THE BOTTOM LINE -
Technically the market has reached both an overbought situation and a bit of a plateau in terms of some prior resistance. So, look for more of a trading range and some trading opportunities with puts, especially OEX, if the S&P 100 drives back up to the prior peak and forms a double top. After all, one of my better signals for a possible interim top was given by a bearish Price/RSI divergence. But more on that later.
And, I'm glad to be back toiling away on the Weekly Sunday Index Wrap - plus I'll get to sound off on a Trader's Corner article once weekly, rooting around in the garden of technical analysis. I promise not to shamelessly promote my book on the subject either. Opps, just did!
FRIDAY'S TRADING ACTIVITY -
Stocks were up strongly after the job growth reported for January - not enough job growth to satisfy economists that the recovery is really robust, but not so much as to prompt the Federal Reserve to rain on the market's optimism by raising interest rates in the next few weeks or months.
Hope springs eternal in the Nasdaq market and it had it best 1- day rally in some weeks - up over 2% or 44 points. The bullishness of the Ericsson quarter was a big help in providing some tangible evidence that tech spending was picking up. Better-than-expected earnings from Ericsson also helped boost European markets on Friday. Goldman upgraded the stock to "outperform" from its "in-line" (with the market) rating.
Financial stocks did well and this is the blue chip leadership the Street likes to see. The S&P Banks Index (BIX.X) continues to perform well as a sector and its strength was seen as definite positive during the Friday session. Moderate growth in jobs is seen as more positive than cranking out 300,000 a month, which is probably the rate we need to really help boost the administration's case that their economic plan is working - Republicans are however, alarmed by the climb in the deficit which was precipitated by revised estimates that the Medicare prescription drug benefit will cost about a third more than the 400 billion cost they were "sold" on.
The S&P 500 Index, closely watched by big time money managers, fared pretty well also by surging nearly 1 and half percent as it got to 1142 by the close, up 14.
As reported widely on Friday, the closely watched nonfarm payroll report showed growth of 112,000 jobs - you have to now go back to 2000 to find the last time there was this much of a monthly jump. And, the unemployment rate declined further under 6% - this may not mean that much to economists, as many job searchers have stopped looking for work, but it's a talking point to the administration, which is feeling a bit beleaguered. I mean the talking heads even get a chance to have a good Q&A with the President on Sunday morning - at least talking head Tim Russert.
I think the Fed watch factor is most significant in the quick rush to exit shorts that we were seeing at the end of the week here. Rising rates do at some point have a danger in that so much of the recovery is still being fueled by borrowing at such historically low interest cost. Well, except for our credit cards! Wonder why the banks are pushing, yet again for the umpteenth time to get that bill through that toughens the ability to declare bankruptcy.
Which I won't be doing anytime soon, as long as I keep my euro assets - gee pleasant surprise when I convert to the greenback - worrisome in other ways as you could read about Friday in OIN intraday reporting.
The meeting of the Group of 7 (G7) was in Florida on Friday. The extreme strength in the Euro has our European partners - at least they used to be our pals - quite concerned.
Bonds also surged on Friday on the back of the economic data, with the yield on the 10-year T-note falling .084% to a 4.085 percent yield. The dollar, fell over a percentage point against the euro to close at $1.27. Again the Yen, the greenback was off far less, closing at 105.53 in New York.
Expectations on Friday was that not much would come out the G-7 Finance Minister's meeting here in the States that would be a call to action to support the dollar.
MY INDEX OUTLOOKS -
As I'm re-introducing my particular style of analysis and the types of indicators and patterns I find meaningful to assess probabilities for future direction near term and out, I will take the widely traded OEX index - and, a personal trading favorite of mine - and introduce more charts on it then would normally be the case - by way of demonstrating some things that I suggest you look at as you make your own trading decisions.
S&P 100 Index (OEX) - Daily charts:
One of the things I look at closely from week to week to gauge market "sentiment" is a simply to plot a ratio of the total daily volume of (total) equity call volume to daily total put volume. Now this is not the Put/Call reading as it takes the ratio the other way round and most importantly takes out the hedging (of stock positions and S&P 100 Index funds) activity related to Index puts and calls.
The "indicator" gives a more pure read of what market participants using and trading options are up to. How bullish or bearish this group tends to can be pretty well calculated by how much call volume there is relative to put volume, at least on the CBOE.
As we know the market is tricky in that often when calls or puts are heavily favored, a point of imbalance is reached and the market tends to tip in the opposite direction. When CBOE equity daily call volume runs about 2.5 times put volume on any given day, and I smooth this out a bit with a 5-day average above - lower left, there is often a top coming in 1-5 days. Not very precise in that, but it's a "get ready" and watch indicator. I've marked some prior extremes - green arrows suggest a rebound or renewed push higher ahead. The red arrow suggests looking for a top within a day or so, within 5 days typically. But, like any indicator, there are times it doesn't work just that way. In a strong uptrend, there will be some false suggestion of froth and a top - the reverse in a strong downtrend.
The recent reading on my Call/Put indicator - by the way this is a "custom" indicator that I have to keep up in a spread sheet/charting program so I can't refer you to a web site to watch it. The last extreme was suggesting a rebound and we got that strongly on Friday. Look for some attempt to follow through on the upside, but be watchful for a double top, which I think is a likely outcome. This is also suggested by the top indication, and about as reliable (not infallible) as they get in technical analysis terms by the drive to a new price peak, that was not also followed by a similar new high in the Relative Strength Index (RSI) as shown in the chart above - right.
The trading envelopes also shown in the upper right chart have come back to a more historical average - as, relative to a 21-day moving average, the indexes tend to trade between a value that is within about 3% above/below the moving average in the center. The pop back up above the 21-day suggests the uptrend is back on track, but a second drive up toward the (upper) trading band is often a more significant lid on the market.
OEX - Hourly:
When is a bottom real simple to figure out - when it's a double bottom! Typically, you can trade off from double tops and bottoms and they won't fool you. This is showing real buying or selling pressure. However, basis the hourly chart in a close up view, there is also resistance coming up in the 570 area. This is an area where I want to buy puts, if I see churning going on. This means buyers don't have enough left to push it past the supply of stock for sale.
The other thing worth noting with the chart above is that some of the better trading opportunities come along when both the short and longer-term hourly stochastic models (5 and 21-hour settings) get into overbought or oversold territory together. The last time was on the downside, but now they're both getting into oversold territory - with resistance indicated on the hourly chart above in the 570 area, looks like some potential for puts with OEX in the 570-575 area, looking for another downswing and to stay in a relatively narrow range awhile longer.
OEX - Daily chart with some other indicators:
One thing about the broadly traded indices, is that they can get into a trend where you can do significant buying or selling when the index comes down/up to its 50-day moving average. And such a "safe" point if we can ever call it that (let's say high probability trade) is not unless OEX got back down into the 550 area. 530 is major support as suggested by the trendline. The market is oversold near-term as suggested by the stochastic, but the pattern looks most like the formation of a top. Stay tuned!
S&P 100 Index Weekly chart:
The problem with getting too focused on the short to intermediate oversold is that the longer-range overbought/oversold type indicators, like the 13-week RSI shown on the OEX weekly chart below, are suggesting that the market is overbought now and may need to consolidate before conditions are ripe for another up swing. This is reflected also in the political/economic uncertainties that will be a focus for the next few weeks.
This first up leg, if its reaching a consolidation/resting point ahead, was a pretty good run of 150 points. Hey, I'd like to be along for any 150 point move on the OEX! Not that I don't have some things to also worry about in index options, like how fast the time premium erodes relative to this trend.
The Dow 30 Average:
I would be mildly bullish here only as long as the Dow can now stay back above its 21-day moving average. It looks like there is significant resistance and stock for sale above 10,600. The weekly chart, below left, shows the same overbought condition as discussed with the S&P 100.
The daily chart pattern (above left) had the appearance of a bear flag - midpoint in a downside correction - until the sharp rebound of Friday. That rally looked like it had more to do with short-covering than the start of a renewed uptrend. Let the market decide and watch for a possible double top - if that develops, it suggests a more prolonged correction and at least a sideways move to "throw off" the overbought condition. Indexes correct in price and or time - by going sideways. I thing there will be a retracement lower also.
Nasdaq Composite Index (COMPX) - Weekly, Daily & Hourly:
The Composite or COMPX looks like it has significant overhead resistance in the 2100 -2120 area. The oversold and strong rebound from the 50-day moving average should carry it up into at least this area, and maybe back into the 2150 area. A double top there would be my indication to short the Nasdaq, such as by shorting the QQQ tracking stock. A weekly close above 2150 however, along with the ability to hold this area as support on pullbacks, would suggest still substantial upside. I wouldn't rule it out but this possibility is not leaping out at me in what I am seeing here.
Remember how far above, then how far below, the COMP got relative to its 200-day moving average? It is now pretty far above it, as shown in the upper right - the 200-day average is just climbing over 1800. A decisive downside penetration of the 50-day average at 2025 currently, would suggest two things - the longer moving average will gain a bit on current price levels and the Nasdaq Composite could retreat back into the 1900-1950 price zone.
QQQ - Daily:
Speaking of QQQ, the stock has been trading pretty reliably up to 5% above its 21-day moving average before corrections set in. In a downtrend, it tends to move down to about the same percentage below this average, but in an uptrend as we've been having, the lower end of its range has been on moves to about 3% under the 21-day average.
What does all this mean. Well, the rebound came in right where I would have looked for it to, based on the lower envelope line. Now, I want to see if it can get back above the 21-day average in the center of these envelope bands. If not, look for the QQQ to come back down to the lower band again, at least, like it did on the last correction.
Above 38, my upside target become to $40 where I would look to short the stock. Volume trends are, so far, consistent with the bull move underway for months, as volume expands or picks up in the direction of the trend - and contracts or slows down on corrective declines.
The long sideways move in the fall, is now providing a floor under the stock as the Q's pulled back to the top end of this range. Still have to favor the trend continuing until we see otherwise. Little danger signals don't offset the trend - number 1 is the trend, until it shows definite signs of reversing. Still, trading opportunities have been coming on both sides of the market.
Good Trading Success!