THE BOTTOM LINE:

The technical/chart definition for at least an interim reversal of an uptrend is when the prior downswing low is pierced on a closing basis; this should be more than a 1-day affair also. On that basis the current bullish chart patterns for the S&P and Nasdaq are intact.

There were two hourly Nasdaq 100 (NDX) trading systems that I was studying and wrote about last week as an introductory 'bottom line' commentary to my prior week's Index Wrap. I won't go into the underlying parameters and explanations as this can be found in my last Trader's Corner article (9/1/09) by going to the OIN Home page, clicking on the "Trader's Corner" tap at top and scrolling down.

What I was mining in these hourly chart strategy studies for the nearly 3 past years of history I have currently was an added clue as to any trend reversal that might have been underway and also related to my thinking to do an NDX put trade. I did that trade but took profits on puts and got net long in QQQQ when there was both a second 'buy signal' and then a breakout above a line formation that I've noted on my two 'charts of the week'; i.e., ones I don’t usually feature as part of my ongoing weekly commentaries.

As I don't trade 'mechanically' I took the bullish signal that was generated by the QQQQ RSI Long-Short strategy or 'system' rather than stubbornly staying with the puts I had. The chart formation was the tip off as it usually is for me. Pattern trumps indicators and trading 'systems' for me. Even though I like a 'systems' approach as an objective tool.

The NDX trading system or strategy relies on more of an EXTREME developing in the lower RSI 'oversold' value and that's probably not going to happen in the current bullish climate. Even though my bullish/bearish sentiment has shown a high bullish extreme in recent days and weeks, that is also not uncommon in a strong bullish cycle. Traders can get bullish and then buy every dip for many weeks. In a trading range market we can rely more on the overbought extremes in both the RSI and Sentiment, assuming that the chart pattern also confirms a tradable top.

CHARTS OF THE WEEK:

There was a second buy indication for my QQQQ trade strategy on the 11:30 hourly close for QQQQ on 9/2 (Wed.), as noted at the second green up arrow on the hourly chart below.

For trading systems purposes a buy or short position of 100 shares is indicated for each buy/sell signal in the same direction. After a subsequent confirming chart breakout above the top end of a 17 hour (9/1-9/3) trading range the Q's had a nice run and then mirroring the underlying NDX hourly chart, formed a bull flag which is usually a consolidation pattern about midway in a move. (Flag patterns are relatively short-lived and cover only a few bars typically.)

A further upside breakout above the top end of the flag looks like it will follow and the overall formation suggests a 'minimum' upside objective back up the prior 41.1 QQQQ high.

The slower tracking trading system that 'tested' the best in terms of the NDX index itself is seen in my next hourly chart below. A buy signal on this 'system' is only triggered if the 21-hour NDX RSI gets to a low 'oversold' extreme and then flips up. The RSI in this case as to dip below 31 (versus only '39' in the QQQQ). The NDX test results is based on a data set (history) that is small relative to the best test results for an indicator-based system. As this strategy tested as having even more profitable results than the QQQQ system parameters over my nearly 3 prior years of hourly history I am continuing to evaluate it with interest.

Someone following this system strictly 'mechanically' would have taken 3 put positions in total. There is a problem applying such a system to index options trading in that it doesn't account for the erosion of time premiums and being well out of the money at an expiration(s).

To strictly follow this system with index options would require rolling up to a higher strike on expiration in order to stay positioned in puts and would be an added 'cost' and loss that is hard to measure with the trade system software I'm using currently. I haven't tried to refine this trade strategy to this extent and trade it in real time and am looking at the RSI-related strategy more as another technical input. (The system applied to a position in the QQQQ stock is another story and doesn't have the same drawbacks; e.g., erosion of time premiums, options expiring worthless, etc.)

Bottom line, as with the QQQQ, the NDX hourly chart looks bullish and an upside breakout of the small bull flag suggests a potential further move up to re-test the prior high around 1668.

I will cover the S&P, Dow and RUT in my regular weekly commentaries below.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains bullish in its pattern as the recent downswing low at 992 held above the prior 978 swing low. Moreover, by Friday of this past week SPX closed back above its prior line of resistance at 1015.

A next key test on the upside in the upcoming shortened trading week is at the prior rally peak at 1039. A move above 1039 with support on dips at or above 992 will suggest a continued move to new highs, perhaps to 1085 or higher as an objective for a next up leg.

TRADER SENTIMENT:

Bullish, bullish and bullish. Trader sentiment as seen above is not backing off much from the expectation that this market is going still higher. Trader sentiment will eventually be 'too' bullish to be sustained. Somewhere in the September to October period is often a time for a downside correction, sometimes a wicked one.

I don't think much of a pullback is imminent, but a second, or even third, spike in my sentiment indicator into 'extreme bullish' territory will suggest that the market is getting close to a bigger shakeout then the bulls are dreaming of currently. Right now they're in a 'fearless' mode. Eventually the market shakes up everyone's bet on a 'sure thing' trend.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart remains bullish for the same reasons as noted with big brother SPX. The key chart points now to maintain a bullish chart, are for OEX to pierce its prior high at 483 on a closing basis and to hold above its recent low at 462; absent that, to hold above the PRIOR OEX 455 downswing low. A close under 455 would be bearish.

Fairly major support begins in the 443 to 436 area. Major resistance can be anticipated at 500-505 currently.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart of the Dow 30 (INDU) is tracking the S&P in its bullish pattern; e.g., an ability to rebound from a higher level than the prior downswing low. The key overhead test is at the prior line of highs in the 9648 area, call it 9650. Fairly major resistance can be expected in the 10000 area.

The key near support is 9250-9255, with fairly major support expected in the 9000 region. Whether INDU, and the S&P indexes for that matter, will get oversold again in the near term is hard to predict. I think we can more safely predict that the indexes will get oversold again in the fall period, but this may be in October. Right now, given the bullish run and bullish chart pattern we're seeing, I'm not paying a lot of attention to the RSI and other overbought/oversold type indicators.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) index has been of course lagging the S&P somewhat for a change. It's not surprising if the indicators are now more positive for an overall economic recovery. The S&P stocks would then get more play and value would be seen there relative to earnings expectations in a recovery scenario.

Support is now assumed to lie in the area of the recent 1958 downswing low, then around 1930, with major support in the 1900 region.

Near resistance is at the prior rally peak at 2059, with my next projected resistance in the 2123 area. Fairly major resistance can be anticipated up around 2250 currently.

Bullish sentiment is high among options traders, making me a bit nervous in staying very heavily in calls, but sentiment will probably stay high unless the prior two lows are pierced.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart remains bullish. I had some caveats about that last week, but the NDX low at 1585 that held ABOVE its prior swing low at 1563, which was followed by a strong rebound and has kept a bullish chart intact.

Upside follow above the recent 1668 high would be a next bullish development. If this occurs, I've noted a next possible resistance up around 1728. Eventually, NDX looks like it may be headed to 1800 in a next up leg, relative to the recent low.

Near support is now assumed to lie at 1585 and below this level, at the prior 1563 downswing low. Only a decisive downside penetration of this prior low would turn the chart bearish and suggest a possible re-test of the 1500 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has of course the same bullish pattern and recent chart action as the underlying NDX index.

Volume is very unimpressive in terms of being quite low on the recent rebound and looks like it was driven significantly by short covering. Be that as it may, the On Balance Volume (OBV) indicator continues to trend higher so I tend to discount the low volume aspects of this most recent rally.

In a regular stock, low volume rallies are somewhat 'suspect' technically and doesn't provide a confirming volume indication for price action.

Near QQQQ resistance: 41.1

Next overhead resistance: 42.5

Near QQQQ support: 39.5

Next support: 38.5

Key next support: 37.25-36.85

RUSSELL 2000 (RUT) DAILY CHART:

If the Nasdaq is struggling some recently, the Russell 2000 (RUT) is as much or bit more so. However, the chart remains bullish in its pattern as the most recent 552 low held above the prior 547 low. Not a LOT of difference but the key thing is that we continue to have higher lows on corrections and maintain that 'stair-step' effect.

I've noted potential next resistance at 580 and then at 590, extending to the 599-600 area.

Key near support is at 552 extending to 547, with next support around 540 in the area of the moving average shown. A close below the 55-day moving average for more than an isolated day tends to suggest some further downside. I assume major support for the low end of the uptrend channel, intersecting around 516 currently, but rising gradually over time to 520 and above.

GOOD TRADING SUCCESS!



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 bullish 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 tend to 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.