THE BOTTOM LINE -
For a discussion of "key reversals" see my 1/13 Trader's Corner
Regarding the NDX - it reached and exceeded expected support in the 1510-1525 area already. This was a minor support and objective, as the Nas 100 would ideally re-test 1470-1475, which looks to offer more substantial support or buying interest.
As to the rest of the indices and per my last week's comments, the S&P 500 (SPX) appears headed to the 1160 area and to around 548-550 in the S&P 100 (OEX). A revised target and anticipated support in the Dow 30 (INDU), which looked to me last week that it would have greater weakness than the broader S&P indices, is now to the 10,300 area, support implied by its 200-day moving average - and, close to a 50% retracement. Well actually, exactly half of its October - December advance would be to 10,287, but what's 13 points in the Dow!
THE WEEK'S CLOSING NUMBERS -
The Nasdaq Composite (COMP) fell 11.6 points to 2,034.3 for a loss of 2.6% on the week. COMP is now down 6.5% since the start of the year - of course, the backdrop of this is the sort of irrational straight up run of the weeks up to January.
GE had some early gains on a better than expected earnings report, but finished off a fraction of a percent. United Technologies (UTX), another Dow stock, did manage to buck the trend on some strong earnings numbers and closed up 3 tenths of a percent.
FRIDAY'S TRADING -
There was also news that spooked the market in regards to consumer sentiment. Stocks came off its early highs after the University of Michigan said its consumer sentiment latest survey showed an erosion of confidence in January. U of M's sentiment index fell to 95.8 in January from 97.1 in December. The increase was below the Street consensus forecast at 97.4.
A significant bearish impact from midweek on was provided by market action related to unwinding stock and index positions ahead of the end of trading of January options - add to equity and index options the fact that we had an annual LEAPS expiration. Investors holding LEAPS over the last couple of profitable years were without an anticipated January rally and profit-taking from LEAPS added significant selling volume.
January is the only month with the LEAP expiration factor added to the equation. As Jim Brown pointed out in his Thursday wrap up, the lack of a January bounce left many market participants with long positions and with fading hope of a rally - opps, time to panic! And, with great disappointment about Nasdaq darling EBAY, investors and traders were dumping losing positions in all sectors.
OTHER MARKETS -
The greenback was down .7% against the euro compared with Thursday and closed at $1.3046. The euro has fallen some 4% from an all-time peak at $1.36 (Dec). The dollar reversed a modest gain against the yen in the wake of the University of Michigan's consumer sentiment results. The dollar closed at 102.70 against the yen, also off 0.7% from New York trade on Thursday.
With currencies, being a 22-hour a day market, it becomes necessary to delineate what trading day you are talking about in terms of domestic markets here; e.g., there is an Asian "day", a London "day" and a New York "day" - but the official FX day begins in New Zealand and ends in New York and encompasses 22 hours. I know FX traders in New York who might get up throughout the night to check their positions - not me, I need my sleep!
Treasury bonds ended higher as stocks pulled back and seeking some safety ahead of the weekend. The 10-year T-note ended up 6/32 to 100 28/32 to yield 4.14%.
Crude futures ended higher after the OPEC raised its 2005 demand forecast - hey, keep buying those SUV's! And, oil stocks!! This week's cold in the US, along with expectations of an OPEC output cut and continuing violence in Iraq gave support to oil futures - the March Crude Oil contract was up $1.22, at $48.53 a barrel. On the week, the contract was unchanged.
Does anyone else notice that oil keeps floating back up toward 50 bucks and that kind of passes for NORMAL now!?
MY INDEX OUTLOOKS -
I had been noticing and commenting some on the upward sloping wedge pattern highlighted on the chart below (pie shape) that was developing on the advance in the S&P 500 (SPX) - it's generally a sign of declining buying power/interest to have the daily price RANGE narrowing as prices continue to climb. Perhaps you may want to file this shape away for the time when you see it again. It's not common, but fairly predictable in its outcome!
The break below the 21-day moving average support, a very useful length (21) for index traders, led to a rally back to it where the line acted as resistance. What had been support, now was resistance.
I also find it telling that bearishness has not built up more as represented by greater activity in equities put options. That's what my indicator above shows. Daily equities call to put volume. This takes out the index options volume, where a lot of hedging is going on, to give a more pure speculative measure of trading "sentiment" or opinion on future market direction.
I'll mention here, for those who haven't run into this study before, that there's NO symbol I can provide for the above indicator, as it involves me inputting the daily ratio into a spreadsheet kind of format in order to then graph it.
S&P 100 Index (OEX) - Daily chart:
I mentioned last week 570 in S&P 100 (OEX) as KEY resistance - this level had previously been the "breakdown" point where prices accelerated to the downside. And how - the rebound to this area provided an excellent opportunity to buy puts. Especially so, since an exit point was so close at hand, as a close above 570 would have suggested a bullish turnaround. When risk is so small relative to reward - and the subsequent decline has been 12 points - it creates the optimal trading opportunity.
This past week decline has taken prices to below near support at 558-560 area, the low end of November's consolidation. With another week's action, it's clearer that the 550-551 area is a next plausible target. I also see 548 as significant, being at two prior tops. Prior resistance in this area, may now prove to be or become support and an area where enough buying could surface to steady the index.
Near resistance is at 560, especially on a closing basis, extending to 563. The near-term trend is down as long as OEX trades under 570. Early week trading will be interesting - there may be some attempt to rally I suspect as the index is oversold short-term. On the other hand, the close at the low on Friday implies accelerating downside momentum - however, this was so tied into options expirations it's a wild card in forecasting.
The OEX is not oversold on a longer-term (wkly) chart basis, but the RSI is edging down toward its lower extreme on the daily charts as you can see above. Generally the 30 area is especially oversold on a 14 period daily chart basis. The Relative Strength Index (RSI) in the S&P 100 has rarely done more than dip very briefly to that kind of low in recent months. Stay tuned on that!
I wrote on the tendency for prior support or resistance areas to later bring in the opposite activity - an area that got sold before, becomes an area of buying interest later on. For my take on this you can visit my last week's Trader's Corner.
Dow 30 Average (INDU) - Daily:
I mentioned last time the 10600-10650 area in the Dow 30 (INDU) average as near overhead resistance and that zone was the definite stopper last Tues/Wed.
I continue to see the 10300 area as a more major support. It is the area where prices would both retrace half of the gains of the prior advance and where the important 200-day moving average currently intersects. If INDU reaches the 10300 area and you are long puts from higher levels, exiting some of them makes sense to me in my trading strategy. I may not stay in for all that a move might get me - as my (trading) mentor used to say, if you buy (options) right you don't have to fight to the end of the trend.
Couldn't say this better than last week: the Dow is into an oversold reading on the longer range stochastic (length = 21, measuring 21-days), but the first time there is often not the last.
Nasdaq Composite (COMP) Index - Hourly chart:
As I mentioned last week resistance began in the 2100 in the Nasdaq Composite (COMP) and a move into this area brought in enough selling to take the Composite lower down into new low territory. Looking at where COMP might go from here - provided the index does NOT get back above the low end of its recent hourly trading range, at 2066, a downside target is to the 2000 area at a minimum I think.
A "measured move" objective is to around 1985-1983 per my explanation on the chart below. A 50% retracement of the prior advance is to 1971 and is a benchmark area.
I mentioned that prior support, once broken, becoming later resistance - the same is true of prior support trendlines - once broken, for some reason internal to index and market dynamics, there is a tendency for a return to such a previously broken trendline to be the kiss of death to a rally. Hey, this might be why Michael Jenkins, an old Street maven, called em "kiss of death" trendlines! - that's at the red (down) arrow above.
Nasdaq 100 (NDX) Index - Daily and Hourly:
I mistakenly wrote last, in one place, not the other, that near support might be found in the 1575 area of the Nasdaq 100 (NDX), rather than the intended 1525. I also was looking at 1510 as significant, representing a 38% retracement level of the August - December advance and NDX blew through there, although not by much.
The above and prior analysis was before seeing the downside price "gap" (gap between low of one day, high of the next) that developed last week. This gap area, between 1545 and 1535, might be only half-way in a move lower as measured from the peak at 1536; i.e., a so-called "measuring" gap.
Since the top, was quite definite with three rallies failing in the same area, I look at some worst-case scenarios on where this Index might be headed. Possible downside objectives are to 1470 and beyond, to 1450.
On the upside, the gap area assumes a key trading significance with rallies possibly or likely to meet tough resistance starting at 1535 and extending to 1545. A close, or better two consecutive closes, above 1545 is needed to suggest that put holders ought to exit.
Nasdaq 100 tracking Stock (QQQ) Daily chart:
38, not any longer 39, is the key technical resistance, at the top end of the downside gap of last week. Some support might have been reached with the move to 37 - this level was a downside objective I had before last week's action developed.
I could see a bounce developing back up to 38, with QQQ (now symbol: QQQQ) heading sill lower after that, perhaps even to an eventual re-test of the 3535 area, a significant low before the Q's blasted off in a strong 6-week advance.
These kind of bearish objectives are off the table if there the stock can get back above 38 and stay more or less at this level and higher.
I made some notes on the chart about the very marked divergence between the rally of late-December versus the sharply declining volume. When you see this in a stock, it's a divergence to pay attention to as less and less buying is putting prices up. This is the classic definition of an overbought market and one that falls of its own weight, so to speak, when there are no more buyers.
Good Trading Success!