THE BOTTOM LINE:
As to the technical aspects of a bottom, besides being extremely oversold now on a long-term basis, trader sentiment is quite bearish. Ah, traders have a genius for finally getting bearish when most of a decline is usually over with!
Options traders have a different problem from stock jocks in that the short-term swings are still capable of being volatile and in a leveraged situation price entry is more critical, and tricky. Hey, we could have given some better advice to those bankers! If we could be sure that the market would continue to have large price swings however, select straddles could be a play. But the fireworks may be over for now.
Index calls seem attractive if bought around recent lows, but how much upside is there; e.g., low-1400 area on a buy of NDX around 1200 as I answered in my Thursday "Trader's Corner" article. Also, bull spreads as attractive? If prices continue falling, what about bear spreads? All kinds of questions on how to make a buck or two in this current market.
It looks to me like prices will stabilize, although I can't carry a high degree of certitude on this. A stable sideways movement would be favorable for selling puts.
A lot of questions and you are more in need of answers! I am sitting on the sidelines mostly and that's MY answer and there is a place for that. It's called preserving trading capital in a period of uncertainty. I did buy some November NDX calls when the index got down to 1200 and formed a second low in that area. What the heck, if tech isn't a wreck, Nasdaq should rebound some.
I bought some Ford, stock and options, given the decline to around $2! I don't usually buy into devastated stocks but the big 2 ought to survive and our political leaders will prop them up while they re-tool. If F doesn't survive then I haven't lost much or much sleep over such a cheap stock. Maybe it's my Michigan roots, but I like some of the cute newer (and smaller) Chevy products and the Volt is a sexy concept.
Time to shop for bargains. Also in the words of the Oracle of Omaha, be fearful when everyone is greedy and greedy when everyone is fearful. Fits MY contrarian philosophy!
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) remains bearish in its overall pattern, but selling has begun to dry up and with some buying coming in around recent lows, especially on the dips below 900. Initial support is at 875-890, with highlighted support at 850 on the chart, then at 800 and a longer term support.
I thought that a bottom would be seen when the 13-day RSI also finally got 'fully' oversold and guess what, it finally did, as RSI dipped below 25. I noted last time that: "In a market of 'extremes', EVERYTHING (all indicators) will get extreme. I can't point to an exact principle at work here, just something that experience suggests to me." Hey, you learn something as you get older, but I'm no Warren Buffet either.
Key overhead resistance is at 1000, extending up to around 1040 with other key resistances at the 21-day moving average (1073 currently) and then at the recent 'breakdown' point at 1100.
S&P 100 (OEX) INDEX; DAILY CHART
I wrote in my Thursday Trader's Corner article not to look for "V" type bottoms in this kind of market, but the S&P 100 (OEX) initially at least could be forming one. How OEX fares on rally attempts above 470-480 will better tell the story if this recent bottom could be a V-type pattern or if there will be a sideways trend and a 'rolling' type bottom.
Major tops are usually of the rolling variety and bear market bottoms as well. It seems we have a long way to go before the economy rebounds and doubtful stocks are going to get ahead of economics for a while. But we're talking HERE of potential in OEX to climb (claw?) back up to 500-520, based on this first bottom in OEX.
Support has been seen in the 420 to 440 areas recently, with major support at 400. Near resistance is at 480, then in the low-500 area and with probably tough resistance beginning around 520.
A bullish technical aspect is provided by the recent bearish extremes in my sentiment indicator seen above, with my 'CPRATIO' dipping below 1.1 to 1. The low 5-day CPRATIO reading shows a substantial increase in total put volume in equities relative to calls.
DOW 30 (INDU) AVERAGE; DAILY CHART
It helped some when Dow Jones took AIG out of the Dow 30 Average (INDU) as replacement Kraft Foods (KFT) held relatively steady, more or less holding its support in the $28 area. INDU in turn held 8000, then next developed support around 8200 and rebounded a 1000 points from there. Not a bad move for those who bought the DJX calls on the retreat to 80 and/or collected most of the premium by selling the Nov 82 puts.
Of course when the Dow got to 8000, it wasn't hard to imagine it going to 7500; but, there's where the extreme oversold RSI extreme helps in keeping things in perspective.
Near INDU support comes in around 8500, then can be expected at 8200, next at 8000, with major support beginning at 7500. Near resistance is at 9500, then at 9800 and with probable tough resistance at 10000. I doubt that INDU can break out above 10000 or will break below 8000; outside possibility: a 10500 to 7500 price range.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) chart remains bearish. The question is whether we have seen a temporary bottom, one that will be re-tested later, or even exceeded substantially later on.
A 66% or 2/3rds retracement, the importance of which I emphasize a lot, is 1690; i.e., as a retracement of the October 2002 to November 2007 multiyear advance. We end this past week with COMP above this key retracement level and it speaks to the possibility that this recent sell off, although very steep of course, is not going to retrace all the back to the 2002 lows or anything close to it. Stay tuned on this!
I've noted support on the chart at 1600, with next support around 1550-1545, then major support at 1500.
Near resistance is at 1800, then around 1845 and with what may prove to be tough resistance starting at 1900 and extending to 1945.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) remains bearish in its pattern, but also very oversold, especially on a long-term weekly chart basis (not shown). NDX is the only major index where I can still project a downtrend channel, giving some further ideas of potential 'support' and 'resistance'. 1200 is a definite support that developed recently. Next likely support is in the 1140 area, down to 1100 even.
Near resistance is at 1425, then at the top end of the downside price gap at 1470 as highlighted on the daily NDX chart below. Major resistance begins at 1600.
I bought some NDX calls on the successful re-test of 1200 based on the idea that an exit at 1180 made it a low risk trade in 'normal' market circumstances. At entry, I assumed that the index could rebound again back up into the gap area or to around 1500 even. That trade still looks ok. I'd be interested in buying puts if the 1600 area was reached. Buying calls or puts at what could or should be 'extremes' is my sole favored trade entry on an outright basis.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The pattern and trade strategy for the Nas 100 tracking stock (QQQQ) is the same as outlined for the underlying NDX index.
Buying the second low in the 31 area looked like a place to cover shorts and exit puts, and to buy the stock for the adventurous. Risk at on the last dip below 31.0 was in my mind to 30 even and that's where I suggested sell stop protection; my suggested exiting sell stop is still at 30 even. I think the upside potential for the Q's is back to 36-36.5 or a bit higher, such as to resistance at 37; my most bullish target currently is to 39.5-40.0.
On the downside, there's certainly potential for a slide back to the 30.5 area or perhaps to 30. Given how oversold NDX is, I don't see big potential however for a new down 'leg' below 30.
RUSSELL 2000 (RUT) DAILY CHART:
Support did end up holding in the Russell 2000 (RUT) in the 470 area again this past week and I've highlighted support at 470-485 in RUT. Resistance is seen at 570 and then very strong resistance I think at the prior 'line' of support in the 650 area.
I think there's potential for a further rebound in the Russell to the 570 area and higher, such as to 600 or a bit higher. Support begins in the 500-505 area and extends to 470 as mentioned and then to 450; major support is at 400 currently.
GOOD TRADING SUCCESS! and...BE CAREFUL OUT THERE!!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
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.