THE BOTTOM LINE:

The 5-day average of the call to put CBOE equities daily volume ratio (CPRATIO) in the way I compute it (daily equities call volume divided BY daily put volume), reached its peak of 1.94 on Friday 10/16 ONE day ahead of the recent Closing high in the S&P 500 (SPX) on Monday the 19th. I have found generally that single day CPRATIO readings of 1.9 and above represent bullish EXTREMES. Such extremes may or may not signal tops. When such extremes also occur on a 5-day moving average basis, there is an even stronger case for a top to follow within 1 to 5 trading days. I said in my introductory note on the OIN home page that part of the bulls 'problem' was that bullish sentiment among traders was "too hot not to come down", per the famous song!

While, as I noted last week that, on the one hand, a sideways move after a strong upswing (SPX) is often a bullish consolidation, this pattern ALSO represents a slowing or stall in upside momentum. A bearish tip off in the S&P was the diverging action in the Nasdaq Composite (COMP) as it stalled so close to its prior price peak. Price action coupled with the sentiment extreme and a prior peak (10/14, 15 and 19) in the 13-day RSI in its typical overbought zone all added up to trouble ahead. Hey, just in time for fright-night!

A couple of more notes on other points of technical interest and I'll move ahead to the charts of the major indexes and how I read the week past and what that may portend for the upcoming period.

CHARTS OF THE WEEK:

Charts that I don't usually or always show but struck my interest recently are the multimonth hourly SPX (dating back to Feb) and the weekly pivot point for the S&P 100 (OEX), with two levels of implied support and resistance based on the 'pivot' price.

When I was one of the senior technical analysts at PaineWebber (now UBS) covering the indexes and bonds mostly, my counterpart for individual equities, used to keep an hourly Dow chart and it covered one side, the back and side walls of his office, all done by hand on graph paper. Finally it went outside of his office and looked like it was going to take over the room. I found this level of detail over such a prolonged period to tell a big picture story, even though it was based on hourly Closes.

If you can keep or tap into the data there's nothing like seeing many months or even a couple of years of hourly data. The trendline seen on the S&P 500 (SPX) chart below goes back to a low made in February; subsequent lows in July and September made for a well-defined (and steep) up trendline. For the first time in 8 months, this trendline was pierced on the downside. The subsequent rally back to the trendline then showed the classic pattern of support 'becoming' resistance. The big picture point is that the recent sell off marks the first time that SPX has a rate of price change that has shifted to a lesser order of ascent, suggesting that bullish expectations may give way to what actually happens with earnings for a while.

The other point to make with the chart above is that the 21-period RSI applied to an hourly index chart gives some excellent buy/sell points when this indicator hits its upper (70-75) or lower extremes (currently the 30-37 zone). These overbought or oversold 'zones' shift over time depending on the dominant trend and how bullish or bearish that trend is.

The other chart is reprinted from my Thursday Trader's Corner article describing the '5-point pivot' method of computing both a key price level for the day or weekly ahead, but also 2 support levels and 2 resistances based on a formula that uses the prior day's or week's price range; e.g., either the HLC or OHLC that includes Open. I'm not yet sure that the 5 weekly points [pivot (P) + 2 support levels (S1 + S2) and 2 resistance levels (R1 + R2)] have enough lasting value for me to compute them every week for each of the major indexes. I'd also like to have an automatic computation for them in my TradeStation's Easy Language set of indicators. I'll have to get on to my contacts there sometime soon.

The pivot point formulas are seen in my 10/22 and my 10/29 Trader's Corner columns accessed on the web site or in your saved OIN market letters for those dates. (The site has a Trader's Corner tab at top for easy archive access to these articles.)

Given the downside range of this past week, trade was not only below the weekly 502.3 pivot point (bearish) but 1st support (S1) was pierced (although with a Thursday recovery rebound) and the handwriting was on the wall so to speak. OEX was next pulled down nearly to the second (S2) support as noted on the chart. (Friday's bar is NOT seen on this chart published Thursday.)

What was interesting to me was that VARIOUS technical/chart/sentiment patterns were working to show what was coming and where prices might be headed. I don't usually use the pivot point 'system' but it showed its value this past week also.

LAST BUT NOT LEAST

Per the SPX hourly RSI above and the oversold extreme hit recently, I won't be surprised to see a near-term rebound, possibly a substantial one. However, prices may then head lower again after that. I'm watching the low-1000 level in SPX if reached, for signs of renewed support/buying interest.

Also, COMP is reached its prior downswing low (of 2041) and in all prior instances for many months, pullbacks have stopped at or above such prior lows. If COMP breaks this pattern by piercing this level near-term, or after a rebound, it would suggest the market may see another round of selling ahead.

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has turned bearish in its short-term pattern. I also anticipate a possible to likely oversold rebound near-term. The recent bearish decline remains within the index's broad uptrend channel. If my highlighted uptrend channel represents a correct showing of SPX's major trend, support will be found down in the 1020 to 1000 area and this level won't be pierced. Stay tuned on that!

Key near resistance is at 1066, then up in the area of recent highs around 1100. A daily close above 1066, that wasn't reversed (lower) in the next day or tow would put the index back on its previous bullish track.

Important technical support is suggested at the prior downswing low at 1020, then in the area of the lower boundary of SPX's broad uptrend channel. A weekly close below 1000 turns the intermediate trend suspect for the bulls, although prior turning points occurred in the 992 to 978 area.

SPX, in terms of the 13-day RSI has again reached its oversold zone or the top end of it and there's been a number of instances in this bull market of upside reversals setting up once such low RSI readings were reached. There could be a rally but not long-lasting and I could envision RSI getting to a more deeply oversold zone such as within 35 to 30. The chart pattern suggests another down leg may lie ahead after a possible next rally.

SENTIMENT

It took Friday's sharp decline to get traders even mildly bearish in terms of how this indicator usually 'works'. To get to an 'oversold' area in terms of sentiment will require another shoe to drop and this may well lie ahead.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index also looks like there could be another down leg ahead, perhaps one that takes the index to a retest of prior support in the low-470 area or to around 466 putting OEX near its prior 462 low.

The S&P indexes have had a tendency in recent months to NOT get so hammered as to get to a 'fully' oversold extreme in terms of the 13-day RSI and its declines have held mostly in a mid-range band (what I call 'neutral' territory) before the index has taken off again. Perhaps in this seasonally week period the index will again register in the 'typical' oversold area basis the RSI indicator. It's a fluid situation and a greater possibility as volatility has picked up so considerably.

Near resistance is at 495 and this looks like a important price benchmark. Trade above 495 would be bullish, especially if OEX manages holds this area in subsequent pullbacks. If so, next resistance comes in not much higher at the prior 509 intraday high.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average chart pattern has been bullish for many months but recent weakness suggests that there may be more to go on the downside. As noted with the S&P, there's a better than even chance for a rebound ahead of any further slide; e.g., setting up by Tuesday.

Key near resistance is in the 9965 to 10000 area. 10000 is a very focused in on level of course, although undeservedly so. Next INDU resistance is in the area of the prior high around 10200.

Near support looks to be well below Friday's low, in the area of the prior 9430 bottom. The close under the 50-day moving average was for sure noted as bearish by the large fund and hedge fund managers that waltz the INDU 30 stocks around.

A larger correction as been 'due' or overdue in my estimation for awhile but traders and investors have kept bullish. Its part of even strong bull markets for the Dow to go though periodic selling sieges. This may be the time for that. October into November is a notoriously tricky time as portfolio changes get done ahead of year-end statements.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) led the overall market higher but it's having its days of profit taking and disappointed long liquidation. It's a rough playing field out there and tech stock prices are not immune to a generally still lousy economy. You aren’t buying that next generation PC with Windows 7 when you may get laid off or sacked. I've seen it even with very able and experienced professional friends.

I noted in my initial 'bottom line' comments that COMP reached its prior downswing low (at 2041) and in prior instances for many months, pullbacks in all the major indexes have stopped at or above their prior turnaround lows. If COMP breaks this pattern it suggests the market may see another round of selling ahead.

Next support below the 2040 area is 2000, with support seen another 40 points or so lower around the prior 1958 COMP low. A retest of 1958 is quite possible and would make this second down leg approximately equal to the first and would therefore fulfill a 'measured move' objective.

Key near resistance is in the 2100 area, then at prior highs made on COMP's last attempt to reach 2200 when the index hit repeated resistance/selling interest in the 2180-2190 zone.

I've commented with the S&P on the bullish sentiment extremes, as seen with the sentiment indicator. Such bullish extremes have been the rule for many weeks in this strong uptrend. Not surprising that we have a period where the bulls get a bit of fear again about the other possibility that, gasp, the market can go DOWN also! Many if not most 'average' investor types are more surprised that the market has been going up for many months.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) pattern has turned bearish in its near-term chart pattern as it looks headed to a test of possible support at the low end of its uptrend channel. The lower up trendline also intersects at NDX's prior 1657 low and a close below it not reversed the next day would add a further bearish chart development and could foretell a move to 1600-1585 again.

Pivotal near resistance is at 1715, then up around 1740. A close back above 1700-1715 with an ability to hold this area on pullbacks would show promise for regaining upside momentum. I don't hold out much expectation that a near-term rally will manage to pierce 1715 but if so, 1740 is noted at a next resistance; this area looks like tough going also. Lastly, the prior intraday high at 1781 is a last hurtle to get NDX on track to a next rally phase, such as to the 1850 area.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Finally we've seen a big volume surge in the Nasdaq 100 tracking stock (QQQQ) and the volume came 'out' on the break below 42. It seems that 42 was a cry uncle point for those who bought into the stock recently as well as for those holding QQQQ from purchases in the 30's that were seeing fat profits possibly slipping away.

The On Balance Volume (OBV) indicator line continues to be in decline and this pattern when it persists has been accurate in foretelling price weakness ahead in the Q's.

Near QQQQ resistance: 42.0-42.15

Next overhead resistance: 42.75-43.0

Major resistance begins: 43.8

Near QQQQ support: 40.7

Next support: 40.35

Major support begins: 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has turned bearish in its pattern and not just on a short-term basis. RUT's double top has been 'confirmed' so to speak with its decline below the prior 576.4 low of early-October. Not only has the key 55-day moving average (the 55 length setting and a Fibonacci number seeming to work 'better' for RUT) failed to mark support, but this significant prior low was pierced.

RUT also pierced support implied by the low end of its uptrend price channel. However, I rate this as 'less' important that whether the index can hold, given further weakness, in the area of prior lows at 552 to 547.

As with the other indexes I anticipate a rally setting up by Tuesday if not before and look for a short-term rebound such as unfolding over 2-3 days. Any such rally is not anticipated to take the index back above 593 to 600, especially on a Closing basis.

A close above 593-600 that lasted into subsequent trading would negate the bullish picture I'm seeing currently and suggest potential for RUT to again reach resistance in the 625 area and the existing double top. A quick bullish turnaround is possible, the way the market can surprise us, but it's not an anticipated outcome by me.

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.