THE BOTTOM LINE -
I begin the week thinking there might be a break below the low end of the price range the S&P 500 (SPX) has been in since early-November, but the 1165 area was held by the bulls in the past week. To date, the Nasdaq Composite (COMP) as with SPX, didn't give back more than 40% of its August-December advance. If there is not an eventual lower low - which I rate unlikely - this latest was a fairly modest correction.
The major trend is still up so a rebound was not a big surprise. However, the market is likely to bounce back and forth within a price range for some time to come, offering trading opportunities in both puts and calls. Important tests on the upside are coming that will demonstrate the staying power of this latest rally. More on levels shortly.
FRIDAY'S MARKET -
MY INDEX OUTLOOKS -
Writing a weekly piece like this, I can only call the markets as I see them at the end of the week. The reason I spend some time on trading principles and try to "set up" the trend parameters is so that you will be able to assess new trend directions and conditions.
S&P 500 Index (SPX) - Daily chart:
Just as trendlines are or act as resistance or support, they later can also take on an opposite role. Therefore I peg the first important resistance at 1205, where the S&P would first touch the previously broken November-December minor up trendline. If this acts as a deflection/resistance, it is likely that this current rally is an oversold rebound, not the start of a new up leg. If so, and if long calls in SPX (and OEX) be ready to bail.
However, if 1205 is pierced, the biggest key test of this market is the prior high at 1218, give or take a couple of points. There has to be a close over this level and the ability of the Index to find support on pullbacks to it, to suggest there is a new leg higher underway.
Another top made around 1218 would be a double top and something to pay attention to. It also could be noted that tops from a relatively short time ago are not as much the potential show-stoppers as major tops from months ago; e.g., the March top.
Sometimes an Index gets "fully" oversold (e.g., 14-day RSI = 30 or less), sometimes not. Sometimes not is most often when the major trend is UP. The RSI got to the same relative oversold condition as at the last rally. Expectations that it would go more than this, was talking my then point of view, always more risky than always looking at market patterns with fresh eyes.
S&P 500 Index (SPX) - Hourly chart:
I put the question mark on my last down arrow noting expected resistance in my last Trader's Corner as it was of course uncertain whether the Index would get above this area. However, the probability that it would was slightly favored simply because triple tops are not all that common.
Overbought/oversold depends on what chart and time frame you're looking at. This relative aspect suggests that the S&P is overbought, but only on near-term basis. Nimble short-term traders shouldn't be surprised if there's a 10-15 point pullback from Friday's high, such as back to the 1190 area; or, from whatever high is reached and then back to around 1195, which now offer support in a continued bullish trend.
I wrote in last week's Trader's Corner about the tendency for resistance, once decisively penetrated, to later act as support - resistance "becomes" later support and vice versa. FYI, to peruse this article click -
S&P 100 Index (OEX) - Daily chart:
The Friday close put OEX at 576, resistance implied by the previously broken up trendline. If OEX pushes through here, the Index will be back in its uptrend channel and in a position to test its 579 prior peak. If there's a close above this prior top, with an ability to hold this area on subsequent pullbacks, OEX has potential to around 590 next, at the top of the uptrend channel as noted by the topmost red (down) arrow.
Conversely, a pullback from 576 and the trendline, if it now acts as resistance, would suggest a decline to 568-570 as near support. 556, at the turnaround low of two weeks back, is the most crucial support for the bulls to defend. The 550 area is major support.
A somewhat mixed chart picture. Returns to these prior broken trendlines are often rally stoppers. But, Friday's strong upside acceleration and (daily) range expansion, with its close at the intraday high, is bullish and showed strong renewed buying interest and the potential to power on higher. Stay tuned!
Not much to say about the RSI - it never got to a "fully" oversold reading as the institutions were willing to start buying as soon as these stocks started looking cheaper again.
I do have more to say about my Sentiment indicator. It's a very good indicator, but it has it's limitation just like all of them do - that is, times when they don't show you what you expect! In a decline, I generally expect at least one or more daily readings at 1.2, a day or a few days before a strong rally sets up. Not so this time, at least so far.
One thing suggested by this indicator is that option traders in the main have it RIGHT as to the market having significantly better upside potential then down - the major long-term trend remains up, only the intermediate trend was down.
Alternatively, traders may be overly optimistic. The market is still struggling to get into a strong major second up leg. This is apparent technically and driven by the fundamentals of economic expansion as mixed in its outlook still. Most importantly for traders, is that there may still be another significant decline to lower lows and not to get married to playing just the upside of this market.
S&P 100 (OEX) Hourly chart:
A final significant bullish test is OEX's ability to rally above the cluster of prior hourly highs at 578-579. A close over this area WITH continued upside follow through would suggest potential to 590 as discussed with the daily chart.
Dow 30 Average (INDU) - Daily chart:
The confirming key to a good-sized rally being underway was the upside penetration of the 21-day moving average. Further confirming action was INDU's subsequent lows over two days being ABOVE the 21-day average. Such bullish action reflects a two consecutive day rule - two consecutive days holding above previous resistance, after the initial breakout, is a solid sign of a change in the trend.
The upper trading band or moving average envelope line is showing that the Average could reach the 10,800 area before again being over-extended according the typical range that INDU trades in. Another 100 points higher from here would suggest taking at least partial profits on calls.
Buying puts is another story. Completion of tops is a more tricky business than determining bottoms. Buying is a ongoing - selling is often a 1-time decision only and selling often tends to dry up all at once.
What other indicators help time the ups and downs of the Dow? As the Dow tends to move a little more slowly than OEX I tend to look at a 21-day slow stochastic with INDU.
The bullish Stochastic crossover (slower line crosses faster on the upside) turned out to have signaled a bottom, with the upside penetration of the 21-day average acting as a "confirming" signal for greater rally potential - especially when INDU pulled back to just ABOVE the 21-day average on two days running.
Of course, the time before that there was second, and lower, touch to this line. But these envelopes are always only indicative of an area that could be a bottom. It would suggest for example, taking partial profits on multiple put positions was a good idea as the (downside) risk to reward (upside) potential was less and less favorable.
NOTE: The 21-day Stochastic has been helpful with the Dow 30. It was "early" on the last bottom in late-September, but that's the way of these things - and why its best to put together other things, such as exiting any calls as soon as the prior low was penetrated. (It was most helpful at the early-August bottom, as the stochastic made a higher low - a bullish divergence.)
Nasdaq Composite (COMP) Index - Daily chart:
COMP has "filled in" its downside gap area from early-January, when it broke sharply under its August to December up trendline.
Support is at 2023-2024, then at 2008, with major support in the 1977 area. The Composite seems poised to at least get to 2100, probably to the 2115 area - then, it's a key test. A close over 2115 would suggest upside potential to 2150.
It seemed perhaps too simple - the 14-day RSI again got to the exact oversold reading seen at the August bottom, then reversed higher from there! Sometimes, things are that simple, but not enough to suggest that the market is not also devilishly complicated too.
Nasdaq 100 (NDX) Index - Daily:
The remaining next bullish hurtle and a key test as it always is, would be an ability for NDX to advance to above the prior highs (red dashed level line) in the 1575 area. Major resistance is likely in the 1600 area, on return to the previously broken up trendline and at the late-December breakdown point. If the index advances to the 1600 area or a bit higher, I think traders are going to want to take at least partial profits in calls - and, to be alert to a stopper to the rally.
Puts may be attractive again in the 1600-1605 area. The pattern being traced out still suggests to me that of a complex correction that is not over yet.
38.75-38.85 is next resistance. 37 is near support. I think we're looking at a trading range for the near-term and prices not below 37 or above 39. A close above or below this range would suggest upside potential to 40 - 40.25, and to the $36 area on the downside.
I have the least strong bullish conviction on QQQ until the stock has upside follow through, especially to above 38. Then, it should hold this area - call it 37.75 to 38.00 - on a daily closing basis in order to feel secure in staying long the stock. If long, be strong, but exit at 36.95.
Good Trading Success!