THE BOTTOM LINE -
The market sometimes is said to climb a "wall of worry". A lot of bad news got priced in, particularly record oil prices, until stocks hit a bottom when oil prices fell, with the path of least resistance being up, as short positions got covered and bargain hunting type buying also came in. Result: continued upward creep.
FRIDAY'S TRADING ACTIVITY -
Stocks ended higher on Friday as the Dow and S&P extended its rally for the third week and the Nasdaq made was up for a second week based on optimism most directly tied to a significant fall (-8%) in oil prices over the past week.
THE NUMBERS -
The Nasdaq Composite Index (COMP) rose 9.16 points (+0.5%), to 1,862 and gained 1.3% on a weekly basis. The Russell 2000 index (RUT) of small-cap stocks was up 0.8%.
REPORTS & ECONOMIC NEWS -
Market fears that the U.S. economy slowed down more than expected in Q2 didn't materialize as the revised estimate to gross domestic product (GDP) growth came in as forecast. The economy slowed in the second quarter - growth was estimated at a 2.8% annual rate versus an initial estimate of 3%.
There were also no major changes in the GDP report's inflation measures, suggesting no change in the Fed's current policy of raising interest rates at a measured pace.
After a seesaw day for oil futures, crude oil for October delivery settled at $43.18, up slightly but this after a steady decline all week. Oil traders watched developments in Najaf, Iraq, calculating what peace in the holy city there would mean for Iraqi exports.
Under a peace deal brokered by leading Shiite cleric Grand Ayatollah Ali al-Sistani, radical cleric Muqtada al-Sadr ordered his fighters to leave the shrine, Najaf and neighboring Kufa. U.S. forces, which had laid siege to the Imam Ali mosque, where al-Sadr and his militiamen had been holed up, also pulled back. A welcome stand down!
OTHER MARKETS -
The dollar was mixed against the major currencies in the wake of the GDP data. The euro was off 0.7% against the dollar at $1.2022 in New York. Against the Yen, the buck was unchanged at 109.63.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:
My view from last week is pretty much unchanged, as I see the S&P 500 Index (SPX) as having key near resistance at 1110, at a prior rally high and at the 200-day moving average. The next resistance I peg at 1120-1122.
Near support is at 1090. Main technical support is 1080, at the prior upside price gap.
I see mostly limited further upside potential at this point - watch 1110 - if SPX closes through there, the Index could make it to 1115, maybe the 1120 area. On a risk to reward basis, don't stick around for the possibility a few more points above 1115. (I figure only an outside chance of SPX getting up to 1130 without a pullback first - 1130 being where the major resistance (down) trendline comes in.)
What I do find bullish and favorable here is that my call to put ratio has not shot up on the advance - it in fact dropped back at week's end. The absence of excessive bullishness is a plus and might be what keeps this rally going longer than I'm anticipating right now.
S&P 100 Index (OEX) - Hourly chart:
As with the 500, the S&P 100 (OEX) looks near to being into a technical resistance zone as highlighted on the chart below. A correction or dip would be common at this point to throw off the near-term overbought condition suggested by the RSI indicator applied to the hourly chart below.
A decline to the 533-535 area wouldn't be surprising, perhaps a bit lower before OEX has another rally. I calculate 550, at the dominant down trendline on the daily chart (not shown), to be the best upside potential for OEX, where I would then favor put purchases.
Dow 30 (INDU) - Daily chart:
10253 is resistance implied by the 200-day moving average, with increasing selling pressure probably extending up to around 10,350 at the top end of the downtrend channel on the daily chart, where I favor buying DJX puts.
Support is at 10,100, then at 10,000.
The Dow 30, and by extension the S&P indices, is getting up toward an overbought extreme, which would be more extreme even if INDU advanced to the 10,350 area or the top end of the downtrend channel outlined on the chart above.
Nasdaq Composite (COMP) Index - Daily:
The 1896-1900 area looks to be potential technical resistance, based on a significant prior (up) swing high.
A little higher than 1900, around 1916, is the intersection of the upper trading envelope line and is about as far extended above the key 21-day moving average as COMP has been getting in recent months.
The Nasdaq Composite is lagging the S&P market but is also at less of an extreme - at more of a neutral reading - in the oscillator type indicators like the RSI shown.
Nasdaq 100 (NDX) Index - Daily:
1410 is where I see overhead resistance based on the prior rally peak in the Nasdaq 100 (NDX), but the even-100 level of 1400 should be watched if the rally carries to this area and then falters. If prices take out that prior high and NDX got up to around 1425, I will be looking to buy puts.
1360 is support, then 1350. If there was a drop early in the week that took prices back to the 1360, at the 21-day moving average with a tendency then to rally from there, there is probably a buying opportunity in calls, looking for a rally to the 1410 area.
It's been a decent rally after the RSI finally got fully oversold - if only we always had the patience to wait for those extremes!
Nasdaq 100 tracking Stock (QQQ) Daily:
The Q's churned through near resistance at 34 and may be headed to the next area of selling interest/resistance at 35. 36 looks like a place to buy puts, if reached.
Not the most impressive rally we've seen given the lackluster volume - note the downtrend in the daily trading activity. Only prices have been going up, average daily volume is not also trending higher. This is not uncommon off the lows however and I mentioned, earlier on, that bullish sentiment has not risen overly much suggesting some disbelief in the staying power of an advance. Moderate bullish "sentiment" often goes hand in hand with rallies that can keep going.
The market could do better in the upcoming week as there is still some upside momentum technically - fundamentally, some encouragement comes from an easing of tensions in Iraq and as long as oil prices don't start shooting up again.
On a longer-term note, there is also a tendency for the market to advance in the second half of a Presidential election year regardless of whether the elephants or the donkeys get their candidate elected.
TRADER'S CORNER -
Good Trading Success!