Each day we wake up, sit down at our screens and expect good things to happen for us. Is that too much to ask? Save for those currently short OTM options wasting time premium away, it's been sparse pickin's lately.
Anyway, we are in a strong seasonal period for higher markets and the rally since 9/21 continues to trudge ever higher. This week served as the first lower close all month, but indexes overall made solid gains since Halloween. Can the green screens and lush bullish pastures persist? Why not look at the long term, mid term and short term charts to see what might be in store?
(Weekly Chart: Dow)
Starting with the Dow, we see that the descending trendline of resistance from late May highs was broken three weeks ago and has offered support the past two since then. It is a steep line, to say the least. If price action manages to hold on the upper side it is in full-bull mode, and would also reach 10,900 by New Years day. Another 1,000+ Dow points upside in the cards? Did I mention that's a pretty steep line?
Stochastic values are overbought just as they have been for weeks. They might very well remain pinned up there for some time to come, but looking back on two year's history before, is this where you want to open a bunch of buy & hold call plays right now? Be my guest, but I'm a big believer in history repeating itself.
(Weekly Chart: NDX)
The NDX is overbought based on oscillators and point & figure charting. Right now it is trying to mount an assault on the upper resistance near 1,800 area but that figure drops as time goes by.
We will also note that the bottom line (red) of this channel goes right down to zero. I'm going to make an iron-clad prediction in here: the NDX will break above this entire channel before zero level is reached. That I guarantee you! Whether this index breaks out from here before pulling back is another matter. Stochastic value history wagers the upside is limited from here, but sideways to somewhat higher is certainly possible.
(Daily Charts: Dow & NDX)
Dialing down to daily time frames, we measure the prevailing trend from 9/21 until tonight. Yes, the weekly trend is down but the monthly, yearly and decade trends are up. Which trend are you trading? Those who've tried shorting the daily chart trend have been sliced & diced for ten weeks now save the occasional short- term swing or scalp. Therefore, traders should be trading this uptrend within the larger-scale downtrends for now.
Both channels are holding with the Dow on mid-value support and the NDX a bit weaker at lower support. Dow stochastic values are mixed as both lines are pointing down, but the fast bar is just barely trying to turn bullish. The NDX is clearly bearish as both lines continue to point downward.
(30 Min Charts: QQQ and SPX)
Thirty-minute charts offer the early morning look for Monday. I would not call these pictures definitive by any means. We have a neutral wedge in the NDX/QQQ and bear flag in the Dow and S&Ps to monitor for breaks. With stochastic values mixed to weak as it is, I'd look for lower prices before any significant bounce.
Can we expect price action to explode when it finally breaks these little consolidations?
(60 Min Chart: OEX)
Let's back out a moment from the 30-minute picture and look at an hourly chart. The OEX offers a fine blend of everything and all our Big Four symbols are now represented in depiction. See that widening pattern since Nov 12th until now? That expanding wedge is bearish by nature as it signifies instability. A tightening wedge or coil is a market storing energy for the next burst. An expanding market weakens as it drains energy on each move wider.
Within that expanding pattern we have the intraday coil drawn in the earlier charts. A break either way most likely finds support or resistance within this building pattern unless a real catalyst emerges to push price action outside the current range. A drop to 578 area would be paltry while an upside run to +/-600 range offers nice swing trade potential. Both are quite meager by most standards and playable by day traders, but even they are quite challenged more sessions than not these days.
Without question these markets want to go higher and bulls who've been pummeled for nigh on two years now are loathe to turn hooves up despite consistent bad news. They continue to hope because we hear projections, assumptions and guesses that the economy is sure to recover next year and all will be well.
That might readily be, but lately we've been hearing CNBC analysts assure us the bottom is in and recovery ahead simply because the stock market is rallying. The market always turns several months ahead, knows all and hence is the leading indicator that the bear is dead.
Now, you're a reasonable person, right? Tell me something: how asinine is that (il)logic? Are they kidding us or what? Heck, the markets have been rallying and crashing repeatedly for 20 months now. Have these media morons taken a look at the weekly charts posted at the front of this piece? What made the indexes stone stupid all those other times at failed rallies yet clairvoyant this time around?
Makes zero sense to me... how about you?
Instead I see a market rallying off artificial depths that extended beyond rational. Shorts kept getting squeezed and retail buyers keep hitting the dips in panic mode spurred by fear of loss. Now we have mutual fund managers trying to play catch up that lets them close out the year looking good to preserve their salaried positions. Many stocks are up +50% to +300% since the lows. How much higher can they go? How much of the future recovery is already priced to perfection?
I don't know. I do know that I'll buy calls aggressively each time weekly and daily chart stochastic values are rising in bullish fashion from oversold extreme. I'll buy puts aggressively each time these signals are falling in unison on bearish reversals as well. I will pussyfoot around with small bits of capital and short-term dinks & dunks until then.
What if the signals never cycle down again? What if the current rally just runs to the moon instead? that would be nice, but do you honestly think the Dow is going to 20,000 from here by 6/02? That is where the current trendline projects to.
I turn 37 years old the day after Christmas straight ahead and will bet heavily on the odds that we will see oversold conditions at least one more time in my life before I retire. Care to take the other side of that bet? I'm not at all worried about trying to catch a runaway market from here: I'm worried about what might happen if I actually catch it!
Don't fall in love with either direction, and guard risk capital zealously.
Best Trading Wishes,