Option Investor
Index Wrap

AN UP WEEK, BUT ONLY SLIGHTLY; MOMENTUM SLOWS

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THE BOTTOM LINE:
The market continued higher, while certain measures of 'relative strength' are going sideways to lower on my hourly charts and the daily RSI line is approaching levels associated with tops this year, but not quite there in terms of the October peak. Of course this is a different time and with even an approach to an overbought condition on a daily chart basis, given the environment the market is in, it suggests that maintaining long call positions has an increasing degree of risk. Given that risk, seen both technically and fundamentally, there is no point in risking any sizable profit in calls. As traders have said, "sell down to a 'sleeping' level".

While this juncture is a point where the continuation of the rally underway since early-March looks iffy to me as the Dow (INDU) nears key resistance in the 13000 area, the S&P 500 (SPX) at 1400 and the Nasdaq Composite (COMP) trading around its down trendline resistance at 2440, it's not to say that this also means that the market is automatically a short. It means that the upside momentum has slowed some and indexes are nearing levels that may have carried as far as can be expected for a counter-trend move, assuming we remain in an intermediate to long-term bear market cycle. This is not to say that that there won't be a last spurt higher; stops could be run, etc.

The bullish scenario is that, contrary to the expectations of many, the major stock indexes break out above their key near resistances and gain some more upside, although for a distance that is probably a 'finite' further. The market can climb a proverbial wall of worry for only so long in the expectations that the balm of lower interest rates is most of what is needed to not only stabilize stock prices but re-start the long-term bull market. Earnings that haven't been as bad as catastrophic expectations is one bullish argument. And, indeed, just on a technical basis, I can still see a long-term (multiyear) trendline that SPX has held and bounced from already.

However, while conventional technical analysis could say that prices 'could' continue higher, the recent relatively robust bullish 'sentiment' readings based on equities call to put daily volume ratios, would say not or to leery of a correction.

I'll save further verbiage for the individual index charts below.

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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:

At its 1397.8 Friday close, the S&P 500 (SPX) did manage to inch above its 1395 high close dating from the January rebound.

Key resistance however remains for the 1400 area, then above that at 1423-1435. SPX might climb above 1400 and stay there, but I rate it unlikely in next 2-3 weeks for the index to climb over 1435 and maintain itself at and above this level. I've kept my fibonacci retracements as from its December high to March low. If SPX closes above 1435 however, representing a 66% retracement of the December-March decline that's another (bullish) story. Why I continue to measure this distance and not the entire decline dating from the October top (?) was the subject of a question I got this past week.

My answer is that the Dec-Mch downswing was the biggest part of the overall decline or the 'power' part of the move'; down leg 'C' in Elliott wave terms. A retracement of more than 2/3 of THIS part of the decline would be an initial indication that SPX could make it back (or come close) to the major 1500-1525 'breakdown' point. Such a move, even if SPX again topped in this area, would suggest that this market is not going to become a basket case; which is interesting for the long-term prospects of the bull market that began in late-2002.

Getting back to basics, first key resistance is in the 1400 area, which starts to put distance above SPX's 50% retracement; next resistance and the most likely 'stopper' to this current advance, is in the 1423-1435 zone. Major resistance begins around 1500.

Near support suggested by the 21-day moving average, currently standing at 1362; a pivotal support zone is suggested by the last two downswing lows, at 1324-1313.

SPX is climbing to near the bottom of the definitive 65-70 (or above) 'overbought' zone; at least this has been the scale that's existed for the past few years. There were periods when the 13-day RSI climbed above 70, but those instances were within the context of a strong bull market. What this indicator suggests at the level it's at currently and in the context of a bear market phase, is that negative shocks or re-ignition of bearish angst can send prices sharply lower and quickly. That tends to be a characteristic of 'overbought' periods.

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

The technical picture for the S&P 100 (OEX) Index is virtually identical to the S&P 500; the patterns are pretty much the same but the (price) levels are different. The key OEX resistance is, initially, 648-650; above 650, a next significant resistance is not a whole lot higher, at 662, with further resistance at 668-670.

A close over 648, not reversed (back to the downside) in the following 1-2 days, is a bullish chart plus and at least suggests the potential for tacking on another 12-15 points. I don't see a lot of upside beyond that, at least not in the next couple of weeks. A correction seems likely before OEX would start a climb above 660.

On the downside, I look first to the 21-day moving average and we start the upcoming trading week with this key average around 630. Pivotal next support is at 610. On the bullish side, the chart pattern is such that it could support a climb still higher: OEX's chart pattern looks like a big 'V' shaped bottom and even that the index might be near a breakout above the right shoulder of a Head and Shoulder's bottom formation. That's the rub, OEX could go higher but resistance ahead is also such that there's risk of a trend reversal.

If there's a further breakout and extension of this current move, it will do it without me holding much in the way of calls. I tend to stay in until the risk of a further move OR a reversal looks about 50/50. I don't like 50/50 projections for trading, a ratio no better than a coin toss. In the believe it or not department, successful traders are not 'gamblers' the way someone is at the roulette table.

SENTIMENT:
It's hard to imply that there will be a SIZABLE extension of the current advance with bullish sentiment jumping to the peak seen last week per the 'CPRATIO' portion of the OEX chart above.

The difference between someone who trades more 'technically' and others is that the former trader gets increasing CAUTIOUS (not bullish) in their outlook as prices get back to key chart areas that marked a significant 'breakdown' point before or areas where there remains likely 'unfulfilled' selling interest. Breakdown points are just that: the market 'broke down' and usually suddenly and most likely leaving a significant supply of stock that would have been offered for sale if buying had held up in that area for a longer period. A return to this same area often brings in renewed selling.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) is knocking on the doorstep now of its key resistance around 13000. INDU once more leads the way higher on this most recent rally and has the most bullish chart currently. INDU has already retraced an amount that nears the key 62 percent fibonacci retracement. Rallies that move beyond a 62 percent to 66% retracement suggests that the index or stock has potential to realize a move that equals a return (of 100%) back to re-test the peak of the prior downswing; in the case of INDU that's a few hundred points higher, as doubtful as that seems in the current bearish environment.

I'd be surprised to see a sustained advance above Dow 13000, but not shocked. There is the broad bullish 'rounding bottom' type pattern that I've highlighted on the chart below. Such rounding formations, when they're a valid predictor pattern, will also mark areas of support on pullbacks to the projected circular line, so it becomes another chart aspect I look at also.

Back to resistance interpretations: 13000 is the key area, extending to 13050. If INDU started climbing over 13050 and maintained mostly closes that were above this level, further upside potential will continue to look good, with the caveat that INDU would be moving toward an overbought condition on a daily chart basis as can be projected by where the 13-day RSI is now, versus tacking on say another 200 points.

Pivotal near support is 12590, at the 21-day average. There were two consecutive closes below this key average at the recent lows, violating the rule of thumb that would suggest that meant more downside would follow. However, 'rules of thumb' are also rules made to be 'broken'; more like guidelines than laws of stock market behavior which are few indeed. Below the 21-day average, key chart support looks like 12270, extending to the 12200-12197 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Like the S&P, the Nasdaq Composite (COMP) Index has retraced about 50% of its last big decline. I could have measured from the 2735 peak that came a bit before the late-December top at 2727, but the retracement amounts are quite close and it was a bit of an arbitrary choice. The down trendline I've highlighted intersects with the 2727 top and connects to this past Thursday's intraday high. We'll see if this trendline, showing current resistance around 2438, proves to be a stopper for the current advance.

If upside momentum is renewed, which would be suggested by a breakout close above 2438-2440 resistance in COMP, then the index would appear to have upside potential to as much as 2500-2505. I don't currently anticipate that COMP can break out above what I see as key resistance at 2505 and extending to 2535. I'm doubtful that the index will manage to pierce the down trendline highlighted on the daily COMP chart below but we should see soon the answer to that question.

On the downside, what looks like the first area of technical support is at the low end of the recent upside price gap and in the area of the 21-day average, at 2348-2351. Next lower support can be anticipated at the prior downswing lows in the 2260 area.

It's not a major 'non-confirmation' at this point, but the RSI (see above) is not keeping pace with COMP's move to a new relative high, consistent with slowing upside momentum.

NASDAQ 100 (NDX) DAILY CHART:

Reflecting the same technical pattern, the Nasdaq 100 (NDX) Index may be hitting resistance implied by an extension of the (2-point) trendline to the area of recent closing highs, per the chart highlight below and implying current resistance in the area of this past
Friday's close or a bit under that even, at 1915. Next technical resistance above recent highs is anticipated to come in around 1959, on up to 1982, as implied by the two retracement levels noted on the daily chart below.

I wrote last week that "a close over 1930 would be bullish"; this didn't happen of course and I am revising that number downward a bit, to say that an ability for NDX to maintain closes above 1915 on Monday-Tuesday and beyond in the coming week will preserve a bullish chart. Some technical considerations suggest that selling pressure may pick up with NDX trading above 1900, but below 1925-1940. A rally above 1940, especially on a closing basis, would suggest that upside momentum was renewing itself, sidelining some selling, with potential then for NDX to tack on another 20 to as much as 40 points.

The first key technical support comes at 1850, and even more pivotal support next down in the 1776 area, at the last downswing low.

I hate to give you one of these 'could go up, could go down' kind of outlooks, but that's the way of it from my vantage point. And as I said earlier in my comments, I don't like staying long calls when I'm at a 50/50 juncture. Maybe, I can stand a little heat in the kitchen and stay with a light call position, respecting the prior upside momentum and figuring buying may overcome selling interest for another spurt. However, the further upside for NDX does look limited.

If there was a conclusive sign of a top, buying puts would be a choice, but I'm only cautious about the further upside and that doesn't translate yet into actually seeing a reversal type pattern; e.g., a 'key (downside) reversal' such as would occur on a move to new high, followed by a close under the prior day's low.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

We can accurately duplicate a similar down trendline on the Nasdaq 100 tracking stock (QQQQ) daily chart and look for it to act as the same potential 'stopping' point; in the case of QQQQ, this trendline intersects at Friday's closing level of 47.15. Conversely, breaking out above this trendline suggests further upside potential, such as to 48.1 to 48.7, resistance implied by the 62-66 percent retracement levels.

Something that the QQQQ chart adds to the puzzle of what lies ahead is that we can measure volume patterns in addition to price; volume picked up on the Thursday temporary trendline breakout, suggesting that there are buyers ready and able to come in on a technical type breakout. With the fundamental market backdrop already known to be dreary and fairly well discounted already, technical factors can still move the market, contrary to the seemingly unrelenting bearish fundamental backdrop. The important On Balance Volume (OBV) trend still is pointing up.

Near support begins at 46 and extends down to 45.4, at the 21-day moving average. The pivotal technical next support level comes in at 43.7, at the prior downswing low.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) continues to mark time and march in place. Resistance or selling interest has been consistently seen in the 720-724 zone and hasn't changed. Above key technical resistance at 724, we've got a next level only a few points higher, at 730-731. A close over 731 would be mildly bullish and suggest potential for the index to challenge additional and possibly tough, resistance anticipated at 740, extending to around 746-747.

On the bullish side, the recent consolidation low was in the 700 area, which held a bit above the 685 support that developed at the prior reaction low and they haven't sold this group of stocks down much, at least not yet. If they can't take it (RUT) down, they may still take it up. Major support remains well below current levels: 650 to 644.

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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