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Index Wrap


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With a strong performance in the NYSE related major indices, since the Tuesday opening, the S&P 100 (OEX) and the Dow 30 (INDU) have cleared their early year highs - OEX by 3 points and the Dow by 100 points, so the possibility of bearish double tops goes too. The narrower S&P 100 (OEX) and the Dow 30 stocks are catching up with the broader S&P 500 (SPX).

What was leading on this strong rally of recent weeks - the Nasdaq - is now lagging a bit. This leapfrog shows that investors move on to undervalued groups after the others have a good run and that's showing a underlying healthy market.

The Nasdaq Composite closed above its early-'04 peak by some 7 points. All this was accomplished on relatively low volume, but with a likely firm market in next week's also shortened holiday trading week, the major indices go out higher than coming in - SPX is up about 9% year to date. Hey, not far off the historical stock market rate of return (appreciation) of 10%.

But where from here? - It seems unlikely that the market is going to run away to the upside in the New Year after the run we've had. There are some warning signs I'm seeing technically and with such things as the dollar. However, market tops, even interim ones after such a strong rally, where some solid put plays could be had, are very hard to pinpoint. Much more so than bottoms.

Some reasons for this and one technical pattern (a "wedge") that might be signaling a significant correction ahead are more footnotes here, but explained in some detail in my Trader's Corner article

The S&P 500 (SPX) gained a half point to close at 1,210.13 and was up 1.3% on the week. The Dow 30 (INDU) Average was up 11.2 points to 10,827 and 1.7% for the week.

The Nasdaq Composite Index (COMP) gained 3.59 points to 2,160.62. and higher by 1.2% on the week.

The market was well off best intraday levels, but in fairly quiet trade ahead of the long holiday weekend. Traders unwound positions ahead of a long weekend and reacted some to a new low in the dollar and mixed economic news, especially a substantial drop in new home sales.

The U.S. currency fell against the euro as government data showed mixed results for the U.S. economy. The dollar was off nearly a percent against the euro to $1.3509, a new high for the Euro, a new low for the greenback. The dollar was down 0.6% versus the Japanese yen - to 103.56 in New York trading.

Crude futures closed at $44.15 a barrel on the New York Merc Exchange, rallying a bit from under $44, in a short trading session.

Tech was weak after disappointing news from Micron Technology (MU) - the company reported its Q1 revenues were good and slightly beat Street expectations as sales grew 14%, as reported late-Wednesday. But shares of MU, an important memory chipmaker as got no boost, in part because profits was slightly under expectations and the stock fell a bit less than a percent.

Red Hat (RHAT) was short of its revenue forecasts although its Q3 revenues were inline with consensus estimates but its Q4 sales outlook was disappointing, and the stock fell more than 13%. PalmSource Inc. (PSRC) fell some 10% to a new yearly low after the company announced a disappointing quarterly outlook even though it was above expectations for its fiscal Q2 profit. The stock finished down nearly 3.5%.

Contributing to the decline Thursday from intraday highs was a pullback in Pfizer (PFE) after the U.S. Food & Drug Administration issued an advisory warning for doctors in prescribing its painkillers Bextra and Celebrex - this until the FDA conducts a full review of their safety profiles.

Pfizer stock finished off a half percent to $26.07 down from its best level of the day - $26.59.

Consumer sentiment improved in late December, according to the University of Michigan's consumer sentiment index, which rose to 97.1 in late-December, from 95.7 earlier in the month.

The U.S. Commerce Department said sales of new housing units in fell sharply in November after October's increase was revised higher. The number of new homes sold in November fell 12% to 1.125 million units after sales rose 4.2 percent in October.

The department originally estimated sales rose 0.2% in the month, versus expectations of around 1.2 million units. Homebuilders' shares were weak in the aftermath of this data release.

Commerce also reported that U.S. consumer spending rose two tenths of percent in November, which was outpaced slightly by a three tenths of percent increase in personal income. Personal savings more than doubled to $22.2 billion in November from $10.2 billion in the prior month, while the savings rate rose to 0.3% from 0.1%.

The Commerce Department also released figures on durable goods orders, as rising 1.6% in November, the largest increase since July, mostly on the strength of a jump in civilian aircraft orders. Total orders fell a revised 0.9 percent in October, a steeper decline than the 0.4 percent drop initially reported.

Excluding transportation, durable goods orders fell 0.8% in November after falling 1.3% in the October.

The U.S. Labor Department indicated that first-time claims for state unemployment benefits rose, after the largest weekly decline in three years in the prior week. The number of initial claims in the week ended Dec. 18 rose 17,000, to 333,000 and was in line with expectations.

The benchmark 10-year Treasury note was off 3/32 to 100 8/32 and a yield of 4.22% in very quiet trade.

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

Giving the benefit of any doubt to the strong trend I had to assume the week just ended was more likely to be up again. And, the S&P 500 (SPX) rebounded and stayed above its prior weeks' price range - that sideways rectangle - and rebounded from the top end of that range. Doing just what it should do to stay with a bullish chart pattern.

Resistance I assumed might come in around 1206-1208 was cleared. I see a more key potential resistance coming up, around 1220, at the top end of a rising up trendline as highlighted below. If SPX cleared 1220, 1240 could be a next upside target.

More on the wedge pattern by following the link above to my Trader's Corner piece. The rising wedge doesn't show a bearish beginning until and unless that lower line is pierced - so a decisive fall under 1200-1205 would put me on alert for what selling pressure might be building.

Next support is pegged at 1192-1193 with major support at 1170. Any close under 1l70 would be decidedly bearish. Actually, a retreat back below the aforementioned 1192 level, especially on a closing basis and with no rebound back the next day, would cause me to blow the whistle and suggest calls holders exit the pool.

My sentiment indicator hasn't yet indicated a significant correction, but it doesn't unless price patterns also line up the same way which hasn't come. The bearish readings did put me on notice that traders were becoming strongly bullish. The 5-day average above 2 (see lower chart) is a definite warning - it can signal a top within 5 trading days and Thursday's close was that. Monday should tell the story on any serious setback - it may only signal Nasdaq starting to fall off.

The wedge pattern is sometimes a precursor to a top as those lines converge, showing a kind of price compression. It is something I will be watching but is not a signal to exit calls into puts. Actually I myself exited any remaining calls, mainly because I don't like to stick around for a final move higher when the market is more high risk and overbought. Not that there is not money that can't be made, but it doesn't fit my risk profile and strategy of tending to be long calls or puts only.

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

The 10 point move from Tuesday's opening up to the end of week (Thursday) high was more than needed for the S&P 100 (OEX) to clear its prior yearly high at 573 which is a bullish next step. This same level - 573 - ought to act as a near support if this index is going to move still higher. OEX did back off from a key technical resistance at the trendline at 578. If the Index clears 580, I could see it rallying another 10 points higher, to 590 - if 590 is seen, well why not 600, a likely major resistance test.

On the downside, 570 is key near support - really 567-570 as near support. Below 567, more major support is likely to be found around 558-560. The very strong bullish pattern is maintained as long as OEX stays above 570. Below 567, call holders should consider that there is risk of a deeper correction.

We have the OEX going up and the RSI backing off considerably from an overbought extreme - there are two ways of looking at this, one bullish, one is a bullish warning. The lack of a confirming RSI is a divergence that can precede a top. On the other hand, the market moves sideways enough so that this indicator retreats to a more neutral mid-range reading.

When the market has a mind to run we can STOP relying on stochastics, RSI, MACD and others of this type that work best or mostly well in trading range markets.

Dow 30 Average (INDU) - Daily:

Bust out - hey, the Dow 30 (INDU) caught up this past week with its move above the prior yearly high and above the top end of the rising wedge pattern that often sometimes turned out to be a bearish precursor to a top and reversal. The top it exceeded this past week was also the 2002 weekly closing high, so its doubly significant.

The Dow did hit another minor trendline that suggested possible resistance - but which may turn out to be only minor. There is no real major resistance implied by prior years highs until well above 11,000 - not until around 11,200.

Support is at 10,750, then 10,600 as key technical support, with 10,420-10,400 as major support.

Yes, the market is overbought near-term. If we get a terrorist attack or something direr happen, it will drop like a Hummer instead of a brick. Actually, this is false physics, as we all know (don't we) that a brick falls as fast as a Hummer SUV/tank - but one does more damage when it hits.

Nasdaq Composite (COMP) Index - Daily chart:

The Nasdaq Composite (COMP) did clear the old high again at 2153, but it also appears to be struggling in the 2160 area - there doesn't seem to be enough buying interest to take it through this zone. Maybe in the New Year. If COMP does clear 2160, it could go to 2230 before being at an overbought extreme again.

Support implied by the prior recent lows, the 21 and 50-day moving averages and the like, is 2125, then 2105-2100. A close under 2100 would be a bearish sign. Major support doesn't come into play then before 2030.

Nasdaq 100 (NDX) Index - Hourly:

The Nasdaq 100 (NDX) is lagging the S&P indices and the Composite but is holding above the 21-day average which is maintains a bullish picture. Near resistance is at 1630-1635. A move to above this area suggests a possible next upside target to around 1670-1675.

A decline below 1600 suggests the selling pressure is building and I would look for a test of support in the 1580-1585 area. Next support looks like 1550-1555. Major support is around 1500.

The sideways trend is "throwing off" the short-term overbought condition so the next move after NDX finishing going sideways, could well be another spurt higher. This is the pattern in prolonged bull trends - the rotational nature of the correction leads to a continued move higher with pauses along the way.

Besides green eggs and ham however, I DO NOT LIKE the way that a lot of key tech stocks are still lagging, including the Semiconductors. So, I will not play for any further upside in NDX. And the QQQ tracking stock looks lower to me.

Nasdaq 100 tracking Stock (QQQ) Daily chart:

QQQ has hit resistance (twice) implied by the top end of its uptrend channel and is coming down from there and will head lower still from the looks of the chart. Namely, the bear flag pattern (circled) that formed over the past few days from an anemic bounce, suggests that the stock can decline to below the prior '04 peak at 39 (what should be support now) to around 38.25- 38.15, technical support implied by the low end of its channel.

The recent sideways to lower trend after a minor double top is sending the RSI lower and well under the overbought extreme it was at. However, I thin, that the Nasdaq 100 will get fully oversold again before it is in a position to rally again substantially.

Have a happy holiday season and...
Good Trading Success!

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