THE BOTTOM LINE:
The Semiconductor Index (SOX) has now retraced a bit over 50% of the steep 9-month fall seen last year from Jan. to Sept. SOX ended the week at 463 and the index looks to have potential up to 480.
At of the end of the week the market finally reached initial 'overbought' readings in the major indices. Not that this means an impending top, but it's an alert that the risk grows for a correction. So, if you continue to buy calls for example, the risk to reward proposition is less and less in your favor. It will be tempting to take profits on calls on a further extension of this rally.
Moreover, key indices are finally at or near the top end of the their uptrend channels, suggesting that they may be nearing some potential resistance. Bullish 'sentiment' again got very high last week. The 5-day moving average of my 'sentiment' indicator got as high as it usually ever gets without a correction or pullback developing.
I thought that there might be a modest pullback early in the week, offering a buying opportunity for those looking to get in, but it's been a steady climb. The rate of increase has slowed down in the S&P, but the Nasdaq has really charged ahead since the Composite (COMP) cleared 2100. COMP looks like it could get to the 2200 area before this rally phase completes itself.
The Dow Industrials (INDU) continues to lag. INDU has only completed a 2/3rds retracement of its March-April decline, whereas the S&P 500 (SPX) has cleared its March peak. Not so the S&P 100 (OEX), at 575.5 on Friday; it's yet to reach or exceed its 584 closing high from earlier in the year.
MARKET NEWS and INFLUENCES
** INDEX TRADER - MIDWEEK UPDATES **
In my Wednesday Trader's Corner article appearing in the e-mailed Option Investor (OI) Newsletter, I often have some updated analysis for 1-2 of the major trading indexes, especially in response to an OI Subscriber e-mail.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES:
S&P 500 (SPX), Daily chart:
This same area (1235) touches the upper moving average envelope line, suggesting an increasing 'overbought' condition. Anywhere in the 1235 area on up to 1240, SPX is living on borrowed time so to speak, as every rally reaches a point where profit taking will set in and a correction begins.
I suggest taking some profits on S&P calls this week, especially on further rallies. Q2 earnings are coming out and are they going to be better than this rally is anticipating? Overall, they probably are not going to exceed current estimates.
Near support should be at 1225, at the prior closing high. Next support is 1215-1210, especially at 1210.
S&P 100 (OEX) Index - Daily chart:
Once 570 resistance was cleared in the S&P 100 (OEX), it was clear sailing for another 5 points. Thursday's high touched my upper envelope line, suggesting, along with Friday's RSI reading, that OEX may be at or near a peak to the current rally.
The index is nearing its prior (Oct-March) up trendline at 579-580 and I take this area as possible resistance. The next upside objective if OEX closes over 580, and assuming this is not reversed the next day, is to the 12-month closing high at 584.4 and/or to the prior intraday high at 586.8.
Key near support, based on the prior high close from June, is 572. A close under 572, not reversed the following day, suggests that the short-term trend has turned down.
564-566 is an area of support implied by the 21-day moving average and a prior top. Unless there was a situation where the market was in free fall for some crisis reason, 565-566, if reached, looks like another call buying opportunity.
Yes, bullish 'sentiment' again got very high last week. The 5-day moving average got as high as it usually ever gets without a correction developing within a few days after the fact. Stay tuned: it may be an action-packed week ahead!
DOW 30 (INDU) Average, Daily chart:
The Dow 30 (INDU) average achieved a bullish upside breakout above its symmetrical triangle pattern, as highlighted below. In fact that pierced trendline, at 10575, should now 'become' near support.
INDU is lagging the broader S&P index and is approaching a minor overbought condition, but also has to be seen as having further upside potential; just not as much on a percentage basis. This situation probably may also mean there's less risk in the DJX calls as the narrow Dow average has about 20 (of 30) stocks that are languishing but also not likely to go a whole lot lower.
I figure key INDU resistance at 10725 and take this a possible next objective, at the top end of an uptrend channel highlighted on the chart below.
10575 is near support; 10460 is likely support implied by the 21-day moving average and I would like to buy a pullback to this area. Significant or major support should be found at the up trendline in the 10,300 area.
An overbought condition is near at hand, but this should not be taken as signaling a top in any immediate timeframe; it does suggest that the market is more vulnerable to a shakeout on negative news or economic developments.
NASDAQ Composite (COMP) Index, Daily chart:
Hard to predict whether COMP will back off from recent highs or continue to churn out new highs, such as to a next technical objective at 2190-2200. I would not be surprised to see either. If 2190-220 is reached next, without much of a pullback, then a deeper correction could develop after that; e.g., back down to the 2115 area even.
The Composite is now the most overbought of the major indices, at least as measured by the 13-day RSI (Relative Strength Index). There are different way to measure 'overbought'. A move to around 2200 would be take the index up to my upper trading 'band' (moving avg. envelope line) and be another measure of an extreme.
Nasdaq 100 (NDX), Daily chart:
SUPPORT and RESISTANCE
1525-1526 is a significant support implied by the 21-day moving average. I favor buying a pullback back to this area, although it seems unlikely currently that there would be this much of a drop.
Near resistance looks like 1580. A close over 1580 would suggest upside potential to 1595-1600. I favor selling long calls and taking profits if this area is reached; aggressive traders could take out some puts here also, looking for a dip back to 1560.
The Nasdaq 100 tracking stock, QQQQ: Daily chart:
37.50 is support implied by the important 200-day moving average. 37.00 is even more key support, at the up trendline. I'd like to buy the stock again in the 37-37.50 zone.
As has already happened recently in the Composite and the Nas 100 Index (NDX), the 50-day moving QQQQ average looks ready to achieve a long-term bullish (upside) crossover above the 200-day avg. This is a lagging indicator, but significant relative to the longer-term trend, which now looks to be up again in Nasdaq.
Average daily volume has contracted (fallen) on balance over the last few days of this advance. I would normally take this as a bearish 'non-confirmation' of this price advance, but On Balance Volume (OBV) is still trending higher, so I tend to discount what the daily total is doing.
Good Trading Success!
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