Resistance Levels - Take Note Stock Option Traders

With the market bouncing off of previously identified support areas, Kent Shaw peers into his DiNapoli crystal ball to see where the market is likely to find resistance and offers a few thoughts about trading option spreads on the bounce.

The D-Levels mentioned earlier this week (1225-1229) for the SPX held up well and the indexes are bouncing like crazy as of June 15, 2006.  Be careful about allowing this price action to lure you into huge long positions, however.

Be Careful Chasing A Bullish Credit Spread

In downtrends and larger corrections the upward reactions are usually very violent and over very quickly. I wouldn't plan on becoming extremely bullish until we see some upward movement accompanied by above average volume.

I placed some orders for short put verticals on June 14th, but was never filled....so I'm stuck on the sidelines. Chasing these moves can be quite dangerous (and expensive).

S&P 500 - Resistance Levels

Multiple D-Levels generated when all minor reactions are included. The most significant are those that are generated from major reactions: 1260-1263 (K4) and 1246-1246.50 (K2)

MNX - Resistance Levels

Resistance for current down trend at 158.15-.24 and at 155-155.50

DiNapoli Logical Profit Objectives

DiNapoli uses Fibonacci ratios in a formula to calculate Logical Profit Objectives (LPOs). There are three that are generated. The picture below shows an example and the formulas.

Here are the calculations for the June 15th, intraday rally in the SPX:

Identifying Market Resistance

And here are the levels on an intraday (10 minute bar) chart. Note that the OP coincides with the D-Level resistance that I showed earlier at 1260-1263 that is also drawn on the chart. If I were a bettin' man, I'd say that 1260-1264 is where we'll see major resistance and possible a resuming of the downtrend. It's also important to keep an eye on the Detrended Oscillator (DOSC) and whether it is oversold/overbought near the D-Levels. Higher probability trades are going to occur when the DOSC is overbought/oversold while D-Level resistance/support is being tested.

The LPOs are a HUGE advantage when trading your own account because it really allows you to set realistic targets to exit. Getting into a stock is the easy part, the really money is made or lost on the exit strategy. You won't always sell at the high but if you use LPOs correctly, over the long haul you will have very consistent results and much lower equity swings, in my opinion. I'm in the process of testing the use of LPOs in conjunction with a an option strategy (short vertical spread + long OTM butterfly near the LPO).

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