THE BOTTOM LINE -
The S&P 100 (OEX) could end the coming week at between 545 to 550 by index option expiration before coming back down again - various technical measures suggest increasing resistance in this zone.
The Nasdaq 100 (NDX) has potential to the 1440 area before much of a pullback develops boosted by the oversold rebound in the Semiconductor stocks and upside potential to 400 in the SOX Index
FRIDAY'S TRADING ACTIVITY -
A strong Friday rally, especially in oversold tech sectors, came as nearby crude futures dropped steeply - you recall the sharp Thursday price spike setting up the importance of Friday's action. Oil traders were looking at the threat of Hurricane Ivan to Gulf of Mexico output, tight crude-oil inventories and the potential for an OPEC output hike. However, October crude futures wound up down $1.80 a barrel (-4%) at $42.75.
THE NUMBERS -
The Nasdaq Composite Index (COMP) ran up 25 points (+1.3%), closing at 1,894 - for the week the Composite was up 2.7%
REPORTS & ECONOMIC NEWS -
Commerce Department, meanwhile, said the U.S. trade deficit narrowed 8.9 percent to $50.1 billion in July, the biggest month to month fall in our trade deficit since December '01.
In tech news, U.S. District Judge Vaughn Walker found late Thursday that the Department of Justice failed to prove its antitrust case against Oracle (ORCL) related to its desired takeover of PeopleSoft (PFST) - the stock jumped 10% - and ORCL rallied 5.8%.
Electronic Data Systems (EDS) said it might cut as many as 20,000 jobs over the next 2 years as part of a plan to cuts costs by some $3 billion - EDS gained 3% on this news.
Keeping a lid on the Dow was a nearly 8% loss in Dow component Alcoa (AA), after the company warned on Q3 earnings as falling short of Street expectations - this due to labor strike, a fire and some restructuring costs.
Another Dow component, Disney (DIS) rallied 1.3% on news that CEO Michael Eisner plans to step down when his contract expires in September 2006. Have a nice retirement Michael!
I mentioned the Dow Transports (TRAN) going to a new high - airline stocks posted some big gains attributed to the fall in oil prices.
OTHER MARKETS -
The dollar fell 0.3% against the Euro (yea! - opps sorry, I'm getting euros soon on a property sale) at a New York close of $1.267. The dollar was unchanged vs. the Japanese yen at 109.52 yen.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) – Daily chart:
1135 is key resistance, at the down trendline, then at the prior highs around 1147. Note how SPX found support at the 200-day moving average this past week. There is a tendency for institutional support in this area, once it appears to be holding in this area. Conversely a close below this average (currently at 1114) would be a sign of technical weakness.
I had measured the top end of the downtrend channel at around 1130, but have redrawn that and it happens that this intersection also comes in the same area as my upper trading band where the S&P 500 has been oversold; i.e., 2.5 – 3% above the 21-day average.
Near support is at the low end of the recent range around 1114- 1115 and key technical support looks still be in the 1100 area.
My sentiment indicator took a jump on Friday indicating more call activity. However, it is far from near a bearish reading. It's common for this indicator to take have at least a 1-day bearish number before there is much of correction. You'll note how the current rally began with a, actually two, bullish readings.
S&P 100 Index (OEX) – Hourly chart:
The 540-541 in the S&P 100 (OEX) continues to look like near technical support – the last dips on the hourly chart of course holding above the previous low around 541. As suggested in my last Index commentary, give the benefit of the doubt to where prices are headed next (after backing and filling - a consolidation) to the direction of the trend.
I would note the slightly bearish RSI divergence on the hourly chart below as the recent new high was not accompanied by a new peak in the RSI. This is only minor - these type divergences being more significant on the daily chart. However, prices could break a bit and then rebound. I think the tendency will be up into the Friday expiration.
I cautioned against buying new OEX call options on a "breakout" to a new high above 546 as more significant resistance comes in not far above - at 549-550 at the trendline and more importantly at the low end of the significant June top. I continue to favor exiting calls in the 550 area if reached and looking at buying puts, risking to a 553 close only if possible for you to monitor the close.
By the end of the week the top end of OEX's uptrend channel will intersect in the 550 area – a good place to trap those holding puts held from lower strikes still held at the September expiration.
Dow 30 (INDU) – Daily chart:
We're still looking at the same downtrend channel in the Dow 30 Industrials (INDU) chart as it has been unable to achieve a bullish breakout and has stalled at the down trendline. Sometimes one index will be a tip off for the rest. INDU action is divergent to the Dow Transports (TRAN) as this sister index went to a new high.
10,350 is looking like key technical resistance: a close above this level still suggesting that prior highs in the 10,450 area could be re-tested. A weak technical picture is presented if INDU can't break out at all above its down trendline. I don't see much potential for the a move above the February high.
Near technical support is at 10,200, with key lower support in the 9950 area.
The Stochastic on the daily Dow chart hangs up at an overbought extreme which could go on a while like it did at the June top. This usually doesn't go on for more than a couple of weeks.
Nasdaq Composite (COMP) Index – Daily:
1873, at the prior closing high was taken out and the Composite got to the 1896 area last week, the area of the last COMP peak as can be seen on the chart below. The Friday action was bullish, but not if there is an immediate pullback such as to 1850. No, the top of the recent range, and the breakout point, was at 1875 and this area should offer support if the Index is headed still higher.
On target is to the "overbought" price area suggested by the upper (red) trading envelop line, around 1927. The very last top actually came when the index was not even this far extended. However, this market has got MO (momentum) and it can continue.
Again, as with the S&P, would not be surprised to see the Nasdaq indices continue a bit higher this week until they reach a fully overbought condition as suggest by the RSI. After that – well, October tends to have a lot of cross currents and potential for downdrafts, especially with election news upon us the threat of a terrorist action.
Nasdaq 100 (NDX) Index – Daily:
The 1410 technical resistance was taken out with the strong end of week move – next resistance is looking like 1430 and with a perhaps more key area at 1440, at the 62% retracement level, the 200-day moving average and the top end of the hourly uptrend channel (not shown).
I suggested on Thursday that 1420 looked like the area to exit calls and look at put positions – this is now looking like too low for an upside objective as NDX could get to 1440.
The 1400 area, down to 1388-1390, looks to be key technical support. "Key" when I use the term signifying to me a level/area where penetration of it reverses a bullish or bearish chart pattern on at least on a short-term basis.
Nasdaq 100 tracking Stock (QQQ) Daily:
The QQQ chart pattern got more bullish with the close over 35. This suggests potential to get to the next resistance, and an area where I would short the stock, around 36.
34 is near support. As with NDX, look for the shorts to continue to get squeezed with a move higher. When they couldn't take em down the stage was set to take em up first.
Watch for when the QQQ and NDX 14-day RSI gets to 65 or higher, as the Index should then be at or near a tradable top.
The On Balance Indicator (OBV) was trending slightly higher last week and total daily volume with it and gave a bullish clue for the rally by week's end.
Good Trading Success!