Option Investor
Index Trader

Rally Can Continue, But...

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THE BOTTOM LINE:

The recent rally looks like it can continue, speaking in terms of the chart patterns seen on the major indexes, including the Russell 2000 (RUT). The 'but' modifier in my title relates to a couple of technical aspects that call into question whether we won't see a another bottom LATER ON, either testing prior lows or possibly exceeding them.

As to whether recent lows could have been a major bottom, it's not a question we have to speculate a whole lot on as option traders. The sustaining power of this rally IS something that holders of index calls, and I have some, DO need to assess and I think the market can work still higher.

The two questionable aspects I had about the recent lows refers to the fact that:

1.) The Nasdaq indexes and tech stocks, the key to the continuation of the current rebound, didn't see the contraction in Advancing volume, which I find to nearly always occur at intermediate-term bottoms; e.g., bottoms where there's potential for a gain of 350 to 500 points or more in the Nasdaq Composite, as opposed to say 150-200 points. For more on my Nasdaq Advancing Volume 'indicator' reading at the recent low, versus two other key indicators I rely on, see my Thursday Trader's Corner piece by clicking here.

2.) The extreme bearishness usually seen at a major low, when the S&P 500 (SPX) got down to 1200, was seen, but just barely and briefly. It's not a precise rule of thumb, but given the extreme trouble the economy is facing, I anticipated a heavier move into puts at the time, relative to call volume. On this recent rally, trader sentiment got a little 'too' bullish too soon I thought and sure enough the market got slammed again on this past Thursday.

Moving on, I don't want to overemphasize my background feelings about the recent low, as not every bottom is the same in terms of fundamental OR technical factors. The market looks headed higher still, but I'm not betting the ranch on it. I'm in for trade and still long some calls.

"DEAD LETTER BOX" or E-MAILS NOT ANSWERED!

You'll recall seeing in both this, my Index Trader and in my (Thursday) "Trader's Corner", the following:
"QUESTIONS/COMMENTS:
You can e-mail me with any questions or comments at Click here to email Leigh Stevens support@optioninvestor.com Please put "Leigh Stevens" in the Subject line."

NOT! I'm sorry to say, as our support desk didn't 'get the memo' so to speak as to my updated e-mail address (to use in forwarding any Subscriber mail to me) since my move back from California over a year ago!! Except for the few who had my direct e-mail, there were zero mails coming in from Option Investor.com sources and I did wonder about that....but never checked up on it with our support desk. My bad!

So sorry for any and all who may have written something to me for answer or response and never heard back. Getting e-mails is important to me also as to future topics so I suffered the consequences also. FROM THIS POINT ON HOWEVER, THE COMMUNICATIONS SNAFU WITH ME HAS BEEN CORRECTED.

MARKET NEWS and INFLUENCES:
Other index and sector closes, recaps of market influences like earnings, company news, related market events, government reports and activities, etc. are found in the Option Investor 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The recent rally in the S&P 500 (SPX) Index is not setting the world on fire, but who would think that bullishly in this downtrodden economy. Near resistance and selling interest was seen in the 1290 area. Key technical resistance next comes in around 1312 as highlighted on the SPX chart below. Pivotal next resistance begins around 1350 and extends to 1370,which is about the best upside potential I see currently.

Pivotal near support is in the 1260 area. There is not a lot of chart support below 1260 until the 1200 level is reached. I noted last week about 1200 being a 'natural' support area, which could be 'the' bottom for a while if not a 'final' low, but my crystal ball is hazy on this window into the market future. Support below 1200 is at 1170.

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

As anticipated, the S&P 100 (OEX) Index broke out above pivotal resistance implied by the 21-day average and staged a substantial, but short-lived, further advance. The pullback was then back to key near support implied by the 21-day moving average. If OEX closes, at least for more than an isolated day, under its 21-day average (currently at 577), I'd anticipate a fall back to the 560 area again.

Conversely, on the bullish side of things, I see potential for OEX to climb back and retest the area of recent highs around 595, with some potential then for a further advance to the 608-609 area. Next resistance looks like 620, with fairly major resistance beginning at 640.

Below 560, I've envisioned support at a downtrend channel line that intersects at 553, and falls lower from there over the days and weeks ahead.

Bullish 'sentiment' did take a hit on the recent pullback, but not all that much yet. Traders see some potential for a turn of the economic corner; this I get from talking to a few. I'm not so sure just yet!

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) also looks like it has some further upside potential in what I see in its chart, especially if INDU can hold above its 21-day average which I've noted as near support at the green up arrow. Fairly major support begins in the 11000 area, and extends to 10850-10825.

I see potential for the Dow to rally again to retest resistance implied by the key supply overhang beginning at 11732, with next potential to 12000, perhaps to 12250-12300 ultimately.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

If the Nasdaq Composite (COMP) Index continues to hold above 2300 on a closing basis, its suggests that the index is headed still higher, possibly into a new up 'leg' with potential to 2425 or higher. Near resistance is at 2250.

Key near support is in the 2250-2253 area, with lower technical support anticipated 2223, with fairly major support coming in at 2200.

NASDAQ 100 (NDX) DAILY CHART:

Unless the Nasdaq 100 (NDX) Index starts falling below 1800, especially on a closing basis, the chart pattern looks like it's in a recovery mode and will retrace still more of its prior early June to mid-July decline. The true test for NDX's rally potential lies in the index's ability to climb above pivotal resistance in the 1870 area, also on a closing basis and for more than an isolated day.

So far NDX has been mostly holding above near support implied by its 21-day moving average, currently at 1832. You'll notice that the "moving average envelope" indicator has made it back onto this chart. Relative to the 21-day moving average, the upper line is set at an NDX value that is 5% above that day's (21-day) average and the lower line floats 5% under the average. Normally, the Nasdaq has a tendency to trade about 5% above and 5% below this key average; the S&P envelope values tend to range from 3 to 4%.

The wrinkle as to predicting a top or bottom just because the index trades in at the upper band or lower line is that advances and declines can climb or fall in the area of this line for some period of time. A value of the envelope lines comes into play at a transitional phases or shift in trend (or in a 'trading range' market) when their use gives another take on possible support and resistance.

Resistance above 1870 coves in around 1900 and extends up to the 1945 area. Support is anticipated in the 1780 area, next around 1760 and then down in the 1720 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is holding above its 21-day average at 45 currently, which is bullish for a possible test of an important 'line' of resistance at 46; next resistance then comes in around 47 and above 47, there's resistance at 47.85-48.

A close above 46.0 that lasts beyond that day is a key test here for the bulls. On Balance Volume (OBV) continues to climb, which suggests that some accumulation is going on. Daily volume is still light however.

The Q's should find support in the 44 area, with next support assumed to lie at the prior 43.3 low and if that level is exceeded, the stock could fall to the 42.30 area.

I continue to see potential for QQQQ to advance to the 47 area.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 Index (RUT) was struggling some last week hold above its 55-day moving average, a 'length' setting and also a fibonacci number following after 21 and 34 in the fibonacci sequence, that tends to show whether RUT (depending on whether it's closing above or below this average) is in an up or down trend.

I'd say the same thing this week, as last, that a close above 717-720, not reversed the next day, suggesting further upside potential back to the 740 area or a bit higher. RUT might get back to the 760 area but if it did, the index would look more like a sale than that RUT was going to see a new up leg.

Near support is down in the 680 area, with next support at 660, then at 647, a key support implied by the mid-month intraday 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.
 

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