Option Investor
Index Wrap

STILL CONSISTENT INDICATOR AND PRICE PATTERNS

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THE BOTTOM LINE:

The same indicator and price pattern this year keeps predicting when to buy puts or, occasionally, calls. I've speculated recently on price and indicator (mostly 'sentiment) patterns seen on the daily and weekly charts, as suggesting a potential for the major market indexes to break out of their 2008 trading ranges. WRONG! It's been 'too' simple in a way, to trust that the major market indexes are going to continue to do the same thing numerous times. However, sometimes the market is quite predictable and when it's locked in a well-defined trading range is one of those times.

INDICATOR PATTERN:
When the 21-hour RSI has gotten in the 'overbought' range, opportunities in puts have been at hand or near. This last instance of this was ALSO accompanied by a bearish Price/RSI divergence for a bit of a 'double' confirmation, as you'll see on the two hourly charts (INDU and COMP) I presented in my Thursday Trader's Corner article (see the OI 4/10 Daily newsletter) and update below. As an oversold condition in this same (RSI) indicator is approaching, a buying opportunity for a short-term call buy may be close at hand.

However, I think that the RSI could hit this (oversold) area a couple of times, so I'm not compelled or in a hurry to reverse positions in the near-term. We have further earnings announcements coming up, including more 'bellwether' stocks like GE. We also have index options expiration at the end of this coming week.

CHART PATTERN:
The major indexes remain locked in a trading range and have been a sell in the last couple of instance when prices have again gotten up to the high end of that range. The high end of that range in 'leading' indexes of the S&P and Dow, has been in the area of only a 50 percent retracement of the last down leg (late-Dec to mid-March); less than that if viewed as a retracement of the early-November high to mid-March low. The Nasdaq has only managed to retrace a fairly anemic 38 percent retracement of the last down leg. These are not robust retracements.

The best trading strategy has been to strictly believe that rallies will not carry HIGHER, other than perhaps a hair's breath higher, than the preceding rally peaks. A breakout above, or breakdown below this range, will of course develop eventually, which is why stop/exit points just above or below the 'line' of prior highs or lows will offer protection for the instance when this pattern is broken.

The up sloping line of higher hourly Dow 30 (INDU) highs and down sloping line of LOWER relative RSI peaks, suggesting declining 'relative strength' on rallies, are highlighted below. As it turned out, the KEY technical predictive (for another top) patterns were the double top in the 12700 area and the overbought RSI readings. The 'GAP' area is highlighted since prior upside chart gaps can act as support, once they are 'filled in'. This consideration is a bit more to the forefront because the 21-hour RSI for INDU has gotten into, although just barely, its 'typical' oversold zone. It's more likely that the 12200 area is potential near-term support however.

NOTE: As I've often said, a sideways move can also 'throw off' an overbought (or oversold) condition, which is well demonstrated in the Dow hourly chart and RSI indicator above. INDU is nearly as oversold on this time scale, as it was when the Index was several hundred points lower, proving the 'RELATIVE' part of the Relative Strength Index. More important is to take note of the fact the RSI is far from oversold on the DAILY charts. Putting this all together, I'd anticipate that the hourly RSI oscillator could bounce around in the oversold zone for some period ahead, before a second or third oversold reading might offer a reliable bullish 'signal'. Stay tuned on that!

The same hourly chart and ('length' setting = 21) RSI for the Nasdaq Composite (COMP) is shown below, by way of noting the similar pattern all around in terms of what happened after one or a few instances of overbought or oversold readings. There was one other divergence seen with COMP, which occurred when prices went to a new low in March but the RSI made a higher relative high, resulting in an excellent buy signal being suggested for that second lower low.

CORRECTION:
Last week I noted that the last low was ... "also accompanied by a GREATER level of bearishness ('than' was missing here) around the time of the lower mid-March low... 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."

The speculation as to a possible continuation of the rally (that got reversed last week) based on 'sentiment' indicators didn't pan out of course, but my note here is that the omission of the comparative "than" didn't convey my intended meaning.

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:

The bullish potential in the S&P 500 (SPX) was broken when the index failed again to rally to a high that exceeded its prior top, which once again defines the high end of a likely trading range.

I would go back to what I said last week about a trading range market is that 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."

Near support looks like 1300 with next support around 1273. I'd like to buy in support again if the RSI again dips to the 35-30 area.

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

I wrote last week that the S&P 100 (OEX) Index was looking more bullish in its pattern, same as the S&P 500 and that there was some potential for the index to get above the last (638) high. Yes, for about a nanosecond!

Near resistance remains at 638-640, with even tougher resistance at 648-650.

Near support I estimated last week as 614-610 and that looks about to be tested; next support is in the 600 area, with support below that at the recent lows around 583-585. I noted also last time that: "A decisive downside penetration of 629, the low end of the recent narrow consolidation would cancel out the bullish chart possibilities...". True enough and the next question is whether OEX holds the 600 area again or retests, or even breaks below, the low seen to date.

My take on what comes next is that if selling again picks up steam, the Index will nevertheless remain above 590-600. I should also note that below the bottom that occurred in the 589-583 area in mid-March, potential next support is not apparent before 560.

SENTIMENT:

I'm reminded again that bear markets can see LONG periods of bearish sentiment. Just as major bull markets have EXTREME periods of bullish sentiment, the reverse is true of bear market cycles. No doubt extremes like seen at the green up arrow above on my bullish/bearish 'sentiment' indicator are effective at marking a period where a good-sized countertrend rally may set up; the likelihood however of a PROLONGED rally is dubious or slim however.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I thought that the last run up in the Dow 30 (INDU) looked like it might continue. In terms of the chart, I had highlighted what looked like a 'bull flag' pattern and that outline remains. However, to be a valid bullish pattern, there MUST also be a breakout above the high end of a 'flag' formation within a few days. It's exceedingly rare that the bullish possibilities in this formation DON'T get realized within 3-4 days. If this doesn't happen and, instead, there's a downside break below the LOW end of the flag type consolidation, this almost always suggests that another top is in place. The predictable result was the Friday break that carried to below the 21-day moving average.

It looks like that once again prices will trend sideways to lower. 12200 is a potential near support area, but with a better likelihood of buying coming again around 12000.

I've noted near resistance at what was technical support, at the 21-day average currently at 12396; above the average, key or pivotal resistance, comes in at 12690-12700.

I've also highlighted a potential 'rounding bottom' pattern, which would be intermediate to longer-term possibility IF prices retreated to no lower than 12000 in the near term or if INDU finds support in the area of the projected rounding (line) formation out into the future. Stay tuned as to whether this pattern, this projected circular line, will act as a future support or not.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

A Nasdaq Composite (COMP) Index rally failure shouldn't have been too much of a surprise this past week as selling pressures again developed in the area of the high that preceded this very last one. Topping out at the high end of what now looks more and more like a trading range was one thing. COMP's piercing of its minor up trendline and the Friday close below the 21-day average now shows that short to intermediate-term momentum has turned down.

I indicated last week that ..." 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." Where we go from here would look to be lower. How far is the question of course.

Near support is in the 2250 area, with 2200 probably being stronger technical support. Stay tuned on that!

I've speculated, as I did with the Dow above, that there could be a broad rounding bottom formation that is developing, assuming that support/buying interest is found in the 2200 area on a renewed decline. I've highlighted this 'rounding bottom' possibility on the chart below. Formation of a bottom in this environment should unfold over many weeks and that price action might trace out this rounding pattern.

NASDAQ 100 (NDX) DAILY CHART:

The recent Nasdaq 100 (NDX) Index rally did manage to squeak above its prior 1865 intraday high, but didn't close over that level, chich was a tip off to the weakness that followed. This point was amplified by a second rally failure the next day.

Near support is at 1800, then comes in around 1760. Major support is probably going to be found at 1700.

I thought that NDX might manage to climb back to the 1900 area, where I hoped to exit some calls I was holding. Instead I got out on the Tuesday rally failure; Tuesday (and Thursday) having a somewhat greater than chance (20%) likelihood of being a reversal day also. It has been a nice run up from the cluster of lows that formed in the 1670 area. Not bad for a bear market rally!

I have no trading suggestions and continue to want only to trade at the 'extremes', where basing or topping action is apparent AND where there is also an oversold or overbought extreme suggested by the momentum indicators like RSI.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Well, I can now see the relevance of a low-volume rally as being 'suspect' here with the Nasdaq 100 tracking stock (QQQQ)! Also, On Balance Volume (OBV), turned down, along with prices, on the day after the Q's rallied over 46. The low volume AND the turndown in OBV was a good tip off to the lack of upside follow after the mid-March to early-April rally took the stock into the area of the January top. The brief spurt over 46.0 was probably amplified some by (buy) stops being triggered.

The resistance zone remains as 46-46.8. Support is at 44.0, then at 43.35, and next at 42.0.

The key area to watch near-term is 44.0 currently. A close below the 21-day average would suggest a continuation either of the decline, such as back to the 42 area, or at least a sideways type lateral move with no real upside progress.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) chart pattern is consistent with the rest of the market, as a rally to 720 area in RUT, the high end of the trading range its been in for some weeks now, brought in renewed selling once more bearish news hit the market.

Near support remains at 680, then at 660, with major support at 645-650. Near resistance is in the 720 area, including the prior swing highs at 724 and 731. Trendline resistance intersects now around 726.

I thought that RUT might "reach the 730 area and break out above its down trendline", but also noted "that this prospect looks like a sizable IF currently." And how, and the Russell 2000 couldn't even reach it's prior high at 724 let alone the 730 area. A continued bearish looking chart and now the Index is not even oversold on an intermediate-term basis per the RSI.

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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