Option Investor
Index Trader

Minor Correction

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THE BOTTOM LINE:

The slowing advance of week before last led to a minor pullback correction this past week. However, there was no downside penetration of chart support and the Dow made an approximate double bottom relative to its lows of early August. The only penetration of what I consider to be a technical support was the S&P and Dow closing for 3 days running under their 21-day moving averages.

However, as I think I've stressed a number of times, the pivotal chart action is provided by what's happening with the lead Nasdaq indexes. And on this front, the Nasdaq Composite (COMP) only dipped very slightly under the key 21-day average and only intraday and then rebounded. The Nasdaq Composite only TOUCHED its average intraday and this appeared to be the 'signal' for the start of a strong 2-day rally.

Recent highs have yet to be re-tested and there may be more corrective action to come, perhaps with it being more sideways than lower, which would also serve to 'throw off' the overbought condition reached by the strong rally into the mid-March highs. All in all, I remain bullish on the prospects for the Nasdaq indexes at least to challenge their May-June highs.

To temper a solely bullish anticipation and forecast here, I would also note that there is significant technical resistance in the 1956-1966 area in the Nas 100; this view is suggested by closing prices having reached into the 62 to 66 percent retracement zone AND by resistance implied by the weekly chart down trendline (not shown). Pivotal for the bulls is how NDX fares on a return to key resistance at 1956-1966.

QUESTIONS/COMMENTS:
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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) chart remains bullish on a short to intermediate-term basis (a 2-3 day to 2-3 week outlook) and mixed to bearish still on a long-term weekly chart basis; i.e., on a 2-3 month horizon.

A close above 1300 for two or more days running is needed to suggest that SPX was headed into a second up 'leg'. On the recent pullback SPX held a line of support in the low 1260 area, which was also the area of the bottom made back in March.

Near support is in the 1277 area, then around 1262-1263, with next support coming in at 1246-1250.

Near resistance is apparent in the 1300 to 1310 area; next I assume that 1320, representing a one-half/50% retracement of the mid-May to mid-July decline, will provide some further resistance. 1350 begins major resistance in my estimation.

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

One notable aspect to the S&P 100 (OEX) daily chart is the strong resistance overhang in the 608-609 area suggested by the mid-April lows. The 608-610 area marked the 'breakdown' point in June and selling interest may return on a move back to this area and this was seen once already at the 8/11 spike high in this area. Above 610, resistance/selling interest should next be found around 620. Major resistance begins at 640.

As suggested last week, in a common refrain from me, more than a 1-day close below the 21-day average suggests some likelihood for a further downside break. When a technical support is pierced, it's ALSO important to see what happens after that. In this case for 3 days after the break below the average, OEX didn't sell off much and found repeated support in the low-1260 area. Analysis of the 60-minute bar chart clearly showed 'basing' action and once the 21-hour RSI or Relative Strength Index moved down toward a short-term oversold reading, there was another surge of buying.

I also wrote last week that I didn't think there was lot of upside potential in the near-term. From here I wouldn't be surprised to see a rally that carried back into the 600 to 610 zone, struggle to achieve much headway after that. However, if a second advance developed that was equal to the distance covered in the first advance or first 'leg', OEX could get to 640 at a minimum.

MARKET 'SENTIMENT'
It was interesting and insightful to see that at the recent market low, my sentiment indicator shown above, got quite close to an 'oversold' level indicating extreme bearishness.

As I point out from time to time, presenting my sentiment model ON the OEX chart above doesn't mean that this indicator relates mostly or just to the S&P 100 group of stocks. My "CPRATIO" relates to the market overall and tends to be predictive, at extremes, for trend reversals for the market as a whole. Whichever market or market segment that is leading the market will be the one to play for the strongest move however.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Like the S&P 100, the Dow 30 (INDU) also was unable to climb above its line of price resistance or 'supply' line at its prior major March low in the 11700 area. In late-June it was predictable that there was a sharp sell off the day this level was broken; a 'breakdown' point in technical analysis terms. Not surprisingly also, the rally to the prior breakdown point two weeks back was met with substantial selling. Fund managers remember wanting to sell more stock then they could reasonably manage without wholesale 'dumping' when INDU had its rapid late-June break below 11700.

With the late-week rebound INDU looks like it could be headed right back to the 11700 area. Given this past week's support found on the pullback to prior lows in the 11300 area with a corresponding minor double bottom, it suggests INDU could make it through this key resistance this time. The question is also whether there'll be more backing and filling in the 11500-11700 range FIRST and more basing action for awhile.

Pivotal resistance especially on a closing basis, is in the 11700-11850 area. Two consecutive days' close above 11730 would put the chart back on a bullish track. Key next resistance then is at 11950-12000.

Near support is highlighted below at the INDU 21-day moving average, currently at 11479; next chart support is back down in the 11300 area. A close below 11290, not reversed (back to the upside) the next day would be a bearish development.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) completed a relatively minor pullback to the pivotal 21-day daily average and then rebounded strongly this past week; such price action presents a classical bullish pattern for one of the major indexes. If COMP follows through on this bullish pattern, the index will rally again to the area of the upper trading band at 5% above the 21-day average, suggesting a possible next move to the 2500 area and above. Ultimately of course, the anticipation will be that the Composite will re-test it's prior high, in this case the 2550 minor double top of May-June.

Immediate overhead resistance will be at 2460-2485 and then at 2510, on up to what may be tough resistance around 2550. While it's possible that COMP is building another intermediate-term top, the index also remains in a long-term uptrend, although the index has been floundering around some at the LOW end of its broad uptrend channel dating back to the October 2002 low. Until long-term technical support is pierced, the existing major trend is considered to be intact.

Near support is highlighted below at 2373, at the 21-day moving average, with next lower support at 2300.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 Index (NDX) has traded quite predictably in technical/chart terms. The March-June rally retraced 2/3rds of the multimonth decline from late-October last year into March of this year, then began a strong and prolonged rally into early-June. This was followed by substantial sell off that ended up retracing 66% of that advance, into the lows of early-July to early-August. Beautiful TRENDS; ones you could get on board and stay with. Less trading decisions means a longer life I'm convinced!

The Nasdaq 100 (NDX) chart will remain bullish as long as the 'line' of prior highs in the 1870 area is not pierced. This most recent decline reversed in bullish fashion from its 21-day moving average. Near NDX support is at 1892, then around 1870-1871. Major support is in the 1800 area.

Near-term overhead resistance is in the 1970 area, then at 1993 to 2000. A daily close over 2000, not reversed the next day would keep the bullish pattern going strongly and suggest that NDX will re-test its prior highs in the 2050 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) rebounded bullishly from its 21-day average and I continue to peg the average as near support, currently at 46.3. Near resistance begins in the 48.25 area and extends up to 49. A close over 49.0, not reversed the next day, would suggest potential for the Q's to work back to the area of prior highs in he 50.5 area.

Near support as mentioned is at 46.3, with next support well below this, around 44.25.

Daily QQQQ trading volume declined on the last pullback as you see above and which makes the volume pattern consistent with a bullish price chart, since volume will typically decline on a sell off and expand on a rally in a bullish period.

Of course, if you look at daily volume graphed above, the end of the week rally brought NO corresponding jump in volume. We'll see how it unfolds but, as commented on before in recent weeks, I've begun taking the relatively low volume during rally phases as reflecting LOW bullish expectations; in a contrarian sense this may be reinforcing the idea that QQQQ will continue to move higher.

RUSSELL 2000 (RUT) DAILY CHART:

On the recent decline the Russell 2000 (RUT) held above the top end of its prior consolidation, suggesting that resistance (once penetrated) had 'become' support. The chart will retain bullish potential ASSUMING that the 763 double top is exceeded at some point, otherwise it's a double top and bearish. However, if the 763 area is pierced, this could lead to an eventual re-test of prior highs in the 800 area.

RUT has support at 720, then 712 and at 700. Near resistance is at 740, then pivotal resistance as mentioned, is in the 760 area.

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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