Option Investor
Index Trader

Index Trader

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Will They or Wont They

THE BOTTOM LINE:
Will or won't Congress pass the proposed monster rescue package? The big question in the season for political football! I find it difficult to say based on a technical read as to where the major indexes are going next. They look like they are 'basing' more or less in the area of the July lows and that the major indexes might not piece their September lows, but the reality is also that the market has been in a downtrend since highs were made a year ago. The S&P 500 (SPX) has now fallen under its 2006 closing low at 1236; the S&P 100 (OEX) closed a scant 2 points under 567, its prior closing weekly double bottom low from 2006 and July '08. Still holding above their 2006 closing lows are the Dow 30 and the two Nasdaq indexes.

In terms of how oversold this market is, it's getting there on a long-term weekly chart basis but isn't quite at such extremes all around and especially is not when viewed on the daily charts. As far as the market timing indicators I rely on, trader sentiment got to a bullish 'overbought' extreme on the sharp run up into a week ago this past Friday. I warned last weekend that this looked bearish and I exited index calls bought on that strong Thursday-Friday rebound. I didn't start out to be such a short-term trader but the inflated expectations looked unrealistic and that the sharp bounce had much to do with short covering.

Assuming there is a Congressional agreement hammered out this weekend or fairly soon in the coming week, based on the charts, it looks basically sideways after that; maybe there's one more shot down to retest recent lows. In fact, without an agreement, there's probably just one more significant sell off ahead also. In that case, it's a tossup whether recent lows hold or not.

The bullish case given a settlement deal is I think at most for a rebound back to the 1300 area or to the 'line' of its August highs in SPX, but probably not to more than 2350-2370 in the Composite, which would be well under its August peak (at 2452).

QUESTIONS/COMMENTS:
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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) index rebound from under 1150 to the 1265 area met resistance implied by the low end of the prior trading range. The rally looked unsustainable given the rapid rise and a short-term overbought extreme but especially by the major jump in bullishness I mention above (and you'll see vividly on my sentiment indicator displayed along with the S&P 100 chart coming up). Sure enough, it was downhill again on Monday.

Another decline to the 1150 area is my most bearish outlook currently. If SPX manages to show renewed upside momentum by closing above its 21-day moving average (currently at 1231.8) and then above 1265, a rally could extend to at or near 1300 again and is my most bullish expectation at present. I suspect SPX is going to be confined to a trading range in this uncertain period and don't see any sustained up leg setting up.

I've noted support at 1180, then in the 1150 area or a bit under; e.g., at the prior 1133 intraday low. Another shot down could pull the RSI to an oversold extreme again, which is more typical of intermediate-term bottoms.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart remains within its bearish downtrend channel at about midrange between 525 and the low end of this channel and 610, at the upper trend channel line. Near resistance is at the 21-day average at 569 currently with next resistance at 583, 595, then at 600-604.

Near support is at 545, then at 530, extending to the prior intraday low at 523. Below support in the 520 area, major support comes in around 485. I anticipate a trading range affair ahead between perhaps 530 on the downside and upside resistance at 583, which extends to 590-595.

Bullish sentiment appears too high to suggest that OEX will mount any sustained advance. The index would need to close above 600 for more than a single day to suggest a bullish chart breakout above the price range I've projected.

DOW 30 (INDU) AVERAGE; DAILY CHART

Not much change in the key support/resistance levels and the chart overview for the Dow 30 Average (INDU), except that we've now seen a low (at 10459) that touched the bottom end of a broad downtrend channel dating back many months. The rebound off that technical support didn't get up beyond the 21-day moving average except as a 1-day affair. I believe that the low end of the channel will continue to 'define' support, so we have an idea of the parameters of support. Near resistance continues to be seen in the area of the declining moving average.

I've noted support at 10800, then in the 10600 area. Resistance comes in around 11200, then up at 11500.

A tough period to trade DJX index options on an outright basis, given the sideways trading range pattern INDU has been in. There was an opportunity in puts with entry made after the repeated failure to break out above 11800 OR on the break below up trendline support in early-Sept, with exit on the sell off to the 10500 area at the lower channel line. For nimble traders, a call buying opportunity also came on the decline to and under 10500, especially sweet if a profit was grabbed on the rapid rebound to 11400.

The price swings have been fast and furious and quickness has been called for in the aforementioned trades. The safest course looks like staying out of buying calls or puts and to utilize strategies that take advantage of a range-bound trade. I calculate that the Dow is going to be locked in such a range for a while yet. A bailout may supply a short-term pop, but unknown is how far to a bottom in earnings needed to propel a sustained rally.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite Index (COMP) remains bearish in its pattern. The latest decline has now equaled the extent of the decline seen in its prior downswing from May high to July low. Such a 'measured move' objective could mean that the recent intraday low at 2070 may be an interim, if not 'final', low for the current move.

Support has developed in the 2150 area, but rallies have been anemic so far. Lower support is at 2100, extending to the prior recent low at 2070. Near resistance is at 2200, with a next resistance implied by the declining 21-day average, currently at 2240. The prior rally high at 2318 has to be assumed to offer resistance again, with further resistance estimated for the 2350 area.

I have no solid conviction about what how the next significant COMP move will unfold. The chart and some indicators suggest potential for another rally. The last rebound showed the potential for an oversold rebound even though short-lived, after price action traced out a classic key upside reversal. While the trend remains down and prices may drift sideways to a bit lower, I don't look for a big further decline.

NASDAQ 100 (NDX) DAILY CHART:

The most bullish thing that can be said about the Nasdaq 100 chart pattern is that the Index has gotten to the low end of its downtrend channel and may have limited downside risk from here. Perhaps a move to the 1600 area, but that's about the most bearish projection I have currently. 1650 looks like a very near support. I'm anticipating looking to buy NDX calls again if the index fell again to the low-1600 area, setting an exit point if the index fell to 1580 and with a minimum objective to 1750 once more.

I estimate very near resistance as being in the 1700 area, then as noted by the red down arrows, at 1750, then at 1775; a close above this prior swing high would be bullish on at least a short-term basis, suggesting further upside potential perhaps to as high as 1850. (If so, I'd be a buyer of the October 1850 puts.)

I don't have a similar projected target on the downside if NDX were to break below 1600. Major support implied by the 2006 lows lies in the 1450 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

This dog won't hunt! The Nas 100 tracking stock (QQQQ) has had short-lived rallies with buying interest quickly fading and the bears back in control. Near support is at 40, with next lower support suggested by the low end of my highlighted downtrend channel at 39.25.

Near resistance is at what was prior support at 42, next resistance implied by the 21-day average at 42.9 and then at 43.8, at the prior recent intraday high.

If short, any advice from me to cover would be contrary to the trend. When I've thought that there is not much further downside potential, prices keep sliding lower. Ah, the beauty of being short stock versus long puts sometimes, as there's no erosion of premium! If I give up on picking a bottom, can a rally be far away!?

The spikes in daily trading volume in QQQQ have continued to come on the declines, suggesting continued liquidation and which keeps the volume pattern concurring with bearish price action. A sizable volume surge on a further big upside move would be encouraging for the bulls and suggest new buyers coming in, not just buying by those short the stock.

RUSSELL 2000 (RUT) DAILY CHART:

You know the old saying about 'location, location, location' in real estate. With the Russell 2000 (RUT), it's 'trading range, trading range, trading range'. RUT has slid to 675, not yet to the line of prior lows around 652-650, but another decline to this area remains a possibility.

Recent price action suggests again that RUT may stay confined to the 100+ point range of recent months. A close above 720 would suggest some upside momentum, but such a move might only lead to another rebound to the low-760 area followed by another period of price weakness. I've noted near support at Friday's low at 691, then at the recent 675 low.

If there were another decline to the 650 area, I'd be a buyer of calls, risking to 640 and with trading objective to 753.

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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