUT could at least reach the 730 area and might break out above its down trendline, although this prospect looks like a sizable IF currently.

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