Option Investor
Index Trader

Advance Slows, Stays Intact

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THE BOTTOM LINE:

The advance slowed this past week but continues in both markets. There's quite a divergence of course between the two markets, the NYSE and the NASDAQ and it's hard to make generalities anymore about 'the' market. I remain bullish on the Nasdaq and Russell 2000 and mildly bullish on the S&P. The major trends are well illustrated by the S&P versus Nasdaq long-term weekly charts.

The S&P has managed to hold the major bottom of June-July 2006, per the S&P 500 (SPX) chart below. SPX would have to manage an upside penetration above 1360 in the coming week to start to break out to the upside on this chart. The major trend is still down, but a possible long-term double bottom is in place. SPX is no longer oversold and is approaching a neutral 8-week RSI reading.

The Nasdaq Composite (COMP) and the Nas 100 (NDX) present quite different chart pictures. Per the weekly NDX chart below, it's apparent that this index remains within its major uptrend channel; which is also true of COMP (weekly chart not shown). However, NDX is also at a key near-term juncture in that it's come up to a down trendline and needs to close above 1960 to achieve a chart/momentum breakout.

Another big technical milestone would be achieved IF the index managed a weekly close above 2030, or to above its May price peaks on a weekly closing basis.

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FUNDAMENTAL 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 S&P 500 (SPX) is maintaining it's well defined up trendline, thereby keeping the large V type bottom intact. The chart is bullish on a short-term basis, but mixed still on an intermediate-term time frame.

A close above 1350 is needed to suggest that SPX might be on track to challenge a key high at 1400 and then of course the prior May price peak. A long climb is ahead to suggest that a bullish trend was resuming.

Key near-term resistance is at 1320, representing a fibonacci 50% retracement of the May-July decline. It seems doubtful that this level will be exceeded without some corrective action setting in, given an approaching overbought condition suggested by the 13-day RSI. Next key resistance as mentioned is 1350.

Near support comes in around 1275, with next support in the 1250 area.

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

The S&P 100 (OEX) Index has a resistance overhang or 'supply' beginning around 610. A close over 610 and not reversed in the following 1-2 trading days would suggest that OEX could challenge key resistance in the 620-621 area. Major resistance begins around 640.

The current uptrend begins to 'break down' with a close below the 21-day moving average at 588.6, if for more than a day. Next technical support is at 580.

The OEX has had a nice run off its bottom and I don't think there's a lot of upside left on this first leg up, assuming there is a second (up) 'leg' coming.

MARKET 'SENTIMENT'
In terms of sentiment, bullishness is not yet getting extreme as seen with my indicator above and is a plus in terms of the market moving still higher. My bet on further upside resides more with Nasdaq.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) also appears to be struggling to get above, on a closing basis, its prior 'breakdown' point at 11730-11750. The next key technical resistance is at 12000 and represents a one-half retracement of the prior major downswing (May-July). A close above 12000 would be bullish and seems unlikely currently, as the Dow stocks as a group are struggling and most prone to lackluster to poor earnings in coming months.

Near support at the 21-day moving average, is at 11500. The next key lower support is at 11230, extending to 11125. The recent advance in the Dow appears due to the rising tide lifts all boats concept. There is nothing much compelling going on overall with the 30 stocks themselves. I favor buying DJX puts for a trade on a further advance in the Average to the 12000 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) presents a bullish chart pattern and looks like it can re-test its prior highs in the 2550 area. The index is also getting close to an overbought extreme also and is moving higher along the 5% upper envelope resistance line, which is not to say that COMP won't just climb higher hugging this line for a while. 2500 is a next resistance in my estimation.

Near support is at 2400, then at 2350, at the pivotal 21-day moving average. I see nothing in the current chart pattern that would suggest that the index, now this close to its prior top, can't or won't challenge its double top of mid-May/early-June.

I thought last week that COMP probably would hit "stronger technical resistance around 2480". The index did start running into selling in the 2260-2262 area and may start selling off some from there. However, the low-2400 area right now looks like it could provide a support floor to any sell offs.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish in its pattern, but a key test is ahead if the index climbs back to the 1993 area again. NDX traced out a 'rectangle' type bottom; such a sideways 'base' could 'support' a move to retest the prior top in the 2050 area. The 'minimum' upside objective suggested by the rectangle bottom has been met however; i.e., at 1957.

A next higher objective, as highlighted on the chart below, is more subjective, but which I take to be 2050. More 'subjective' as it's based on my rule of thumb that the 'width' of the sideways move suggests a price swing equal to that distance on the UPSIDE. It's subjective in that this is 'Gann' type technique but without the use of a specialized Gann chart. A less esoteric charting concept is simply that a retracement of the amount already seen in NDX, greater than 2/3rds of the prior decline, suggests that the index is likely to go on to re-test it's prior high.

Near NDX support is now up to 1920, with next key lower support around 1870. Buying calls on a pullback to this area, if that much of a decline develops, probably still offers a favorable risk to reward. 'Risk' at that point should be held to 10-15 points in terms of an exiting stop.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has the same potential to test its prior high and mirrors the underlying NDX chart pattern of course. Pivotal near resistance is at 49, then at the prior closing high at 50.55.

Near support is at 47.0, then in the 46 area.

QQQQ continues to see relatively low volume for such a strong move. I've begun taking this volume pattern as reflecting low expectations and, in a contrarian sense, probably bodes well for a continued move higher.

RUSSELL 2000 (RUT) DAILY CHART:

Hey, how about that Russell 2000 Index (RUT)! Back challenging its prior high at 763 no less.

RUT looks like it can next move to a new high although caution is indicated if the index tops at this prior high for some period of time; e.g., 1-2 weeks or more. I've projected possible next, and probably major, resistance at the 'kiss of death' trendline, currently intersecting in the 805 area.

Near support begins at 740, then at 725 and next at 714, at the pivotal (for RUT) 55-day moving average.

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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