Option Investor
Index Wrap

New Highs, Bullish Data

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The Dow tagged 9903, Nasdaq 1992, and managed to close only slightly lower on Friday despite a steep selloff into the close, and an acceleration thereof in the futures after 4PM. The Dow dropped -47.18 points or -.48%, the Nasdaq -5.63 or -.28%, and the S&P dropped -4.84 points or -.46%. For the week, the Dow added 0.1%, the Nasdaq 0.2%, and the Nasdaq 2%.

Most noteworthy in Friday's trading was the selloff following yet another day of bullish news. The wire was bullhorning blowout employment data, the actual bullishness I examine briefly below. Nevertheless, the feeling at 8:30AM was "The sky's the limit," and one suspects that the party ended as quickly as it did because there simply weren't many shorts left to squeeze. New 52 week highs were made, but the indices closed lower than they did the day before.

Option volatility remains at alarmingly low levels, demonstrating a multiyear extreme in complacency, or, if you will, a bear market in fear. The VXO dropped .02 to close at 17.56, the VXN - .15 to 25.2 and the QQV -.19 at 23.49. As discussed in the Market Monitor today, these readings are ripe for an upside surprise, with the VXN coiled into a bull wedge on the weekly chart and projecting potentially as high as 70. An upside surprise in volatility would correspond with a downside spike in equities.

In the meantime, the indices continue to rip higher, but as we will see below, there are increasing indications of exhaustion, with most every chart displaying bearish oscillator divergences.

Weekly COMPX candles

The weekly chart of the Nasdaq shows the extremely toppy oscillators, with price scraping the upper resistance line of the bear wedge in place since the March low. There is nothing to prevent the Nasdaq from pushing higher still, but the oscillators are clearly indicating that the higher odds bet is to the downside from here. The bear wedge support at 1900 is crucial, a downside break of which brings into play a possible downside target as low as 1280.

Weekly INDU candles

The weekly Dow chart shows the oscillators trending in overbought territory, but the 10 week stochastic is actually fade lower along the top without actually downphasing. This looks bearish to me as well, and I do not expect to see the upper wedge trendline broken. It held on this morning's retest with a year high set at 9903. A sustained break of this level will invalidate the bear wedge, but again, as with the Nasdaq, the oscillators tell us that such is the lower odds outcome.

Daily OEX candles

The bearish divergences pick up in frequency and intensity on the shorter timeframes, as we see on the daily chart of the OEX. Friday's bearish engulfing candle did not abort the daily cycle oscillator upphase in progress all week, but if the selling doesn't reverse on Monday, it will leave significantly lower oscillator highs against the higher price highs. This bearish divergence portends more aggressive selling to come. 517 is lower wedge support, with 525 upper resistance. While the price trend remains up, the oscillator upphase appears to be running out of racetrack, and with the weekly oscillators maxxed out, upside appears limited from here. A break below 517 projects to to a bear wedge target of 498.

20 day 30 minute chart of the OEX

The 30 minute chart of the OEX shows a possible lower wedge support line break. We see more bearish oscillator divergences as indicated, and these foretold the end-of-session breakdown. There is, however, a bullish interpretation here, with the 100% Fibonacci line a possible reverse head and shoulders neckline at 525. A sustained break of this line could project to a possible target of 546. However, in the short term, the 30 minute cycle oscillators are in clear downphases, and I expect more weakness to carry into Monday. Look for possible support at 515, followed by 510.

Daily QQQ candles

QQQ did not leave off on as weak a note as the OEX, with somewhat more life left in the daily oscillator upphase. The same negative divergences are apparent, however. Resistance is at 36.20, support at 35.40, followed by 34.20.

20 day 30 minute chart of the QQQ

Again, the same bearish oscillator divergences and bear wedge support failure. It appears a foregone conclusion that the selling on which the Qubes left off will carry into Monday morning, with the only question being how deep a selloff we can expect. In a bearish position, I'd want to see the 34.40 level broken to invalidated the potential reverse head and sholders interpretation. A bounce at or above that level could pack some upside punch, particularly if the daily cycle oscillators above are still within their upphases at that time.

Tying it all together, we have the weekly cycle oscillators maxed out and showing hints of bearish divergence, the daily oscillators nearing the end of upphases and showing clear bearish divergences, and the 30 minute cycle oscillators pointed south. I expect the selling to continue on Monday morning. If it is strong, we could see the daily cycles flip to downphases, which would line up with the weekly and leave the market vulnerable to a deep correction, particularly so when considering the low volatility readings. Weak selling on Monday could result in an upside blast if the 30 minute cycle oscillators bottom out with the daily oscillators still in their upphases.

One last matter concerning the economic data. I came across the following charts culled from the Bureau of Labor Statistics data, showing the percentage of the population actually employed. They certainly put the recent excitement about the alleged uptick in employment into start perspective. I strongly encourage you to play with BLS' excellent charting functions to gain your own perspective on what is actually happening out there, and to draw your own conclusions about the state of the economy.

Have a great weekend and see you at the bell!

10 year chart of Employment to Population Ratio


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