THE BOTTOM LINE:

The peak of option trader bullishness on a 5-day moving average basis (per my sentiment indicator) on 9/18 coincided quite closely with the recent top. There was one slightly higher Close in the S&P two days later but it was downhill after that.

Yes, Virginia 'overbought' indicators, including my 'sentiment' indicator, do have a fairly high correlation with tops. The problem is of course, peak prices can continue on and stretch out for further days and weeks so such indicators alone don't tell us how soon a correction might hit; AND, how extensive will the next correction be. However, when put together WITH price action, there is a lot we can reasonably or reliably forecast.

When I got back from my trading hiatus in my old Pacific ocean haunts late this past week, a period when I hardly looked at prices but was fairly confident holding some index puts, I of course updated my charts for my weekly mission to make some sense out of the major index trends. Since the leading market has been Nasdaq, I thought I'd start by dissecting the recent Nasdaq 100 (NDX) trend on an hourly chart basis, absent my sentiment model which I've already alluded to.

CHART OF THE WEEK:

You may recall the NDX hourly chart I featured 2 weeks ago as seen below but NOT updated yet. What I was seeing was a slowing of upside momentum coupled with an overbought hourly RSI (length setting at 21). This suggested to me that we were seeing at least an interim top. Again, the below chart ends on 9/18.

As I noted already, on a DAILY closing basis, the indexes did go on to a higher closing high on one subsequent day but that was it. On the continuation of the hourly NDX chart (through the recent 10/2 Friday close) seen below, the trend definitely looks higher after the 9/18 chart seen above. However, as noted the index was losing momentum in the sense that the up trend was 'flattening' out relative to what it had been.

PRICE patterns that suggest trend reversals coupled with things like the price/RSI divergence I've noted on the chart below, that is price action COUPLED with indicator 'confirmation' are potent in forecasting. I've noted the KEY downside reversal on the hourly NDX chart also. This was seen on the daily chart as well.

A 'key' downside reversal, as opposed to a plain vanilla 'downside reversal', is where prices go to new high, often a decisive one, followed by a collapsing trend and a CLOSE that is below the prior period's LOW. This is a fairly strong reversal pattern. They don't always end up leading to sharply lower prices, but the odds of that go UP when coupled with previous overbought indications such as 'extreme' bullishness or overbought RSI readings.

Now of course the big question is where do prices go from here? No doubt the short to intermediate trend momentum is now showing a downward trend. The upside breakout above the dominant weekly down trendline in the S&P has reversed with a weekly close below the down trendline dating from the high of exactly 2 years back. There is not yet a break below a prior downswing low however on the daily or weekly charts.

Prices haven't retraced much of the prior decline so there's more 'room' on the downside as part of what I would consider a 'normal' correction. I'm anticipating an oversold daily chart RSI before this current weakness is over, so anticipate lower prices still. Short-term a rally is due judging by the oversold level seen above in the hourly RSI.

My current favorite trading strategy or system I employ for QQQQ is now long 500 shares; I've set up the trading rules to allow the taking of multiple (100 share) positions if the system keeps getting the same buy 'signal'; caveat: this is a shorter-term trading system.

Sharp eyed observers of my prior columns may notice that well-defined DAILY chart uptrend channels are suggested in ALL the major indexes. The lower parallel line intersects just one prior low, so the upper rising trendline (and typical of a strong uptrend), is the dominant component in forming these uptrend price channels.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) remains in an uptrend as long as prices don't pierce its prior (down) swing low at 992. There is a violation of the normal symmetry of an uptrend by the fall under the prior rally high but this isn't enough to suggest a chart reversal according to how technical analysis would see things here.

An interesting aspect of the chart is whether SPX will now head toward support implied by the lower end of its uptrend channel, which currently would also be approximately a 50 percent retracement of its last major rally as seen on the chart.

If SPX rallied to above 1040-1050 on a closing basis and managed to sustain lows in this area, the index could still mount a rally to around 1100. Absent that, the 1000 area looks like a possible downside objective and a fairly 'minimal' retracement at that.

Obvious potential chart support points are the prior lows at 992 and 978. The key resistance area begins around 1075. On balance, SPX looks headed still lower. Bearish sentiment has only begun to build up. As most options traders seem to be trend followers it has only lately dawned on them that there is a down to the market's up. They should do more study of technical analysis! Well maybe not if we lose our 'edge'!!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index chart has the identical pattern to the larger S&P 500 so if you've read the above and see the OEX chart below, the picture for this index should be clear; i.e., that there's more near-term downside potential than upside. 480-485 is the short-term demarcation line. A close above this area, that is maintained, would suggest that the bullish trend had reasserted itself.

The trend is stil UP in technical terms as long as there is no Close that pierces the prior 462 low. I also watch to see that any such close with special 'chart' significance is not just a 1-day affair; e.g., the result mostly due to exiting stops being executed, etc.

The usual tendency (per my chart musings below) have been in recent weeks/months for the 13-day RSI to NOT get fully oversold. Rather, rallies have been setting up 'in what I would call a neutral' RSI range. Stay tuned on that.

Key support is down in the 455 to 465 area. Key near resistance is around 484-485, with much stronger resistance, as wasn't difficult to anticipate, in the 500 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

A short preface here is that I did catch one of the media talking heads speculating on the Dow's potential to again reach 10000. When I heard that I felt a slight bit more confidence in holding puts! Once a contrarian, always a contrarian!!

The Dow remains overall bullish in its pattern. Even a dip to the 9000 area, assuming INDU didn't head still lower, would keep the Average within its anticipated uptrend channel. Actually, a sizable dip like that would be 'healthy' in my opinion, as it would keep traders and investors from going 'too' overboard in their anticipation of a strong recovery.

A recovery may be quite slow as suggested by Friday's unemployment data. No matter how many times traders HEAR that unemployment will probably top out in the 10 percent area, they haven't been acting as though they believed it. We often chose what we want to believe and it's quite often dictated by our position in the market!

I continue to believe that the Dow will see 10000 at some point based on my study of relative trends and upside potential of the 30 Dow stocks. However, near-term I'm focused on how much lower INDU might go. The 9450 area may be some near support, then stronger support at in the 9250 area. Major support begins around 9000.

Key near resistance is in the 9650 area, with tougher resistance around 9850. Major resistance begins at 10000.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) remains bullish in its broad pattern, such as seen in its projected uptrend price channel below, but near-term momentum is down and may continue. A short-term rally is due but may not get very far.

Key near resistance begins in the 2100 area then is seen at 2140, extending up to (new highs) around 2200.

Pivotal near support begins in the 2000 area, extending down to the prior 1958 intraday low.

Bullish sentiment has been declining recently from a quite high and probably 'unsustainable' level; I mean things weren’t looking that rosy in the real world versus on the Street of Dreams!

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) continued its surge higher UNTIL its 9/23 intraday high spiked up to resistance implied by its upper trend channel boundary. The 23rd then say a key downside reversal as I've already mentioned; i.e., a new high, here a decisive new high, followed by a price collapse and a close below the prior day's LOW. When a market is overbought, such a key reversal tends to be especially predictive for a good-sized pullback.

I've noted near support in the 1640 area, but the key or pivotal support looks to be closer to 1600 currently. I didn't note it on the chart but a pullback to between 1617 and 1574 would put NDX between the 38 and 50 percent fibonacci retracement levels relative to the early-July to late-September advance.

Very near resistance begins around 1700, extending to the 1735 to 1750 area.

A move down to the low end of the projected uptrend channel that found buying interest/support in that area, coupled with an RSI that was at or near the oversold area noted would likely be a compelling buy. I favor going into long calls where the underlying index is in a likely strong technical support area and is 'oversold' to boot. In such a support area I'll let a relatively small further decline stop me out of the trade. My old saw about the risk to reward ratio being key on assessing trade entry comes into play in these situations.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

There's not more to say relative to the Nasdaq 100 tracking stock (QQQQ) chart than already said about the underlying NDX index. With the Q's we can see how a study of volume patterns has played out. The last rally up to the recent high just over 43 was accompanied by LOW volume and that's not a related way for volume to 'confirm' what is happening with prices. Low volume rallies are a bit suspect and now we have the correction and now the volume 'comes out', suggesting some bulls getting into fear mode and exiting. Can't blame them if they've had a 3, 5, 7-point ride!

The important On Balance Volume (OBV) indicator is down with prices as seen on the chart. If OBV starts to turn up without much of a rally going on, this may be an early tip off to a recovery rebound.

Near QQQQ resistance: 41.6

Next overhead resistance: 42.6

Major resistance begins at 43.15, extending to 43.7

Near QQQQ support: 40.4

Next support: 39.0-38.5

Major support begins: 35.7-34.5

RUSSELL 2000 (RUT) DAILY CHART:

In my redrawn uptrend channel for the Russell 2000 (RUT) daily chart, the recent high now seems logically to intersect at resistance implied by the top end of its uptrend channel. Previously, without subsequent price action and my re-imagining the trend trajectory, I thought RUT had achieved a more substantial upside breakout. Instead it appears that the index was tracking in line with the Nasdaq chart and when it also returned to the line representing its previous rate-of-change or upside momentum, the strong uptrend was temporarily exhausted.

Near resistance is comes in around 600, at its prior breakout point, then at 625 to 635.

Near support comes in around 575, then at 552 to 547, at the prior swing lows and finally at 543, low end of the current intersection of the lower trend channel boundary. I'll be looking for a buying opportunity if RUT retreats to this lower channel line. If such a low for this move happens, the RSI would likely be registering oversold also.

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.