Option Investor
Index Wrap

KEY TEST AHEAD

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THE BOTTOM LINE :

I wrote last week on some different ways of measuring what I think is a very tough resistance overhang to this market and the different ways that this can be measured technically. Add to what I talked about last time is now a recent resurgence of bullish sentiment, which in my experience is too much to suggest that we're going to see the major indexes punch through resistance.

I'll review in the individual stock index commentaries specifics on the various technical means of measuring technical resistance I wrote about last weekend as implied by:

1. The upper end of downtrend price channels as seen on my charts.

2. The 55-day moving averages. I look at the 55-day, a fibonacci number, but this average is very close to the more 'typical' 50-day average.

3. 13-day Relative Strength Index (RSI) levels that are nearing areas that have preceded tradable tops in the last few months.

4. Non-confirmation of volume as there's yet to be a strong volume surge to match the relative price buoyancy of the past 3 weeks.

In addition to these foregoing technical considerations, bullish sentiment as measured by my indicator, rose substantially in the past week, which isn't generally a prelude to another up leg.

I would also caution against a dogmatic viewpoint however as a breakout above the downtrend channels and above the 50/55-day moving averages that is sustained is also not something to 'fight' by stubbornly staying in or initiating new long put positions or other bearish strategies. Because a trend development is surprising doesn't make the market 'wrong' so to speak, just that there may be some turn of events ahead that isn't apparent now; e.g., an economic bottoming and upturn sooner than current estimates.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Key near resistance in the S&P 500 (SPX) is at the down trendline, intersecting currently around 889 and at the prior line of (up) swing highs around 918. 'Resistance' is also suggested by the 21-day moving average just over recent highs and by the level of the 55-day average which lies in the same area as the down trendline.

A decisive upside penetration of the 889 to 918 price zone that is sustained beyond a day or two would be bullish and suggests a further move higher. Fairly major resistance is anticipated in the 1000 area.

A zone of nearby technical support highlighted on the daily SPX chart below is between 850 and 815. A close below 815 would suggest potential for a retest of the prior low around 740 or perhaps even for a new down leg to as low as 600. However, on the long-term weekly charts, there appears to be substantial support at 800 on a weekly closing basis.

Rather than a big new down leg it seems more likely that on a substantial decline, support will be found in the 740 area, with rebound potential after.

[Image 1]

I'm continuing to keep an eye on the 13-day RSI seen above. The RSI has gotten close to the area where prior rallies in recent months have subsequently faltered or reversed.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index is getting close to resistance implied by the down trendline intersecting around 430/431 currently which is also resistance implied by the 55-day average. Before this level is reached, OEX would have to punch through the 21-day moving average, currently at 423. Above the 430 area resistance, implied by the prior upswing high, is at 445. A close above 445, not reversed in the following trading session, would be bullish and suggest potential back up to the 483 to 495 area.

A zone of support is noted on the OEX daily chart below at 396-410. A close below 396 would be bearish and if not reversed (back to the upside) the following day would suggest a fall to the prior low around 360, or perhaps to as low as the lower end of the downtrend channel. However, a decline back to the 360 area should again see substantial buying interest coming in.

[Image 2]

MARKET SENTIMENT:

Bullish sentiment, as seen on my 'CPRATIO' indicator above, shot up recently to levels at the red dashed line at 1.7 that suggest another decline is coming on a contrary opinion basis. The timing suggested for such a downturn to begin is probably not longer than by mid-week, although it could occur in the week after, when volume picks up.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I won't repeat the same things on the bearish significance of the downtrend channel in the Dow 30 Average (INDU), just that it's the same as in the S&P indexes. Key resistance in INDU is between 8606 (21-day average) and 8683 (55-day) to 8700 at the down trendline. A close above 8700 that was more than a 1-day affair would suggest a bullish breakout. Next resistance in that case is at 9000, the area of prior highs as noted at the red down arrow. Above 9000 there's clear sailing as far as prior highs, until the 9650 area.

Near support is at 8350 down to 8145. If 8145 is pierced on a closing basis, there's no potential technical support based on prior intraday lows until INDU gets down to the 7500-7450 area.

[Image 3]

I'd again make the point that the recent rally high put the INDU 13-day RSI seen above into an 'overbought' area in terms of what's been 'typical' for the period shown on the lower indicator portion of the daily INDU chart above.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Key nearby technical resistance in the Nasdaq Composite Index (COMP) is the same as last week; i.e., at 1600. A close above 1600 would be bullish, especially if buying interest/support developed on subsequent pullbacks to this area. Next resistance as far as chart points is seen at the prior 1786 high.

Near-term support is in the 1500 area, then down at 1400 and is unchanged from last week. I'd repeat my assessment that a close below 1400 would imply renewed downside momentum with next potential support at the prior lows around 1300.

[Image 4]

NASDAQ 100 (NDX) DAILY CHART:

Friday's close at 1185 saw the index just a hair's breath from resistance at the 21-day moving average, standing at 1187 currently. The Nasdaq 100 (NDX) would break out above its downtrend channel with a move above 1220, resistance implied both by the down trendline and the 55-day average. Like the S&P and Dow, NDX is nearing key or pivotal technical resistance.

I see it as unlikely that NDX will achieve a sustained advance above 1200-1220, but if it does there's another key test not far above, at prior highs in the 1250 area. Above 1250, next chart resistance is suggested by the prior 1383 high.

Nearby technical support is in the 1157 area, then at 1091. A close below 1090 that lasted more than 1-2 days, suggests renewed downside momentum and a potential re-test of prior lows in the area of the 11/21 intraday low at 1018.8

[Image 5]

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Key resistance in the Nasdaq 100 tracking stock (QQQQ) is at 30/30.5. A close above 30.0 to 30.5, especially for more than a a day, would suggest renewed upside momentum and a next potential upside in the stock to the 34 area.

Near support is at 28.5, then down in the 26.8 area and lastly at the prior low for the current decline at 25 even.

Volume continues to contract which is not surprising for the recent holiday period. However, in the New Year, a bullish upside price breakout above 30-30.5 not ALSO accompanied by a volume surge would be suspect as to such a rally's staying power.

[Image 6]

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) seems to be on the verge of piercing resistance at 481, at its 55-day average. If it can do so and sustain such a move, upside potential is suggested to as high as the 550 area, at its prior high and the upper end of its broad downtrend channel.

It seems unlikely that RUT will lead a rally and achieve a new up leg, with a 'breakout' type move in RUT likely only if the major indexes also see further rallies ahead. So far, the key (55-day) moving average has been a 'stopper' to rally attempts. Stay tuned on what develops in the New Year!

Key near support is at 440, then 416 and lastly at the prior low for the Sept-Nov decline, at 371.

[Image 7]

I tend to measure overbought/oversold levels with RUT on a longer 21-day basis, rather than 13 as seen above. The 21-day RSI is at a more or less neutral reading, suggesting neither an overbought or oversold condition.



GOOD TRADING SUCCESS & HAPPY NEW YEAR!!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of red down arrows.

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 (i.e., 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.

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