THE BOTTOM LINE : The market in terms of the lead S&P 500 (SPX) index has now retraced a little over a quarter or 25% of its last downswing; i.e., the decline dating from the mid-August high to the recent (11/21) low. A bottom may have been signaled when SPX held key support at 800 (and its July-October '02 lows at 793) on a closing basis.
A bullish development that I wrote about recently was seen in the high level of bearishness ahead of recent lows. Beside this key contrarian technical and psychological type indicator, I've been writing for a while now about the potentially bullish falling wedge pattern, which has now been pierced on the upside.
The falling wedge formation is rare, but tends to be quite reliable as a predictor when you see it in the indices and in individual stocks. The pattern is that of a downward price trend bounded by two intersecting down-sloping trendlines. The two trendlines can be quite steep and will intersect when projected out into the future.
Since I didn't write my usual Trader's Corner article on Thursday, I will pen one tomorrow (Sunday) on the WEDGE chart pattern and go into this one in detail; there is also the bearish rising wedge. The revamped and much improved Option Investor wed site now allows its contributors to update at any time and send a special e-mail to subscribers as well without being dependent on an HTML editor. Hooray!
I would caution that this bullish chart breakout that I'm describing has to be viewed in the context that the move above the declining bearish down trendline was on the truncated low volume Friday session. These patterns don't always of course work out in the expected direction or have the upside follow through that is an average; e.g., a further 20 to 30 percent, even a 40%, rise from the breakout point at the trendline.
Stay tuned on this analysis of upside potential and stay cautious, especially as traders got quite bullish at the beginning of this past week. This economy has got a long way to go to recover even though there's the historical tendency for the market to bottom several months ahead of an actual upturn.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:Key near resistance is at 900, 915-917 then 1000-1007 in the S&P 500 (SPX) as noted on the daily chart below. SPX managed a close above its 21-day moving average which is a bullish plus but this was also seen at the last upswing high when the index reached 1007.
Support is evident in the 800 area then is suggested by the prior recent low at 741. Major support is still anticipated on a fall to the 700 area.
I noted last week that: "The only bullish (chart) pattern potential is still seen in the falling wedge formation which can suggest potential for an upside breakout move ahead, especially as prices get nearer to the apex of that falling wedge-type triangle."
We got the beginnings of the breakout move by the end of the past week but a key test lies ahead as to what upside follow develops if any. Important also is to what degree prices pull back; a shallow correction maintains bullish potential such as for a move back up to the 1000 area.
S&P 100 (OEX) INDEX; DAILY CHART
I also noted last week that "What keeps me off the short side overly much at this point is suggested by my call/put indicator seen in conjunction with the S&P 100 (OEX) daily chart below; more on this below the chart."
Given the oversold condition I wrote about last week, it wasn't a stroke of genius to look for rebound potential from a new low at the lower trendline. OEX didn't fall to support anticipated at 350 or anyway near 300 major support. I've noted support around 350 at the trendline, but there's the prior 361 low as support also; higher support comes in around 387.
Immediate resistance is at 440, then comes in around 456; pivotal resistance has to be seen at the prior upswing high at 483, extending then to 495-500.
SENTIMENT: As I wrote above, trader sentiment shot up to the 'overbought'/high bullishness level seen on the CPRATIO graph above early in the past week. This cautions me that this rally might not be sustained after what is already a pretty good (25%) rebound.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Key resistance in the Dow 30 Average (INDU) is in the 8920 to 9000 area, then at 9160, with fairly major resistance coming in at 9615-9630.
I wrote last time that "...I thought that 'major' support was at 75 in terms of DJX and I covered some remaining DJX puts there and again took a small plunge into Dow Index calls on that dip below 7500 in INDU where I had an alert set. Stay tuned on this trade!"
Well, so far that Dow Index (DJX) call buy is looking pretty good and I've raised my exiting 'stop' out point to 79.5 in terms of the Dow Index. I did take exit some of those calls on the move up into the low-8500 area in INDU.
Major support is at 7450-7500, with significant technical support around 8000, and above that at 8185-8200.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) is lagging on the upside; COMP hasn't yet pierced its 21-day average at 1558, but did manage to pop up above the upper down trendline. Next resistance above 1558-1600 is at 1680-1700. Fairly major resistance is suggested at the prior rally high at 1786; call 1786 to 1700 as major next resistance.
Support is at 1425, then at 1380, 1295 and at 1240.
I did go into the wedge pattern some last week as I described the formation as having several alternating 'touches' to the upper and lower down trendlines, which was also seen in COMP. I projected a breakout move on an advance above 1500. Now the question is how much upside follow through there is. 1700, maybe 1800, is an upside possibility, especially if COMP doesn't fall back below 1450.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has resistance at 1200 to 1212 that needs to be overcome to suggest a next upside move to 1280 and perhaps back up the 1380 area again.
Technical support is at 1085-1115, then around 1020 and suggested down at the lower trendline at 970.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
I noted last week that I covered "some remaining shorts in QQQQ as it got to 25 which triggered a buy at market, also putting me net long a little." Wish I had bought MORE...but like everyone no doubt I often think that if the trade goes my way!
Near resistance in QQQQ is at the 29.9-30.0, then at 32 and finally at 34 which is a very pivotal level if the Q's get up there again.
Technical support is at 26.7, then at 25 and lastly in the low-24 area as suggested by the lower trendline.
I'd say the same as last week that "A close above 30, not reversed the next day would be bullish." Stay tuned on that!
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) remains within a bearish downtrend channel, but has had a good-sized rebound off its last low which better defined that line.
The key test regarding further bullish potential is what happens on a move into the 492-500 area assuming RUT gets there. A close above 500 not reversed the following day would suggest potential to re-test next resistance in the 550 area.
Support is at 420-427, then at 400 and at the prior low in the 370 area.
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, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
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 favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.