The Bottom Line:
A pullback is "due" by some measures. If this begins in the near term, the question is whether it will be a shallow, or a bit deeper, correction. There's no way I can tell based on what I'm seeing, but the warnings are significant enough to make me not want to take out any more index calls.
The kind of strong rebound in the Indices, coming after completion of a steep correction and accompanied oversold condition (at the recent bottom), don't typically just turn around into a steep fall; absent some crisis. Institutional money is coming into stocks on dips and will tend to support the market. That is until more buying power (supply of that green stuff) is used up. NYSE and Nasdaq Advancing Volume trends are showing good overall momentum still.
For the option player, this phase of the trend can be difficult, as volatility and time premiums shrink. You can be in danger of being on the right side of the trend, but starting to lose some of your (unrealized) profits. Which is why I prefer waiting for a good-sized pullback to initiate new call positions and why I suggested exiting at least half of the profits on OEX and NDX calls suggested back at much lower levels.
If I have bought "right" (i.e., before the 'power' part of the advance began), as soon as the indexes hit significant profit-taking, I'm exiting. For remaining call positions, trailing stops or exit points are a good idea.
There's a danger in trading when we've missed the biggest part of a strong trend (or were on the wrong side of that trend - hey, we've all done it!), of wanting to get back in too soon. Too soon is not waiting for the next pullback or even a sideways consolidation, where momentum indicators like RSI or Stochastics have dropped back from more overbought extremes.
I also like getting in again when 'sentiment' has backed off from its recent bullish extremes. Waiting can be hard in these instances, but it pays off over the long run.
MARKET NEWS and INFLUENCES
** INDEX TRADER - MIDWEEK UPDATES **
MAJOR INDEX COMMENTARIES AND CHARTS:
S&P 500 (SPX), Daily chart ...
Basically, the S&P 500 (SPX) went sideways this past week. Technically, SPX is struggling to pierce resistance implied by its previously broken up trendline, as highlighted on the daily chart below.
Key resistance still looks to be the 1195-1200 area. 1198 represents a 2/3rds retracement of the last downswing. A weekly close above 1198-1200 would suggest some likelihood that SPX will challenge or re-test its prior peak at 1229. A weekly close above 1208 would finally achieve a bullish breakout above the weekly down trendline (not shown).
Due to the declining volatility, I have my trading band or moving average 'envelopes' pulled into the 2% area, which is what I'm using currently to provide an idea of the price point, at or above which, the Index is 'overbought'; a good measure of the possible high end of its range. As always of course, there can be a lengthily period where prices advance up along the band, hugging the upper envelope line.
In these situations, pullbacks to the center (21-day) moving average defines likely support and is about as much of a pullback as will develop. Such pullbacks become my minimum buy point for new call purchases; once I see that the 21-day average is shaping up as an area of buying interest (support).
Key SPX support is at 1178-1180, 1178 being the prior top, resistance that should now be support. This is also the area of the 21-day closing average. If SPX closed under 1178 and which was not reversed the next day, next solid support looks like 1160. I would have an interest in buying a pullback of this magnitude.
S&P 100 (OEX) Index - DAILY
OEX cleared 567 at the end of the week. To maintain a bullish chart picture, the index should stay above this area. If 567 gives way, look for support in the 558-561 zone. A daily close under 560 and not reversed the following day, is a short-term bearish reversal.
Right now OEX looks to be at the top of an uptrend channel. If the index can't get above 570-572, the index can fall toward the middle of this price channel; such as back to 558, perhaps even to around 553, the low end of the channel.
The S&P 100 is approaching an overbought condition as measured by the 13-day RSI. The other significant measure of an upside extreme are the two recent daily readings of my 'sentiment' indicator seen above; at the 2 level and higher, with such readings associated with market corrections ahead.
S&P 100 (OEX) Index DAILY chart (#2) ...
A 'bellwether' or predictive stock I look at in conjunction with the S&P indices, is General Electric (GE). The company is in every major area of economic activity and a good proxy for a lot of the type companies making up the S&P index.
GE broke pierced the top end of its multi-month trading range or 'rectangle', providing some related confirmation of the strength of the OEX uptrend. Daily volume on the stock has been lackluster however and OBV (On Balance Volume) has flattened out.
A reason to watch GE is to see if 36.50 holds as support on pullbacks. This important level is the top end of a lengthily sideways trading range; an inability to stay above its prior 36.5 breakout point, would also be bearish for the S&P and Dow.
As discussed in my most recent (Wed, 5/25) Trader's Corner article, certain 'bellwethers' (key stocks, indexes and sectors) can give important clues related to the major index trends and the likelihood of continuation or reversals of those trends.
S&P 100 (OEX) Index, Hourly chart ...
The top end of the hourly uptrend channel comes in bit higher in the hourly chart than suggested by the daily chart (at 572); the trendline rises toward 575 over the shortened week ahead. Near support is 567, then 564, with the low end of the price channel intersecting currently around 560.
Trailing stops on OEX calls could be bumped up to 559, at just under the hourly up trendline.
The 21-hour RSI continues to show a minor bearish divergence, as the indicator drifts lower while prices trend sideways. This kind of divergence suggests, at a minimum, that the index is vulnerable to a decline. Stay tuned on that.
DOW 30 (INDU) Average, Daily chart ...
I discussed previously the significance of the 'line' of prior highs at 10550, seen before the last sharp decline. The Dow 30 (INDU) Industrials has not been able to pierce this key resistance. Until it does, the average is a looking like a fall waiting to happen, perhaps back to support in the 10400 area.
The 21-day stochastic has been a pretty good indicator for showing the overbought/oversold extremes. The problem in relying on this indicator for precise timing of a reversal is the tendency for the Dow to take its own sweet time in when an actual reversal develops. It does provide some indication that the LONGER the indicator hangs up in the overbought zone, the greater the likelihood of a trend reversal. It shows increasing risk is what it really does.
DOW 30 (INDU) Average chart, Daily chart (#2) ...
The other point of the chart is to provide a note about the Dow Transportation Average (TRAN), one of the key bellwethers for the Dow Industrials,
It's still important for the averages to "confirm" each other. When one goes to a new low, like INDU did last October, and the other (TRAN) doesn't, it was a bullish divergence; a very strong Dow rebound was to follow that low.
If INDU goes to a new high above 11,000 later this year, and the Transports (TRAN) do not, it may be the mother of all sell signals, at least for this year. Something to check in from time to time, assuming this recent rally kicks into second/third gear.
NASDAQ Composite (COMP) Index, Daily chart ...
There is resistance at the most recent 2075 close implied by the previously broken up trendline. Above 2075, the key resistance is 2095-2100, as noted at the down arrows on the chart.
If further rally attempts falter at 2075, or 2095 to 2105, it suggests a top to this recent upswing. Support begins in the 2050 area, with best support back down at the (upside) chart 'gap' at 2004-2005.
A close over 1543 would be bullish. Ability of NDX to advance beyond a 2/3rds retracement gives support to the bullish interpretation that NDX is in another up 'leg' that can challenge the old highs.
For the tech heavy Nasdaq, the Semiconductor stocks represented by the SOX Chip index has been a key bellwether at some key market junctures. When NDX was looking like it might get back above 1550 early in the year, SOX formed a potent double top and was a tip off to the sharp further NDX down leg that to follow.
Now, SOX has pierced a long-standing down trendline, which may be telling us here that the Nasdaq has completed its downside move and can mount a sustained rally; especially after a near-term pull back first. NDX has had a steep first run up move or leg; I don't think the outlook favors a runaway second up leg. The first act was pretty good however! Traders have not lost their love affair with tech; when it moves, it's a racehorse!
Nasdaq 100 (NDX) Index, the Hourly picture ...
The RSI is drifting down, as the Index went sideways most recently; just like the OEX pattern. The odds, and market gods, probably favor a pullback ahead. It seems due. Stay tuned.
The Nasdaq 100 tracking stock, QQQQ: Daily chart ...
I've noted resistance on the chart below at 38.25-38.50, at a 'line' of prior highs. This zone is likely to be quite tough to penetrate without a period of consolidation and a pullback first. Such as, back at least to the (upside) 'gap' area at 37.25; or, to support implied by the 200-day moving average around 37.0. I have buying interest again in this area.
If there was a break of 37.00, a quick exit seems advisable, as there might be an eventual further buying opportunity closer to 36-36.25. I'm not looking for this much downside, but it lays out the range of possibilities. On the upside, a close above 38.50 would point to a possible next target of a buck higher, to 39.50.
Average daily volume tapered off, ahead of the long-weekend, but the OBV (On Balance Volume) trend continued higher, which I take as the more important bullish confirming volume trend.
AND, on that note, have a great Memorial Day weekend and kick off to summer.
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Good Trading Success!