Option Investor
Index Wrap

New Highs

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Friday's decline left the indices with minor losses for the day and significant gains for the week, with the Dow dropping .4% or 44 points for the day, closing at 10,409.85. The SPX dropped .3% or 3.44 to close at 1108.48, while the Nasdaq added .2% or 3.31, closing at 2,006.68. The failure at new 52 week highs on Friday left a gravestone doji rejection for the week, but given the positive closes for the week, the pattern is suspect. The Dow is up .8% for the week, the SPX 1.1% and the Naz 1.7%. For the year, it's 24.8%, 26% and 50.3% respectively.

The past week's gains took place on very light holiday volume, as did the previous week with abbreviated and closed sessions leaving holes in the charts. As a result of the low volume, price swings were exaggerated and volatility actually rose from its subterranean lows of prior weeks even as the indices advanced. Bonds got sold aggressively during the past week, as did the US Dollar Index, and the relief rallies for equities on the blessed absence of geopolitical disasters are nevertheless subject to intermarket uncertainty, as bulls and bears alike wonder how long an equity rally will be able to run in a rising rate/ declining dollar environment.

That said, there were powerful incentives for the markets to sell off during the past week, but the bulls were unshakeable, resisting the threat of terror attacks, mad cow outbreaks, the massive failure of Parmalat and the subsidiary fallout in bonds and derivatives for US lenders and investors, and fat bullish profits waiting to be taken.

Weekly COMPX candles

The Nasdaq rose along the lower wedge trendline, closing right on it but regaining a foothold after the previous week's close below it. The failure at now downsloping Bollinger resistance of 2030 is certainly not bullish, but the bounce of the past month has left preliminary buy signals on the ambiguous, bearishly divergent weekly cycle oscillators. If next week is positive, I expect the weekly cycles to give us a clear (for a change) buy signal and likely abort the bearish divergences in place since the summer.

Once again, 1980 is a key support level, and while the oscillators are toppy, support has been firm and the uptrend persistent even for the Nasdaq.

Weekly INDU candles

The Nasdaq has kindasorta advanced for the past month, the Dow has been on a tear to the upside, cranking out a new 52 week high Friday above 10500. While that level failed to hold, it's nevertheless a monumental level given the sub-7300 print last March. While Prophetcharts displays this week's candle in red, it was nevertheless a .8% gain over last week. The weekly cycle oscillators are on buy signals, in an upphase within overbought territory, and while a correction was due today, it will continue to look corrective until the uptrend has been violated. I would want to see a move below 9600 before declaring the 2003 bull anything more than tired. Trendline support and price confluence at 9900 come first.

Daily OEX candles

The chart of the OEX since the November low is a sight to behold. Friday's decline of .79 or .14% nevertheless represented a marginal key outside reversal day, but did nothing more than validate the upper rising channel trendline. The uptrending daily cycle oscillators are very extended, and the odds favor a correction which may well have begun on Friday, but we won't know until the oscillators are pointed south. Support at 546 is the next target on the daily candles.

20 day 30 minute chart of the OEX

The 30 minute chart shows a bearish stochastic divergence and the ensuing drop. The 30 minute cycle oscillators are in a solid downphase, and given how toppy the daily cycle oscillators have become, a high-volume selling spree on Monday could be sufficient to kick off the daily cycle downphase discussed above. That said, the OEX closed right above confluence support at 548, and until that level is broken, the uptrend remains substantially intact. Below 548 comes support at 542-44.

Daily QQQ candles

QQQ printed a bearish engulfing candle, engulfing Wednesday's print which had engulfed Tuesday's print. The absence of a significant drop following each of these outside reversals is impressive, and should be seen as a warning to bears. However, the fact that such has occurred during a daily cycle upphase is not bullish and could indicate that move is waning.

QQQ failed at 36.79, dropping .06 net for the day. As on the OEX, the daily trend is still up, and while there's more upside room on the QQQ's daily upphase, the price action shows hesitation here at the highs. 36 had been strong resistance on the way up, and it should now provide strong support below. 36.60 is trendline resistance.

20 day 30 minute chart of the QQQ

As on the 30 minute OEX, the 30 min QQQ is in a downphase that has so far delivered strong price traction to the downside, launching from a bearish Macd divergence. Confluence at 36.20 is first support, followed by 35.8-36. I expect that the 30 minute oscillators will be oversold and ready to bounce by 35.80, and if they do, the ensuing upphase will tell us a great deal about the rally- a lower price high will signal trouble, while a higher high will cause the daily cycle to begin trending in overbought. On the other hand, if 35.80 does not hold, then the daily cycle upphase should abort, and the bears will have the ball.

As discussed in the Futures Wrap, Monday's return of high volume trading constitutes a wildcard, and I urge traders to remain limber, and to keep their stops in place. The market will tell us which direction it wants, and our job is to follow it, not to force. See you on Monday.

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