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Trader's Corner

A Look at Major Oversold Extremes

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The other day I wrote this column on how the market could be near a tradable bottom and why I thought that on a technical basis. I was keen on buying some of the Nas 100 (NDX) calls at 1900, with an exit point if the index traded below 1885.

I was out today on that stop as call premiums shrank more than just the index 'open' would imply; a sometimes negative in trading index options that offsets the advantage that risk is limited to what was paid for the option. So much for my assuming that buying into a short-term oversold condition will tend to make for less risk, given that intermediate-term and major trend momentum was still declining.

Where can the market go next in terms of chart and other technical considerations? Quite a bit lower judging by trader sentiment, prior weekly lows and weekly oversold considerations.

The last drop to an extreme in bearishness implied by the level of put activity on this past options-expiration Friday was due to an 'unwinding' effect. It's somewhat of a surprise that my sentiment indicator didn't fall more than it did today, suggesting that traders may not be convinced of an accelerating decline.

OOf course, the S&P 100 (OEX) chart shown next would suggest the possibility that the index will hold in the area of its prior 583 low. Dips in the CPRATIO to the lower (green) line and under have led to many market bottoms occurring within 1-5 trading days. Tomorrow may tell the story on that!

Taking the same OEX and expanding our view out to the weekly line (close-only) line chart, it's striking how the return to the previously broken long-term up trendline, reversed itself to offer strong technical resistance (I call it the 'kiss of death' trendline) and the next major down leg followed. On a weekly closing basis, 567 in OEX has to be viewed as a next area of potential major support now that prior lows in the 595-600 area have given way.

My subject today is also about oversold (indicator) EXTREMES and by evaluating oversold on a weekly long-term chart basis, its apparent from the SI indicator seen above that the S&P is not quite there yet. The S&P 500 (SPX) 13-week Relative Strength Index reading is equal to the OEX above, so it can represent this technical aspect for all the S&P.

TThe S&P 500 (SPX) is the major benchmark index for the NYSE market and its chart has some prior lows that have YET to be tested, whereas the Dow 30 (INDU) has made a new low (not shown) for the current move and OEX is AT its prior 2008 low. The SPX prior lows might hold of course on this decline and the index is oversold enough to suggest this possibility as well. It all depends if the market is in full-blown or just 'moderate' panic mode. The call to put ratio today suggests that traders are not yet in the full-blown variety.

The asdaq 100 (NDX) index wasn't able to once again rally in the face of the bearish influences holding the mainstream market down and tanked today big time also, taking the index finally back into the area of its prior upside gap, which I've been talking about for awhile but ended up not waiting for. WRONG! Since gaps below the market tend to act as support, 1850, where the gap gets 'filled in' could be a next low.

BBy looking at two other 'extremes', there are two other downside possibilities to account for in looking at further downside potential. 1800, representing a 66% retracement would be the expected extreme for a PARTIAL retracement (only) of the prior advance; this, versus a round trip all the way back to the rally starting point at 1669. Another extreme so to speak is the downswing low that occurred at 1776 and which could get re-tested.

There is a technical aspect to the weekly NDX chart that suggests possible major support at not far under 1800, in the 1780 area on a weekly CLOSING basis, per the long-term up NDX trendline highlighted on my last chart. This assumes that this trendline will act as a support and that the major weekly trend isn't going to reverse lower by all measures.

And, in terms of oversold EXTREMES, NDX would have to fall considerably lower to get to a fully oversold level again as can be seen above.

Please e-mail Click here to email Leigh Stevens support@optioninvestor.com with any questions or comments, with 'Leigh Stevens' in the Subject line and it will get forwarded to me for a reply.


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