THE BOTTOM LINE:

CBOE options traders on Wednesday this past week bought 2.2 times the number of equities calls than puts, which is a very high ratio of daily call volume to put volume. The 5-day (moving average) number for my call-put ratio is as high as it was in late-August. While this prior extreme in bullish sentiment wasn't followed by a major correction there was a 5-day sideways trend that followed, which in turn was followed by a 47 point pullback in the S&P 500 and around a 100 points correction (peak to trough) in the Nasdaq Composite.

CHARTS OF THE WEEK:

The same tendency for corrections is seen when the RSI hits certain extremes. If we look at this in terms of one of the most active index options, that of the Nasdaq 100 (NDX), that's when the 21-hour Relative Strength Index (RSI) gets at or above the 69 to 75 range as seen below. You'll notice the tendency for NDX to level off after hitting this high zone. In a strong rally phase like the current one, RSI declines to the 31 to 38 area have seen strong rallies follow, again in terms of the hourly chart.

I noted in the chart below that the steady climb after the 'confirming' bull flag pattern was very bullish. Actually, not as bullish was when, after that extended rally phase, there was an even greater surge higher. This is sometimes if not often an 'exhaustion' type move, as bullish traders dump their remaining money into bullish strategies. Corrections often follow.

I've been playing around with a trading system that automatically buys after certain low extremes in the hourly RSI in QQQQ and sells after the RSI falls back from certain high extremes in the same indicator. This is noted on my second 'chart of the week' below:

While the chance of a correction increases, I'm not seeing the conditions for more than a minor pullback consistent with the market action since May. On a cyclical basis, October tends to be more the period where I worry about a sharper and deeper correction. The market is now quite overbought on a longer-term basis. A few more weeks of this and some news could well cause traders to rush to all take profits at once.

This is the meaning of 'overbought': a period when most of the money available for buying stock has been committed and where relatively minor stampedes to take profits lead to a sharper than usual drop as there aren't enough new buyers immediately waiting in the wings. I tried to submit my Trader's Corner article on the whole topic of 'overbought/oversold' but had some technical glitches that prevented my publishing it this past week. You will see this piece tomorrow (Sunday) most likely.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is still in a strong move higher since the index pierced its last high in the 1040 area. It looks like it could be headed to the 1100 area or higher next. Working against this kind of further spurt higher in the near-term is the fact that SPX is also quite overbought both in terms of bullish sentiment and relative to the RSI, the aptly named "Relative Strength Index".

Regardless of indicator considerations and as I noted also last week, the chart will maintain its most bullish pattern if it can continue to hold above its prior high in the 1039 area, which is where I've noted initial technical support; i.e., a prior high, once exceeded, tending to 'become' later support.

The next key area of chart support is in the low-1000 area. Pivotal resistance looks to fall in the 1100 area, extending to 1115 currently.

TRADER SENTIMENT:

Another spike higher in trader sentiment in the past week is seen above. Prior such extremes on both a single 1-day basis and in terms of the 5-day moving average of my 'CPRATIO' have led to pullbacks, typically within 1-5 trading days. Stay tuned on this timing. It's not the time that I want to join the large number of bullish traders and start buying more and more calls. I like to buy em when not many want em and then sell to them when they are in a fever for more and more bullish participation.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index has the same bullish pattern as big brother (big sister?) SPX, with key support noted at the prior 483 high. Next lower support is noted below around 472.

As I've written on the OEX daily chart below, relative to prior peaks in the 13-day RSI indicator during this bull market cycle, overbought RSI extremes have not signaled big trend reversals, but have occurred ahead of some relatively long and some relatively short-lived corrections.

The key point is that the RSI peaks have suggested that better index options prices will follow for those that wait for the RSI to get back into what I've defined as a 'neutral' range. This is simply a range that's around the mid point of not 1 to 100, but between 30 (a typical oversold reading) and 70-75 (a typical overbought area). In a strong bull market, it's unusual for the RSI to fall to or near its 'fully' oversold zone.

Key near OEX resistance is suggested in the 500 area. Near support is noted at 480, then at 472-470.

DOW 30 (INDU) AVERAGE; DAILY CHART:

We saw a continued move higher for the Dow 30 (INDU) this past week and consistent with how the 30 stock charts look; as noted last week: ", there are at least 15 Dow stocks in strong up trends, maybe 5 under selling pressure and maybe 10 that are in more or less neutral sideways trends."

The bottoms up approach of looking at the chart patterns of the individual 30 Dow stocks suggests enough underlying INDU strength to propel the average to the 10000 area or a bit higher in the coming month. 10000 is a big deal in terms of the attention that the media talking heads will give to any close at or above this level.

There could be a pullback to the 9650 area before any such move (to 10000) that would 'throw off' the current 'overbought' condition, to be followed by another run that would carry the Dow to the magic 10000. Near support as mentioned is around 9650, with next technical support looking like 9450.

Very pivotal resistance is at 10000, extending to 10225.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) is bullish in its pattern. I've noted the indicator considerations that give me pause in taking on any new positions. I don't go in much for scale up buying in index options, the way I might in a stock.

Key support is suggested around 2059, at the prior high. I didn't note a next lower (green up) support arrow, but the levels I'll be watching is any close below the 21-day moving average currently at 2044, especially if this was more than a 1-day affair. The next pivotal support is at 2018, which would 'fill in' the upside chart gap from 9/4-9/8.

I've noted a first estimated technical resistance at 2165, with major resistance at the extension of the previously broken up trendline which currently intersects in the 2300 area.

Bullish sentiment was relative high among options traders the week before last, but this past week saw a level of bullishness that suggests more 'capitulation' to the 'what me worry' full-speed ahead bull camp.

I'm bullish too, but also try to keep emotions in check. I've been through too many sharp corrections when everyone is convinced there's little risk in being heavily on one side of the market. In bull markets it's true there's often quite lengthily periods of bullish fever. There's a bias to being long and you have plenty of company. There's no free ride forever however. Otherwise too many people would make 'too much' money!

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) continued its surge higher this past week in strong continuation of the move that began soon after the last (down) swing low was seen at 1585. The upside chart gap seen after that low was made (between 1640 and 1643) was the key initial pattern technically to suggest buying calls. Anyone waiting much after that point doesn't have the same 'comfort' level if a correction develops. One (a correction) seems due; e.g., 50 points from the recent 1725 close. As much as price considerations, I'd favor buying NDX calls again if the 13-day RSI gets back down to a neutral reading; e.g., around 45-50.

I've pegged initial technical support at 1668, the area of the prior high on the last rally that preceded this one, with next support not much lower, at 1650.

Near resistance I've calculated at 1760, with even more pivotal resistance up in the 1800 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is bullish in its pattern, but upside momentum has stalled on a short-term basis. This may or may not lead to a pullback but one wouldn't be surprising. Daily trading volume is certainly muted. The On Balance Volume (OBV) line has been trending higher and OBV has been the most important Volume indicator with QQQQ; i.e., as long as OBV is trending HIGHER, this indicator has 'confirmed' the continued bullish price trend.

I've tried to figure why the relatively low volume of late as the stock continues to track higher. My best guess is that this situation is consistent with a somewhat overbought market, in that a lot of the would be buyers are in already and aren’t doing a lot of further buying. If prices crack, then volume jumps on traders taking profits on the stock or money managers lifting some of their buy hedges.

Near QQQQ resistance: 43.0

Next overhead resistance: 44.0

Near QQQQ support: 41.1

Next support: 40.75

Pivotal next support: 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has broken out to both a new high and to above the upper end of the broad uptrend price channel that it's been in for several months. A move ABOVE the rate of change or line of ascent that is hit at succeeding highs over some period of time is a CHANGE that is worth noting as it demonstrates visually that the rate of upside momentum for a stock or index has accelerated.

RUT will continue to show a quite bullish pattern if any near-term pullbacks find support along the trendline that marked those prior highs. Near support therefore comes in around 609-610 currently, with next support noted at 590, at the top of some prior highs. Major support is suggested by the 55-day moving average at 555.

Near resistance is estimated for the 632 area, with next resistance around 653.

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.