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Index Wrap

ADJUSTMENT

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THE BOTTOM LINE -
Market action with the further spurt to the upside this past week, after only a minimal sideways consolidation, is suggesting a new bullish up "leg" and more than just a completed trading rally. For me it causes an adjustment of what might be "overbought" extremes (below) and of higher upside index targets. This situation makes it difficult for traders to take on new call positions as the risk (of a sharp downswing) goes up. Conversely, buying puts when a correction seems due, risks getting caught in a stampede higher when "irrational exuberance" takes over.

Longer-term bullish: 1.) The S&P 500's 50-day moving average crossed above it's 200-day average, for the only the second time since a bearish (downside) crossover 4-years ago - the first time was May last year, suggesting the major trend has again turned UP in the blue chips. 2.) At its close of 3628 the Dow Transport average (TRAN), in the face of very high oil prices, is nearing its all-time weekly closing highs (of 3685 in '98 and 3742 in 99), suggesting a pick up in economic activity ahead. 3.) The Russell 2000 (RUT) bellwether index of small cap stocks, has gone to a both a new weekly closing high for the year and an all-time high as RUT exceeded its 2000 peak, breaking out above a major double top. 4.) Bellwether blue chips General Electric (GE) and Microsoft (MSFT) have gone to new yearly highs, as well as the Nasdaq 100 (NDX), which has gone to a new closing peak.

Can the rest of the market be far behind? - Well yes actually! To keep things in perspective, the S&P 500 (SPX) has retraced to date just a bit more than half of its 2000 - 2002 decline (but has exceeded a 2-year high). The Nasdaq Composite (COMP) has not yet pierced its 12-month weekly closing high (at 2140) and has only retraced about 23% of its 2000-'02 decline. If you still hold stock, especially tech, from 2000, you probably wish you had switched into bonds; or, real estate. Well, householders are happy!

FRIDAY CLOSING NUMBERS -
The S&P 500 (SPX) got to its highest level in 3 years - since July 2001, closing up 10.7 points (+0.9%), to end at 1,184.17. SPX gained one and a half percent on the week. The Dow 30 Average (INDU) a laggard in recent weeks, closed up 69 points at 10,539 (+0.7%), also up 1.5% on the week.

The Nasdaq Composite (COMP) Index rallied to 2085, up 24 points (+1.2%) to 2,085.3 - for the week, COMP gained 2.3%.

FRIDAY'S TRADING ACTIVITY -

Major news was a summary of the Sept 21st Federal Reserve meeting and the discussions relayed from the meeting. Their minutes indicate that some members perceived downside risks to their central forecast, including the possibility that the end of fiscal stimulus and a desire by consumers to increase savings would lead consumers to pull back on their spending.

Federal Reserve Board discussions suggested that current economic conditions are likely to warrant a further modest tightening of rates, but also noted that "policy actions would need to be increasingly keyed to incoming data."

Members noted that the Sept. 21 rate hike to 1.75% had brought the real federal funds rate slightly into positive territory only.

Much of the policy discussion at the September meeting revolved around prospects for hiring and capital spending by businesses. Labor market conditions had improved modestly and business investment "would most likely continue to provide considerable impetus to the overall economic expansion going forward," according to the minutes.

However, Fed members also expressed concern over the expiration of a capital spending tax break at the end of the year, as possibly resulting in a "fairly sharp slowing in investment." In addition, businesses seem overly cautious in their investment decisions, perhaps because of concerns about corporate governance or terrorism.

Another worry was the "further widening of the U.S. trade and current account balances," which the committee attributed to relatively weaker growth in foreign economies.

All in the all the market took the report bullishly for stocks and the economy as growth looks to be on target but is not likely to be so strong as to cause more than modest further rate hikes.

DELL, MY BELL - Strong third quarter earnings from Dell Computer (DELL) helped lift tech stocks. Dell rallied to a 4-year high after posting a 25% gain in Q3 profits, in line with Street forecasts. The stock ended at 40.4, up up over 8%.

REPORTS - The Commerce Department said retail sales showed surprising strength in October, rising 0.2% despite a large decline in auto sales. Excluding autos, retail sales rose 0.9 percent, the strongest sales since May. The figures were slightly better than expected.

The University of Michigan said U.S. consumer sentiment improved slightly in early November. Its consumer sentiment index rose to 95.5 from 91.7 in October, its best reading in 3 months and more than expectations for a rise to 93.8.

OTHER MARKETS -
The 10-year Treasury note ended 13/32 higher at 100 15/32 to yield 4.19 percent, in light trading.

Crude-oil futures ended lower to mark a loss of almost 5% for the week as traders weighed fresh concerns over global oil output against pressure from nearly 2 months worth of growing U.S. crude supplies. December crude futures closed at $47.32, for a loss on the week of $2.29.

The dollar was down against both the euro and the Japanese yen slightly - the Euro continues to be unable to surge through 1.30, but it holding quite steady just under - stay tuned, as 1.30 is an important area.

MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:

Time for a new scale of 5 percent in my upper trading band (aka envelope), relative to the 21-day moving average in the S&P 500 (SPX) - 5% on the upper envelope line is a setting useful for a strong move up in a bull market. Since the usual overbought indicators like stochastics and RSI don't work when the market is running like this, a setting well above the historical "norm" of 3 percent gives a good idea of price areas that is an area of high risk for a (downside) correction.

1210 is a measured move type objective based on the flag pattern from recent trading traced out below. More on flag patterns can be found here

My upper trading band suggests that the S&P 500 (SPX) could be headed to around 1200 before it gets to a point where a bunch of folks decide its time to lighten up and sell. If we do realize such a quick 100-point rally, it seems like the glory bull market days. Support is clearer than "resistance" - quotes around it cause it's hard to say where that is. But support is around 1140, the prior high. Last week, I said that I didn't anticipate a dip to below 1140 and I still don't.

Speaking of exuberance, my "sentiment" indicator saw its first 1- day reading of call activity so much over puts that it suggests that traders are getting so bullish - that's it's bearish! Another time for that explanation, but its just a fact that tops don't tend to come until a lot of market followers are trading in calls - about double put activity on any given day for equity options.

It's also true that these readings in the bearish area can come in clusters and get more extreme than the 1-day reading of last week.

S&P 100 Index (OEX) - Hourly chart:

574-575 is an upside objective in the S&P 100 (OEX) based on the same considerations as for SPX above - the area of my upper trading band at 5% which is rarely exceeded (at least for long) and based on the price where the recent rally would carry as far as the prior advance; i.e., a type of measured move based on the spurt up, added to the top of the 3-day short consolidation. Stay tuned on that!

Of course an objective anywhere near the 12-month intraday high around 573 is also quite significant technically - a top developing in this area should be watched for its potential of being a double top. It may take a while to get through these old highs - if at all - especially given the overbought extreme seen in indicators like RSI.

I note my expected support areas on the chart below, at 555, then at 545.

Since OEX is approaching its early-year high, it instructive to see how overbought the RSI got then when it hit 80. Then it took weeks for that top to form.

Dow 30 Average (INDU) - Daily chart:

I thought significant resistance would come to bear around 10500, but the Dow 30 (INDU) managed to spurt through this area on short-covering and some new buying going into the weekend. The chart presents prior highs as obvious areas both as next targets and possible resistance/selling pressures coming in around 10570, then if exceeded, at 10750-10753.

I measure a possible objective for this current advance as being to the 10700 area. Potential for a double top exists or just a pullback to consolidate the strong gains made in such a short time.

Nasdaq Composite (COMP) Index - Daily chart:

Anticipated resistance in the 2050 area, didn't slow the Nasdaq Composite (COMP) down and 2100 is my next objective, perhaps a bit higher say to 2115-2120 - but there is a point where sellers are going to come in again. Near support is at 2030-2032 and further key support coming in a zone from 1990 down to 1980. Significant support should also be found just under 1950, at the up trendline.

The Composite is about as overbought as it gets, but in this kind of strongly trending market this is a less reliable guide to going into puts. But when reversal type price action comes in, prices can give ground quickly in this kind of situation as "bad news" hits hardest when RSI reaches these extremes.

Nasdaq 100 (NDX) Index - Daily chart:

The Nasdaq 100 (NDX) has closed at a new 2004 high, but I will also watch closely the intraday high from early in the year also. If my expanded (set at a higher percent value above the 21-day average) percent envelope line (at 6%) marks the area of a top like early this year, NDX will get as high as 1575-1580 before coming down.

As I said last week, my next focus on the charts is what happens around the yearly high at 1560. I don't think further upside above this area is all that great. I would exit calls and go into some December put options if NDX got to the 1600 area.

Support is at 1515-1520, then back down in the 1500-1490 area.

There's more room on the upside for the RSI before it's screaming overbought.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

39 remains my upside objective on QQQ - if the stock clears this area, especially on a closing basis, I don't think there is necessarily a lot more upside to come after that. It depends on what happens the next day - two consecutive closes above a resistance point like a prior 12-month high is more crucial than a one-day event. It's a matter of what happens after the shorts cover and whether new buyers then step up to the plate. Stay tuned!

Near support is expected at 38-37.9, with more significant support and buying interest developing if there was a pullback to the 37 area.

Daily volume has not expanded greatly - nothing like the way price has - making me a bit cautious on the further upside potential for the Q's. That and the overbought extreme we see. Regarding volume, the On Balance volume indicator continues higher, so there is no bearish divergence - the direction is up which is key.

I like to see more volume coming in to match such a strong rally - otherwise it suggests the rally is driven as much by short- covering as bullish enthusiasm. Probably what's needed is for QQQ to achieve a decisive upside penetration of the yearly high at 30 - or not, to drive the stock down again.

Good Trading Success!

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