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Index Wrap

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THE BOTTOM LINE:
I quoted in my most recent Trader's Corner article (Option Investor Daily of Thursday 5/8) a mutual fund manager, John Hussman, when he stated recently that: "Investors really have no sense of market dynamics if they believe that a recession-linked bear market comprises a single decline of less than 20% followed by a 'V' shaped rebound into a new bull market."

There is something more to prove for a bullish case, even though 'V' and similar 'W' type bottom patterns may look convincing as to the market having put in a 'final' low. That 'something' is the ability of the major indexes to achieve an advance that goes beyond the 62 to 66% retracements of the last down leg.

An ability to re-test the December highs is crucial to the question of whether the rebound from mid-March is #1, a counter-trend move that is still remands within an overall primary bear trend or #2, is a resumption of a primary bull market; i.e., 'primary' trend here refers to the major or multimonth trend direction.

Retracements of prior moves, up or down, tend to no longer be just 'retracements' once they've exceeded a fibonacci 62-66% of the prior price swing. They began to look a recovery move instead and a resumption of the prior dominant trend.

As far as trading strategy, a resumption of the recently stalled advance needs to occur to justify sticking with index calls. Absent that, it's time to go back to buying puts.

Moreover, given the recent 'overbought' readings on a daily chart basis, risk of a sideways to lower move looks greater than the possibility that the market will continue moving up. Stock prices may have had as much of a recovery as they're going to, until market participants see what happens next as far as signs of an economic recovery.

Regarding the long-term trend, I find it interesting that there are two quite contradictory weekly chart patterns within the S&P, which I'll show here, then move on to an analysis of the daily charts for the various indexes.

I hope that I can overcome my recent jet lag on my trip back to my old haunts in London long enough to see this analysis through today. I can tell you from this side of the pond that they are NOT lowering interest rates over here. They know they have an inflation problem, unlike the fiction maintained by the sort of 'rigged' (?) CPI numbers in the States. Anyone buying milk, bread and gasoline knows that we have an inflation problem!

LONG-TERM PATTERNS

BULLISH CONSIDERATIONS FOR THE LONG-TERM SPX CHART:
The recent weekly closing low in the S&P 500 (SPX) chart formed the 3rd point of a long-term up trendline as seen at the green up arrow below. There's another aspect to the long-term charts of course, which is the fact that weekly closing highs made in the 1550 area formed a top relative to the 2000 price peaks. However, my focus is on the multiyear up trendline here. Time will tell of course as to whether SPX can hold above 1300 and maintain itself within a long-term UPTREND.

BEARISH CONSIDERATIONS FOR THE LONG-TERM OEX CHART:
I put considerable stock in trendline breaks where prices come back to a previously broken up trendline, which now acts as or 'becomes' resistance. A Wall Street mentor of mine, Michael Jenkins, used to call such a (previously pierced) trendline, the "kiss of death trendline". This chart consideration gives us another 'benchmark' so to speak with the S&P 100 (OEX), which is whether OEX can climb above 660 on a weekly closing basis and get back within its uptrend channel.

The green arrows on the OEX weekly chart below are highlighting the 2nd and 3rd weekly closing lows forming a 'conclusive' up trendline, followed by a rebound back to that support line highlighted by the red down arrow, suggesting a price area (around 660) that may now act as stubborn technical resistance.

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:

Since the 6-week old rally has stalled in the area of the key fibonacci 62% retracement at 1423 in the S&P 500 (SPX), as highlighted on the SPX daily chart below, it's clear to me anyway that we're at a key juncture. Faltering momentum is suggested by the recent retreat in prices to the area of the 21-day moving average, a key near-term support. However, there's yet to be a close below this average. Stay tuned on that!

Near and quite critical resistance is at 1423, on up to 1435. A close above 1435, provided that the index then held this area on subsequent pullbacks, would maintain a bullish chart.

Near support implied by the 21-day average is at 1383 and then in the area of the last (down) swing low around 1324.

If the index mostly drifted sideways for a time and continued to 'throw off' an overbought RSI reading that way and resisted much of a further decline, this would also maintain bullish chart potential.

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

There's not a lot more to say about the S&P 100 (OEX) Index in terms of its chart and indicator patterns, than that related to its S&P 500 big brother (big sister?) index. Key OEX resistance is at 655, at the 62% retracement and it would take a close above this level not reversed in the following day(s) to suggest that the index was poised to go higher, such as back to the 700 area.

661, representing what would be a 66% or 2/3rds retracement (as measured from the 12/26 high at 700, versus the 711 high of 12/11) is another 'benchmark' resistance and dovetails with potential long-term chart resistance I wrote about in my initial 'bottom line' commentary. To round out some other technical considerations, 662 to 668 could also be interpreted as the key resistance zone. A weekly close above either of these numbers, especially the later, would maintain a bullish chart pattern.

Support implied by the 21-day moving average is at 638 currently, with lower support implied by the prior 609-610 downswing lows.

MARKET 'SENTIMENT':
A bullish outlook continued to get more pronounced recently with the rally but never got 'extreme', reflecting a (not surprising) cautious attitude about the trend ahead. Bullish sentiment declined into the week just ended but, again, nothing extreme was seen. If the market keeps slipping then this picture should change and bullish sentiment continue to fall. Currently, I would assess my sentiment indicator as neutral.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) hasn't yet been able to take out 13066 resistance implied by the 66% retracement level, and the Average ended the week slightly under key near support at 12768, at its 21-day moving average. Next and even more critical technical support is at the prior 12270 and 12176 lows.

Short-term momentum has reversed lower and I would anticipate this continuing, but I will be watching as to whether INDU continues falling below the key 21-day average versus popping back up above my key trading average. If so the index could trend sideways to higher rather than down further. It should be an interesting week ahead.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index just about reached the key 62% retracement level and then pulled back some; not a lot, but the fact that COMP has retreated some from the 2500 area could be suggesting that the rally in tech stocks has run its course. It just all depends on the whether the index can close above 2500 and then more or less maintain the 2500 level from which to mount a new up 'leg'. This is likely to be a tall order to pull off.

Key technical resistance is in the 2500-2508 area, then at 2536.

Near support is in the 2350 area; it's not noted on the COMP daily chart below, but this level is the low end of the upside price gap from 4/17-4/18. Upside chart gaps tend to act as support on subsequent pullbacks. The next and quite key lower technical support is at the prior bottom at 2257-2266.

NASDAQ 100 (NDX) DAILY CHART:

The chart here, somewhat more than all the other major indexes, remains bullish in its pattern. The question, along with the other major indexes, is whether the Nas 100 can continue to overcome key resistances.

By adjusting the point at which the decline begins to the 12/11 price peak, I arrived at 1985 as being the pivotal 2/3rds (66%) retracement level, which the Nasdaq 100 (NDX) Index has not been able to overcome on any sustained basis.

If NDX managed a weekly close above the psychologically important 2000 level, I'd consider that the index had ultimate potential to retest highs in the 2150 area. I should mention also the top end of the early-January downside chart 'gap' area, at 2040, as potential resistance that NDX would reach beforehand.

Near support is in the 1910 area at the 21-day moving average. A next key technical support is at 1850, where the upside gap from 4/17-4/18 would get 'filled in' and where substantial buying interest could surface.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The pause in the rally could be consolidation, prior to the Nasdaq 100 tracking stock (QQQQ) working still higher; my suspicion that this may not happen is, again, the fact that once the Q's got up into a price zone that corresponded to the 62 to 66% retracement levels, prices have been churning around. If this continues it's suggestive of a top.

Right now it's hard to tell which direction the stock is going based on the price pattern alone. A close over 48.7 not reversed in the next 1-2 days after that, is bullish and suggests a possible move to the $50 area next. Resistance is at 48.7, 49.6 and 50.15.

The continued low volume and (slightly) declining On Balance Volume (OBV) line suggests a less than robust market; a 'robust' market would be one driven higher by greater and greater buying interest coming in. This hasn't been the case with QQQQ for awhile.

Near support is at 46.8, with next technical support in the 45.7 area.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) didn't make any further upside progress this past week in working above the prior 731 top. The chart looks most like that of a well-defined trading range market between 730, perhaps 740, on the upside and the 650 area on the downside.

I'd be surprised to see a close over 740, resistance implied by a fibonacci 62% retracement. Since I've been 'surprised' (by the market) before, I also should note that if 740 was exceeded on the upside and the index then didn't trade back down much under this level, I'd have to consider that there was ultimate upside potential in RUT back up the 800 area.

No change in what I thought from a week ago as I continue to estimate near support for the 700 area in the RUT, with next lower support coming in around 685, at the prior downswing low.

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