THE BOTTOM LINE -
After such a strong advance, it's common for the market to churn around with little further upside progress, which keeps the bears cautious. Eventually the indices should experience a steeper decline than the small pullback seen to date, given this tendency and pattern. I think we're due for a start to a more significant fall soon - specifics are with the charts below.
FRIDAY'S CLOSING NUMBERS -
The Nasdaq Composite Index (COMP) was off less than a point also, to 2,101.9, up 1.5% on the week.
FRIDAY'S TRADING -
Intel (INTC) was the biggest decliner in both markets (-1.7%), after the Semiconductor Industry Association said consumer electronics sales in Q4 are expected to be about even with those of this year's third quarter, as high energy prices are holding back discretionary spending.
The biggest outside influence Friday was that the dollar continued to fall to new record lows versus the euro, as the European currency hit a high of $1.33. Weighing on the dollar were reports that China's central bank had cut its U.S. Treasury holdings, due to concerns over the eroding value of the dollar. Like any smart investor, they want to hedge their bets when the horse they're riding is falling way back.
The dollar rebounded some later in the trading day in New York and the euro fell back to $1.328, after a member of the monetary policy committee of the Chinese central bank said his remarks at a Shanghai seminar had been misinterpreted in a local newspaper article.
U.S. Treasuries fell slightly on the speculation that the plummeting dollar might prompt foreign central banks to cut their investments in U.S. bonds. If interest rates have to rise to lure bonds buyers back in this will be a distinct negative for stocks.
MY INDEX OUTLOOKS -
You would think that bulls would expect a retracement after such a strong advance; for example, the indices give back at least a quarter, to a third, even half of the prior price gains. But this is not the way market psychology works. Market participants often expect trends that are mostly only strong in the direction of their bias on the market.
The pattern we're seeing is likely that of a minor top being built rather than a bullish consolidation. This week should tell the story - if S&P 500 (SPX) resistance in the 1185-1188 area continues to cap rallies, support in the 1170 area will not hold. Next support is in the 1160 area, with major support around 1140- 1142. Tough to call major resistance with SPX at a new multiyear high, but my top end upside objective would be to 1215-1220.
We had another bearish extreme in sentiment this past Wednesday, albeit in a light volume day ahead of turkey day and shopping madness. In the theory of contrary opinion, high levels of bullishness sow the seeds of an opposite occurrence. Basically in these instances, most everyone who is going to buy stock in current circumstances has bought already and there are not enough buyers in the wings to support the market when bearish news comes round again.
S&P 100 Index (OEX) - Hourly chart:
The S&P 100 (OEX), as often is the case, broken down into its hourly price action, shows any reversal type patterns shaping up the best. And it looks like a Head & Shoulders top could be setting up per the way I outlined in the OEX hourly chart below.
In this scenario, OEX does not get back above 564 again and breaks below 560 in the next 1-2 trading sessions - if so a "minimum" downside objective is to 550-548. 548 offers significant support as the top end of a prior trading range and an hourly double top that OEX broke out above early this month.
If I'm reading the chart tea leaves wrong here and there is a move above 564, next higher resistance is at 568-569, at the recent top, with 573 then being key resistance at the Jan-Feb rally peaks.
A bearish price/RSI divergence set up when the OEX went to a new high "unconfirmed" by a similar new high in the hourly RSI. This is less significant in the hourly chart than if it were on a daily chart basis, but it provides a clue to be on alert to a possible reversal at least short-term.
Dow 30 Average (INDU) - Daily:
Not much more to say this week on the Dow 30 (INDU) - if it can't penetrate its prior top at 10570 on a closing basis, then figure some likelihood of it re-testing technical support in the 10360 area. 10200 is the lowest I see this average going on the downside.
On the upside, assuming INDU does pierce 10570-10600, then the obvious target becomes the 10700-10750 area. We can usually assume that when a market keeps marching back toward a yearly high, that this price area is the one to watch.
Upside momentum in the Dow is waning as can be seen by the (21- day) stochastic model above. Loss of upside momentum usually precedes a decline, as has been the case at other tops seen in 2004 in this indicator.
Nasdaq Composite (COMP) Index - Daily chart:
I peg resistance in the 2115 area, then at the prior high around 2150. Longer-term momentum has turned up in the Nasdaq Composite (COMP) as seen in the 50-day average trading above the 200-day for the first time since it crossed below it last June.
However it seems unlikely that there will not be a pullback first, say back toward support around 2050 at the 21-day average which is the middle point of my moving average envelopes.
The Nasdaq 100 (NDX) should give us a better technical picture of the Nasdaq.
Nasdaq 100 (NDX) Index - Hourly:
I pointed out last week how the Nasdaq 100 (NDX) has been trading more or less within an hourly uptrend channel since August and I use to zero in on likely areas of resistance within the overall uptrend.
There was a nominal new hourly closing high this past week, but it appears that momentum is slowing. 1590 is resistance implied by the top end of the channel. This extends over the next few days up to 1600, an area where I favor some put purchases, looking for a correction of 50 points (to 1550) at that point.
Key technical support is seen in the 1520 area, then at the bottom of the uptrend channel at 1505. Given the rally from the 1435 area up to 1587, a correction of 60-70 points would be quite normal. It remains to be seen if the those waiting to buy a more substantial dip like this will get their opportunity!
As with the S&P 100, the Nas 100 has a even more pronounced bearish divergence with the RSI hourly indicator above. I think that this divergence is forewarning a correction and a tradable downswing ahead.
Nasdaq 100 tracking Stock (QQQ) Daily chart:
The pattern could be a bearish rising wedge in QQQ. Bullish momentum is regained if the Q's can break out above 39.30.
Absent that, look for support in the 37.75 - 37.65 area to be tested around the steep up trendline. 36.60 looks like major support currently.
40 is a next potential resistance and upside objective based on the hourly uptrend channel (not shown), then 41 appears on this basis to be major resistance
Upside momentum is waning, as is volume. I think it's a matter of time rather than if that QQQ falls from the area of its recent highs.
Good Trading Success!