The Bottom Line -
I prefer to be maintain a bullish trading stance, but also am not looking for a whole lot more upside. There is no signs of a reversal in terms of the pattern; I would just say that its more high risk if you go into any more index calls. Better to wait for a pullback. There are some levels where I would take out some puts; levels where I thing various indices would be at extremes. Just I attempt to buy near rock-bottom so to speak, so that I can set relatively tight exiting stops (and sometimes getting 'stopped-out' prematurely!) and have the maximum upside potential on the snap-back effect, I could see some put buying opportunities ahead. Doubtful that we will NOT have some continued back and forth price swings ahead; more on levels and specifics with the charts below.
This week's Index Trader will be somewhat redundant to the weekend Market Wrap that I wrote for the newsletter. I will not repeat the fundamental influences section of course, or, my take on some of the bellwether index and stock charts; i.e., SOX, INTC, and GE; OR, the LAST section in the 5/21 Market Wrap, which is mostly some general notes and thoughts on trading STRATEGY. You may want to peruse that section in the OIN daily Newsletter Market Wrap section, either in the e-mail version or online.
MARKET NEWS and INFLUENCES
** INDEX TRADER - MIDWEEK UPDATES **
Hey, it makes for a nice weekend when you got a big fat trading profit and don't care too much how it opens Monday. Well, all could relax but those sweating to take the last little bit out of the rally; or, if becoming a big-time BULL in the rally. Hey, that's why the Call-Put reading went ballistic on Friday. "Sentiment" FOLLOWS the trend. Be a leader, not follower!
I did do my usual Trader's Corner article this past Wednesday and also, per my tendency, I also updated key points on the suggested OEX and NDX call positions.
I discussed in this past(Wednesday) Trader's Corner, the modified take-ALL-profits at set objectives, versus taking profits on HALF of the any calls at the objective, then setting "trailing" stops or exit points at just below relevant trendlines. [for this article you can click here]
On this (trailing stop) basis, my suggested 'trailing stop' exit points are up to 563 in OEX and 1505 in NDX.
This strategy is a way to take a lot of the profit out of the market when there are big moves no matter what, but to keep some index options for the further possible upside potential involved. While at the same time protecting against a downside reversal by the trailing stop strategy that moves up ('trails') under key trendlines. Some capture of profit happens on remaining calls.
When the market has its next short-term reversal there may be another opportunity to buy calls on pullbacks. Maybe not; the next best new trade may be in puts...it's too soon to tell.
For now I favor or anticipate a possible further bullish play, on the next pullback. I tend not to go into NEW positions after a big move (the sky shoot). I may stay if I got a profit already and I protect some of it. This is mostly because I can't find a good exit point proportionate to the further upside potential, once in the middle of a trend; the price swings can get too big.
The DOW 30 (INDU) - Daily chart
10,400 ought to be rock-bottom support, at the prior top and 200-day moving average. A close under 10,400, with no rebound the following day (to back above this key level), would suggest a rally failure.
Making me cautious on INDU (above chart) is that the 21-day stochastic is just entering its overbought zone. While this indicator has a good record of being associated with tops or bottoms, there is also a tendency for multiple readings at the extremes before the index reverses.
The "easy" call opportunity was in the 10,100 area, based on it being low risk; not easy in terms of tiptoeing in without the media 'talking heads' to urge you on. They only are trend followers! If holding calls from lower levels, exit on a break of 10,400; or, if INDU falters at 10,550; OR, reaches the 10,700 area.
OVERALL INDICATORS - S&P market segment
S&P 500 (SPX) daily chart + key indicators ...
It also should be noted that the SPX advance is approaching resistance implied by the prior (early-April) highs and is equal to a 62% Fibonacci retracement; of the March-April, 7-week decline. A bit more of an advance and SPX will have retraced 66%, which suggest key resistance as just under 1200. Only a close above 1200 would suggest that SPX could challenge its prior (yearly) peak.
SPX is approaching an overbought reading, but it's not in the extreme zone, unlike the situation at the bottom made in the 1140 area, which kicked off this recent strong rally.
I look at the 10-day moving average of NYSE up volume (see chart above) as the key to volume activity on rallies. It should be rising, but this has not been the case lately, as can be seen on the Up Volume (10-day) moving average above. This latest price spurt up has been accompanied by a falling or faltering 10-day Up Volume average; not a good sign for strong continued upside follow through from here.
The most bearish of my key indicators is the extreme in sentiment hit on Friday as call activity got quite high, relative to puts. You can see in the lowest portion of the chart above, what happened not long after my Call-Put Sentiment indicator hit the lower extreme. It set the stage for the rally to follow as traders got 'too' bearish. However, this indicator is a 'leading' indicator, as reversals might not occur for anywhere from one to a few days (e.g., up to 5) days after such an extreme.
S&P 100 (OEX) Index - DAILY
The key element, besides the 'overbought' implication of the approach of the OEX to my upper trading band, (currently intersecting around 570), is the fact that OEX has rebounded to resistance implied by the prior top at 567; this level, as noted by the red down arrow, also represents a return to the previously broken October-March up trendline. As support levels AND support trendlines, once pierced or 'broken', tend to then 'become' resistance later on, 567-568 is doubly worth watching for signs of a (downside) reversal from this area; or, from the Friday high already reached.
I suggested taking profits in the 565-568 (it should be 565-567) on OEX calls; e.g., held from the 550-545 area. For those holding calls exit if OEX starts to fall under 563.
No put recommendations yet, as the OEX chart pattern remains bullish and momentum is up; moreover, the chart or 'pattern' is the first among 'equals' of the four factors I mention above. But, I do put a lot of stock in an approach back to the trendline noted above at the red down arrow; sometimes calling it the "kiss-of-death" trendline.
S&P 100 (OEX) Index - HOURLY
My suggested 'trailing stop' at 563 is just under the hourly up trendline. My trade objective for 565-567 has been met. Key resistance is at 567. A decisive upside penetration of 567 would suggest next objective to 570, perhaps even to 575; I don't anticipate it going higher then here on this rally. Stay tuned on that!
The 21-hour RSI is showing a minor bearish divergence, as it hasn't yet 'confirmed' the most recent high. This may be suggesting we'll see some early weakness in the week ahead; e.g., a pullback or drift back down to the 561 area, then another rally.
NASDAQ 100 (NDX) Index -- DAILY
Resistance in the NDX Index, as suggested by the Nas 100 daily chart below, is around 1545-1550, as suggested by the up trendline drawn through the late-March/early-April tops.
This trendline, coupled with the rising support trendline below it, gives an initial appearance of a bearish rising wedge pattern. I am cautious about over-staying in NDX calls. In fact, I suggested in my last Index Trader commentary to exit at and above 1500. This represented a 60 point gain from call purchases made in the 1440 area, on the pullback to the 21-day moving average, before NDX took off on one of its sky-shoots.
Key support looks like 1450-1455 on the chart. As said, I'm cautious about staying in calls but not ready to suggest that its, willy nilly, time to buck this strong up trend by a put play; except, that I would suggest buying NDX puts in the 1550 area, where stop protection was 5-7 points above; e.g., at 1455-1457. At that point I would be looking for a pullback to at least the 1500 area.
Nasdaq 100 (NDX) Index - HOURLY
Technical 'damage' so to speak in NDX is more pronounced if there was a Daily close below 1500. At any rate, a break of the steep (cyan) up trendline, and most definitely if 1500 was pierced, would then suggest downside potential to the lower end of the hourly uptrend channel which intersects around 1470 currently ... with a relatively steep uptrend line, the level at which it (the trendline) would be pierced ('broken') rises over the next few days accordingly.
QQQQ - The Nasdaq 100 tracking stock
The best near-term upside I see for the Q's is to the 38.25-38.50. 36.75 is key support.
I would rather be long than short of course ... always respect the trend! ... but will also consider shorting the stock at and above 38.00, on up to 38.50 max, with a protective (buy) stop at 38.70. My downside objective at that point would be for a pullback to the aforementioned 36.75 support. Such a trade would then just meet the kind of risk to reward parameters I look for.
Good Trading Success!