Option Investor
Index Trader

Limited Upside, Limited Downside?

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THE BOTTOM LINE:
The Nasdaq Composite (COMP) could have bottomed this past week. By this past Tuesday, the 3 key indicators that I rely on to be in synch got down to the extremes associated historically with high-potential bottoms. These 3 indicators, that of the 10-day Nasdaq Up volume average, the 13-day RSI and my 'sentiment' indicator, are seen on my first chart. What is lacking is the same type 'line up' on the S&P side, but more on that later.

In the ABOVE daily COMP chart, the RSI indicator didn't get quite to (or under) its typical 'oversold' 30 reading but it fell quite close to that level. In terms of price action, which is also a major determinant of whether there's a trend reversal that's developed (or developing), recent lows haven't quite retested the prior COMP double bottom low at 2170, but that's not an expected thing necessarily. In fact, triple bottoms are not all that common. My other thought is that given the extreme stresses in the economy, a bottom may not form quickly this time. A period of sideways 'basing' action could still lie ahead. On balance, there are more signs of a short to intermediate-term bottom at this juncture than not.

In the S&P, the key indicator that didn't get to an extreme and then turn up was the RSI, as seen on the chart BELOW of the S&P 500 (SPX). The NYSE daily up volume total for the New York Stock Exchange, on a 10-day moving average basis, turned bullish with the turn up in the average seen below. My sentiment indicator is the same one used for both SPX and COMP. The RSI didn't get to the 'usual' extreme associated with high-potential bottoms. The S&P therefore presents a somewhat more mixed picture based on the indicator patterns I normally see at significant lows. However, in chart terms there is an approximate double bottom in place.

Bottom line: time to at least cover puts in the S&P and NDX, especially on dips; NDX calls look attractive also on dips, especially to 1700 and under (e.g., to the 1680 area), with exiting stops at 1650.

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.

QUESTIONS/COMMENTS:
Please e-mail me with any comments or questions at Click here to email Leigh Stevens support@optioninvestor.com and put "Leigh Stevens" in the Subject line. We have straightened out past months' problems where e-mails were not getting to me from OI Daily Subscribers.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bearish in its pattern in terms of it building a top in August after a limited rally, followed by further sharp declines. There is the possibility that a double bottom low has or is forming in the area of the July bottom. The index could get more oversold before it's in a position to mount a sustained rebound with enough upside potential to make calls attractive.

Support was seen this past week in the 1220 area and a bit under; major support begins at 1200. First anticipated technical resistance is the 21-day average, which was 1268 as of Friday. 1280 is a next resistance, with 1300 the beginnings of major resistance.

I noted last week that I thought SPX downside might be limited, no re-test of 1200 and more chopping around. "The chart most suggests a trading range market still, only now between the low-1200 area and 1300 on the upside." This is still my view.

SPX's ability to climb and stay above about its 21-day average should signal an ability for some further upside progress. I don't see big downside potential left in puts. Maybe buying calls was worthwhile on dips to/under 1220 but I'm leary of being caught in a lengthily sideways move.

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

The S&P 100 (OEX) continues to hold above the lowest intraday lows of the July bottom and the chart is neutral in the sense of the index being currently locked in a trading range between 550-560 on the downside to 600-608 on the upside. If trading for 30 points price swings is attractive, there have been some opportunities, given good execution.

Near resistance is 585-590, with pivotal resistance in the 600 area. Near support is in the low-560 area, with pivotal support at 550.

I thought last week that OEX would get down toward 560 again and rallies stopped right at the 21-day moving average which also wasn't surprising in a yo-yo market like this. A daily and especially weekly close below 567 creates a still weaker looking chart.

I also wrote last time that a close above 580 would be a cause to exit puts but there was no upside follow-through that followed. A close or better two such closes, above the 21-day average is a better sign of a possible reversal move. I've been on the trading sidelines in this choppy period.

MARKET 'SENTIMENT'
As I noted in my initial 'bottom line' commentary, this past week (Tuesday) finally brought enough of a surge in equities put volume to create an oversold extreme in terms of a bearish extreme in trader sentiment. This may be an indication that the market is at or near at least a short-term bottom. Given enough uncertainty on the outlook for the market and for earnings, such sentiment extremes can come again or a few times, before the market sets up for a substantial rebound.

DOW 30 (INDU) AVERAGE; DAILY CHART

The Dow 30 (INDU) is neutral to bearish in its chart pattern. Neutral in that its going sideways and still bearish in the absence of an upside breakout move.

Resistance/selling interest is coming in on moves up to the 21-day average, typical of a trading range affair with a bearish bias. Next resistance above the average is on rallies toward 11800. Support has been found on dips to the low 11100 area. Major support begins at 10800.

With this sideways type move, there's little percentage in buying Dow Index puts or calls, only in strategies involving the capture and erosion of time premiums.

Many of the 30 Dow stocks are quite oversold on a long-term basis and while a re-test of 10800 could happen, I don't see much lower downside risk currently. A close above 11800, not reversed the next day (back to the downside), is needed to suggest a possible upside breakout.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

In a switch, the Nasdaq Composite (COMP) has had a bearish chart pattern, as it's been in steep slide with anemic rallies, while the S&P and Dow are holding up relatively well. 2200 is again proving to be an area of support; next lower support and buying interest since March has come in on (short-lived) dips to the 2170 to 2160 zone.

Maybe there's limited downside from here, but upside potential may be limited also at least for awhile. I've noted resistance at 2300, with next resistance at 2350. The chart pattern suggests a sideways to lower, backing and filling period ahead, perhaps for another week or two. Resistance at 2300-2320 may cap any rally attempts in the coming week.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 Index (NDX) looks like it's a bit in no man's land as the index took out its July lows but hasn't re-tested its March bottom. A rebound to above 1800 that isn't a short-lived day only affair is needed to suggest that the index may have seen its low for the recent downswing.

Near support is in the low-1700 area. A further sell off back to 1670-1680 where there was prior good buying support back in March would suggest a possible major double bottom and present a good buying opportunity in calls. Too obvious to come true? Maybe, but every so often it's just like that.

If you have puts and have been riding this decline, the oversold condition recently suggested by the RSI reading below 30, was a signal to take the money and run. It's a bearish trend but a flattening out sideways move will spell the end to further profit potential.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I've noted support in the 42 area in the Nasdaq 100 tracking stock (QQQQ) with next support around 41. Near resistance is at 44, then up in the 45.75 area.

My own trading recap: I covered stock I was short on the first decline to the 44 area, which looks to have been too soon of course in retrospect, but that was my objective and I was happy with the gains I had.

Turning around and getting long half of what I covered wasn't my best trading decision ever. Stock I bought on the first decline to the 44 area, got kicked out on a 42.5 sell stop. I guessed that support would again be found in the 44 area like occurred in July but selling kicked up instead and kicked me OUT. Better to have risked 75 points only as once QQQQ fell under the line of support seen in July, it was look out below.

There should be a substantial buying opportunity on a successful retest of lows in the 41 area. Will there be enough sellers in an oversold market to push the Q's this low again? I won't hold my breath waiting for that but 41 would be a measured move objective where the two down legs would equal out.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) Index continues to hold up well and support has been coming in between the area of its 55-day moving average and 700, which I thought might be the case. Still, I'm impressed with the relative strength being seen in small to mid-cap stocks. But stock money has to go somewhere and this sector has been a perennial favorite with many individual investors.

RUT has now retraced a little less than half of its last advance and that's a good performance in this market. 700 remains a key or pivotal support, especially on a closing basis. Next lower support is in the 680 area.

740 is near resistance, then 750-755 and of course the prior high around 763.

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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