THE BOTTOM LINE:
There were technical chart and indicator patterns of recent bottom formations that suggested areas to buy calls in the various indexes. These patterns varied from index to index, unlike what is seen sometimes where there's more of consistent pattern. The highlights that I was seeing for the various indexes; these points are also repeated with each individual index commentary:
SPX: A low (1029) not far above the prior 1020 low after the (13-day) RSI fell to its first oversold reading since July.
OEX: Continued its pattern of rallies developing after the RSI has fallen to what I've highlighted below as a 'neutral' zone.
INDU: The Dow maintained the pattern seen at its last (early-October) downswing low where an upside reversal developed in the area of its 50-day moving average.
COMP: The Composite reversed higher after reaching support implied by the low end of its broad uptrend channel.
NDX: I can't claim I was in calls in the above indexes at just the 'right' moment, but the Nasdaq 100 calls were an 'irresistible' buy when it formed a double bottom (within 5 points of its 10/2 intraday low).
QQQQ: My 'favorite' trading system, based on certain 21-hour RSI extremes, is long a boat load of the stock (1000 shares) and never went short at the last top. I 'allowed' multiple entries in the trade rules, without built in stops. A drawback of this trade strategy is that takes at least $50,000 to trade just this system in the Q's; it's very profitable in back-testing so far.
RUT: An EXACT double bottom; a 553 intraday low this past Monday, versus a low of 552 on 9/3. Such indications of a bottom don't get much more 'ideal' than this! Moreover the double bottom formed after the RSI got 'fully' oversold on a 13-day RSI basis, it's first such instance since the March bottom.
Given that the recent pullback has probably run its course, the other question is about upside potential from here. I assume that the major indexes will break out to new highs at some point. The major indexes could also settle into trading ranges for awhile. Upside potential toward and above prior highs will also depend on continued progress toward economic recovery and better earnings prospects. The 'technical/chart' picture at this juncture suggests an intact and ongoing uptrend.
CHART OF THE WEEK:
A check of what Dow Theory is suggesting as to the current long-term investment buy/sell 'signal' that the theory would indicate. There hasn't yet been an instance since the March bottom where the Dow 30 Industrials (INDU) and the Dow Transports (TRAN) have both 'confirmed' a possible reversal in the major (up) trend. As seen in the highlighted weekly chart of the two Averages below:
I've studied the 3 and 5 point pivot calculations for the most broadly based S&P and Nasdaq indexes, as written about in my last two Trader's Corner articles (10/22 & 10/29/09) and which are seen via the OIN home page, clicking the Index tab at top and scrolling down.
I find these calculated Pivot and projected support and resistance points to be of some value but not crucial to what I do on a technical basis from week to week. However I'll review here what the 3 points were and are, for the S&P 500 and the Nasdaq Composite for the weeks ending 10/30 and 11/6, so that you might get a feel for some weekly pivot points.
Looking at the 3-point pivot calculation for the week ending 10/30 for the S&P 500 (SPX) and Nasdaq Composite (COMP), this past week had 1053 as the suggested SPX pivot, 1073 as first resistance and 1014 as first support. The SPX 11/6 Close was above this pivot (bullish) and the 1071 weekly High was just under projected 1073 Resistance.
For this coming week for SPX:
1st. 'pivotal' Resistance projected at 1083
SPX Pivot point suggested as 1056
1st. 'pivotal' Support projected at 1041
Looking at the 3-point pivot calculation for the week ending 10/30 for the Nasdaq Composite (COMP), this past week had 2089 as the suggested COMP pivot, 2139 as Resistance and 1995 as Support. The 11/6 Close was above the pivot point (bullish) and the Composite stayed above and below suggested pivot Support and Resistance respectively.
For this coming week for COMP:
1st. 'pivotal' Resistance projected at 2145
COMP Pivot point suggested as 2085
1st. 'pivotal' Support projected at 2051
For those interested in this following such projections for the week (or day) ahead, here's the 3-point pivot formula:
3 POINT PIVOT METHOD:
R1 = (P x 2) - L
P = (H + L + C) / 3
S1 = (P x 2) - H
The 5-point pivot method is more complex and gives a second support and second resistance that are well outside 'normal' expectations for what lies ahead in the major indexes. These additional points can add value when the market ends up moving sharply higher or lower in the day or week ahead. I refer you the aforementioned (Trader's Corner) articles for this additional calculation.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has regained its bullish footing as indicated by a low that held above its prior (down) swing bottom. An SPX intraday low at 1029 was above its prior 1020 low. This after the 13-day RSI fell to its first oversold reading since July.
I noted last week my anticipation of ... a possible to likely oversold rebound near-term" and that "The recent bearish decline remains within the index's broad uptrend channel." I did think that SPX might get to 1020 or a bit lower, but the index reversed from a somewhat higher level than that.
Key near resistance is at the prior highs made at or near 1100. Next projected resistance is seen in the 1140 area.
Pivotal technical support is now suggested in the area of the recent 1029 low. Next support comes in around 1011, support implied by the low end of SPX's broad uptrend channel.
SPX got to the oversold area identified for the 13-day RSI after many months of not getting to such a more 'fully' oversold condition. This development also bodes well for a latest bottom being in place.
Trader's never got extremely bearish, but did start taking out more puts on equities, both on a speculative and investment protection basis. I take the fact that my CPRATIO indicator DIDN'T skyrocket immediately as mildly bullish at this juncture.
S&P 100 (OEX) INDEX; DAILY CHART
I thought last week that the S&P 100 (OEX) Index might retest prior support in the low-470 area and this wasn't far off, given the intraday low this past week at 479.
The S&P 100 has had this tendency in recent months to develop rallies not from a 'fully' oversold extreme in terms of the 13-day RSI, but more this pattern of upside reversals coming after this indicator falls to the highlighted 'neutral' zone in the RSI scale.
Key resistance is in the 500 area again, where the prior top formed, and then at 520, resistance implied by the top end of the uptrend channel.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average chart pattern held up better than the S&P and I've noted before in recent weeks, that a number of this small group of big cap stocks are in solid uptrends. Good buying was seen on this recent pullback in those stocks. I was also anticipating last week a "better than even chance for a rebound ahead of any further slide such as by Tuesday." A bottom set up by Monday and the rally did get underway by Tuesday. INDU maintained the pattern seen at its last (early-October) downswing low where an upside reversal developed in the area of its 50-day moving average.
Key near resistance is in the area of the prior highs just shy of the 10200 area. Next resistance is up in the 10400 area in my estimation.
Pivotal support is suggested at the recent low in the 9680 area. Next key technical support is then seen around 9400.
I would note again, per my last week's comments, that November is a tricky time with many cross currents as portfolio changes get done ahead of year-end statements.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) held key support and rebounded this past week. The Composite reversed higher after reaching support implied by the low end of its broad uptrend channel. Moreover, the bottom it made is close enough to the prior intraday low to suggest a double bottom, which is seen more 'precisely' in the Nas 100, QQQQ and Russell 2000.
Key support is seen at the prior 2024 low, although I think support should be found above that, around 2050.
Pivotal resistance begins in the 2150 area, extending to the cluster of prior highs in the 2180-2190 area. Above the area of these prior highs, I anticipate resistance around 100 points higher on any approach to 2300.
Bullish sentiment dropped back from the prior bullish EXTREMES and this recent price correction is healthy in that respect for the continued prospects for a further climb in the Nasdaq.
NASDAQ 100 (NDX) DAILY CHART:
As I noted in my initial 'bottom line' comments about the Nasdaq 100 (NDX), I can't claim I was in calls in the other indexes at just the 'right' moment, but the Nasdaq 100 calls were an 'irresistible' buy after formation of its double bottom within 5 points of its 10/2 intraday low.
Key resistance is now not hard to figure for the area of NDX's prior highs around 1780. Above this prior top, assuming there is going to be another big up leg, substantial resistance should be found on a move toward the top end of the uptrend channel, currently intersecting in the 1855 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
There was a strong upturn in the On Balance Volume (OBV) indicator line this past week and this volume measure has been reliable for suggesting a continued move in the same direction. The surge in volume at the recent low suggests a capitulation type bottom.
Near QQQQ resistance: 43.0
Next overhead resistance: 43.8
Major resistance begins: 45.5
Near QQQQ support: 41.7
Next support: 41.25
Major support begins: 40.6, extending to 39.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has reversed its prior bearish pattern contrary to my more bearish expectations of last week where I thought that the prior lows might not hold. Hold they did as RUT made an EXACT double bottom; i.e., a 553 intraday low this past Monday, versus a low of 552 on 9/3. Such indications of a bottom don't get much more 'ideal' than this! Moreover the double bottom formed after the RSI got 'fully' oversold on a 13-day RSI basis, the first such instance since the March bottom.
Key resistance begins at the 55-day average, currently intersecting at 594, and extends to the 600 area. Next pivotal resistance is in the area of the current double top around 625.
Near support is at 560, then in the area of recent 553 low.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
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.