THE BOTTOM LINE -
While the market is nearing an overbought extreme, another rally to slight new highs would be pointed to by the fact that bullish conviction among traders has been fickle. As soon as the recent rally faded, call activity slowed down significantly.
The Nasdaq is hurting and rallies are weak with key tech stocks getting battered of late. Nothing robust, like the NYSE indices. With Microsoft (MSFT), Cisco Systems (CSCO) and especially Intel (INTC) with bearish chart patterns, I don't see how the rest of the market chugs higher ignoring this.
In terms of the Nasdaq 100 Index (NDX) my upside target was met on the recent move to the 1400 area, with only an outside chance of hitting 1410. QQQ is only barely hanging about 34, where it should be above to suggest another re-try for 35. Volume patterns show some of feign signs of accumulation of the stock however.
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 Dow Average (INDU) had four of its 30 stocks up enough to keep the fall a bit less than the broader market: Boeing (BA), Exxon Mobil (XOM), Procter and Gamble (PG) and Verizon (VZ) all going to new 52- week highs during the session. The Dow Average ended down 30 points or -0.3% to 10,260.2 - for the week however the Dow was up a fraction of a percent (+0.6%), marking a 4th consecutive week its been higher.
The tech-heavy Nasdaq Composite (COMP) fell 28.9 points for a loss of fully 1.5%, to close at 1,844.48. For the week, COMP was down 1%.
REPORTS & ECONOMIC NEWS -
Of interest to Presidents and the public was that the U.S. unemployment rate fell to its lowest level in 3 years. It was also pointed out that most of the unemployment decline was due to the number of job seekers who stopped looking. Hey, put that into a 30-second sound bite - NOT! The Labor Department estimated the unemployment rate fell by a tenth of a percent to 5.4%, the lowest since October '01.
STOCK SHOCK -
In its mid-quarter update, the 800-pound gorilla/Silicone valley based chipmaker also said its chip inventory would increase again instead of remaining flat.
Some analysts, following the stock for their Wall Street clientele, promptly lowered their forecasts in reaction to this update. Others kept a bullish recommendation on Intel, saying valuation levels were getting attractive.
Disappointment wasn't limited to Intel, as Altera, Cypress Semiconductor and Integrated Device Technology also lowered their outlooks. Altera (ALTR) said it expects Q3 sales to come in below its prior predictions. Cypress (CY) also dropped its Q3 earnings forecast and expected a decline in revenue 5-10% below its second quarter. Integrated Device (IDTI) joined the bandwagon, saying that it expected next quarterly revenues to be down as much as 5% from its last quarter.
Hell hath no fury like a tech investor scorned - Altera fell 6.6%, Cypress 8.9% and Integrated Device by 5.6%.
The Institute for Supply Management reported that its key index fell to 58.2 percent from 64.8 percent in July, indicating a slower economic expansion. This wasn't such great news but the corker was Intel raining on the market scene!
OTHER MARKETS -
The non-farm payroll number was seen as being strong enough to keep the Federal Reserve on a path of measured rate hikes, including an anticipated quarter percent point rate hike at their Sept. 21 meeting.
The U.S. dollar rallied in the wake of the U.S. jobs report. The buck rose 0.9% against the Japanese Yen to 110.46, and 0.9 percent versus the euro, reaching $1.2058.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:
The S&P 500 hit my second level resistance in the 1120 area and then retreated. A move to as high as 1130, back to the top end of the current downtrend channel can't be ruled out, but that would be my most bullish expectation. A close above 1130 would suggest a possible new up leg however.
Near support is at 1100, then 1090 marked by the green up arrows on the SPX chart below. 1090 is my guess at key support, at the 21-day moving average. If the 21-day average does mark support, a move back up toward the upper trading band or envelop is suggested - otherwise, usually, Fagidaboutit!
I suggest playing the downside potential here by buying puts in the case of a further advance such as and especially to 1130 - from there downside potential is back down 1100-1090 at least. If 1090/1100 is seen first, I'll be evaluating a call buy in this area for a trade.
What is common at tops of significance is a more bullish call to put reading than what has registered this past week. Ability to rally to new highs around estimated resistance at 1130, could cause such a build up of bullish sentiment - stay tuned on that! If the index dips first, the next extreme on my above call/put indicator should be a bullish reading.
S&P 100 Index (OEX) - Hourly chart:
If the OEX can hold 540 and rally, there may yet be a test of my anticipated technical resistance around 545; a stronger selling interest should come on any rally toward that prior top formation - that's the reason for the highest (red) down arrow that is shown on the chart below, at just under 550 -
If another rally develops first from the 540 area, without much of a further decline, a put buy is suggested between 545 and 549- 550. If there's no move to a new high and a decline comes from here, 535, around that prior low hourly close, is key technical support - below that, I don't see much technical support before the 528 area.
We haven't seen the pattern for some time of multiple touches to an overbought reading on the RSI (length: 21). The RSI has been showing an overbought extreme on and off but I remind myself and other traders often that markets can stay at extremes for some time; eventually it does suggest an Index top for a time.
Dow 30 (INDU) - Daily chart:
I figured resistance at around what the Dow got to per the way the downtrend channel is highlighted on the daily chart -
A move back up to the downtrend line shown at around 10,350, without much upside follow through, suggests a put play. A close above 10,350 I'd consider a breakout move, where I'd then be looking at the prior rally highs for a possible re-test of its June peak around 10,490.
Near support is at 10,100, with next lower support at around 9950. I know 10,000 gets some attention but on the last decline the Dow was under there by nearly a 100 points.
The Stochastic on the daily Dow chart above is at a typical overbought extreme - it will be interesting to see if it hangs up in this area like the last peak in June. The overarching consideration is price action - if we continue to have a pattern of declining rally highs and a lower lows, it's the definition of a downtrend.
Nasdaq Composite (COMP) Index - Daily:
The anemic rally of the past week didn't get near challenging the prior closing high at 1892, and the Composite promptly headed back down toward 1840 - well almost. The weakness in COMP was not surprising given the weakness in the Semiconductor stocks, led by the sharp break in Intel (INTC). The Semiconductor Index (SOX) fell to a new low below 360.
The RSI indicator is not quite into overbought territory. My other key indicators are trending lower especially Nasdaq daily up volume totals. I will be keying off the ability of the COMP to hold 1840, or not, as a clue for which way on the next move. The recent rally attempts are lackluster so far -
Nasdaq 100 (NDX) Index - Daily:
I figured 1410 as resistance, starting around 1400, where the Nas 100 (NDX) got to this past week. It's hard to figure where NDX goes next. The 1400 area seems key.
I'm watching the 1350 area on the downside, at the 21-day moving average. A decline to below the 21-day average is most often followed by a fall toward the lower trading envelope line, suggesting we might see a re-test of the 1300 support area.
Stay tuned for a breakout in either direction as the way to be trading NDX. What would attract me for a next trade is a continued rally approaching 1420 - if this unfolded I will be looking at buying puts, with a close above 1425 as my exit point.
Buying calls in the 1340-1350 area is a possible trade, but would want to see how the market was then to believe it. This market has just been too weak to want to play the upside except selectively; e.g., calls bought in the 1300 saw a 100-point rebound follow.
Nasdaq 100 tracking Stock (QQQ) Daily:
QQQ remains quite weak or bearish in its technical pattern if it can't even mount a rally to 35 and above. Those buyers are quick to get gone - tech is just too weak.
If QQQ stays above 33.7 - 34 we could see a second up move to higher levels than last week. The key if is whether 35 gets pierced and QQQ stayed above this level - if so a rally toward 36 could still happen. And, if so, put purchases and/or shorting the stock looks warranted at 35.7 - 36.
The glimmer that another rally could get going is that the On Balance Indicator (OBV) is chugging higher against an overall downtrend in volume. Volume has been light for the past month - we'll see what gives after Labor Day. Maybe the stocks are getting "cheap" but they can get cheaper still!
Good Trading Success!