A Technical View of the Market

07/21/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Options expert Bernie Schaeffer has been analyzing his charts and believes we are seeing a breakdown in the S&P 100 Index (OEX). He thinks the recent market volatility may presage a very bumpy ride ahead…


“We could be hearing some of the final rattling breaths of support at the 570 level for the OEX. I have visited and revisited the 570 level on the OEX in the past, as the region has stubbornly held as support with its bevy of open put positions. Last week, the 570 level briefly provided a 'speed bump' to the index’s decline, but since then, the OEX barely paused at that level before resuming its decline. I think 570 will die very, very hard, but if it does, we could see a spectacular decline.


“In fact, there was a similar development in the OEX in 1987. At that time, the 150 level had provided support for the index on a number of occasions. (Actually, it was the 300 level at they later split the OEX two-for-one). Yet, when the area was finally broken, the bottom fell out.


“The market is currently caught up in a downward spiral, as crude oil attempts to tackle the $78-per-barrel level and gold moved above $660 an ounce. What’s more, the DJIA worked hard to put in its third consecutive session of triple-digit losses. This was quite a feat, as the Dow has suffered only one other 'triple-triple' during the past two years. However, it’s the tech-laden Nasdaq 100 Index (NDX) that is proving to be the big loser, as it is down roughly 4.4% from its July 7 close.


“This decline in the market has carried the major indices back to their respective 80-week trendlines, which have served as important support levels during the past year. Yet the one exception to this tale is the NDX, The index gave up support at its 80-week trendline at the beginning of June and failed to reclaim it during the market’s recent attempt to bounce back. What’s more, last week’s weakness has the index flailing below support at its 160-week moving average.


“With both the OEX and NDX trading below critical support levels, the broad market could be at a braking point, as the remaining major indices struggle to cling to support. A breach of their respective 80-week trendlines could level the market vulnerable to a pullback to their 160-week moving averages.”

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