Option Investor
Index Wrap


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My last Index Trader article was titled 'Bull Run' and this one adds 'Done?' to it. My advice to holders of Index calls: time to take the money (profits) and run. I say this not just because upside momentum appears to have stalled, but based on a number of technical considerations besides prices marking time for a while.

In terms of the S&P 500 (SPX), things look OK, as it appears SPX may simply be consolidating above 1225, the area of its early-March high close. But looking at the S&P 100 (OEX) chart, as I'll show, the index stopped at the top end of its uptrend channel and my upper trading band; ditto, in the Dow 30 (INDU), when it hit 10700. The OEX also had a bearish price/RSI divergence as RSI failed to 'confirm' its recent closing high. The backdrop to this recent market stall is significant given my 'sentiment' indicator coming after readings of extreme bullishness.

Looking at some key stocks: bellwether GE looks to be struggling to stay above 'must-hold' key support at 35. I don't see how the S&P 100, or the Dow (INDU), keeps going up without stocks like GE on board. In terms of Nasdaq stocks, a number of key 'bellwether' type companies are showing signs of topping; e.g.: Intel (INTC) continued lower Fri., piercing its up trendline; Cisco Systems (CSCO) recently reversed from the same 20.25 area where it topped in June; Microsoft (MSFT) reversed down after a short 1-day close over resistance implied by its 200-day average; even Google (GOOG), the current darling of tech stocks, looked toppy after it gapped lower Fri. just after making a new high on Thursday.

Looking at the Nasdaq indices, the Composite (COMP) has stopped moving up after hitting its early-Jan high again in the 2190 area; this area was also at the top end of its uptrend channel. The Nas 100 (NDX) also appears to be at the top of its channel, although this trendline is not as well 'defined'; NDX is at my upper trading 'band', so the index is pretty 'extended'.

Whatever kind of top might be developing (interim, intermediate-term, etc.) is also of keen interest of course to those thinking of buying index puts. I can say that buying puts around recent levels is not a bad speculation, assuming an exit point is used that's set to just above/over recent highs. Downside potential in a 'normal' 38-50% correction (of the last run up), relative to this amount of risk, is a favorable to good risk-to-reward ratio.

Closing index prices, a recap of market action, specific company influences and government releases are covered in the e-mailed and online OIN Newsletter, in the 'Market Wrap' section.


S&P 500 (SPX), Daily chart:
The S&P 500 (SPX) is again hitting resistance implied by the top end of the uptrend channel the index has been in since early-May. Of course, as you can see on the chart below, SPX continued to climb up along that trendline for some weeks before it fell sharply, but briefly, in late-June.

What's to say that the S&P won't continue to climb up that upper trendline for more weeks here? Just ahead of the June top, the RSI reached its upper ('overbought') extreme, as was the case at end of the week. Most often when an index gets up to such an extreme, a correction follows relatively soon. A sideways consolidation or move can be one type of 'correction' before the index takes off again. However, given the extreme bullish sentiment and the way key stock charts are looking, I anticipate a price pullback, not just a sideways move. SPX might get up to the 1240 area, but I don't see much upside potential after that.

I calculate near support as being in the 1220-1225 zone, especially at 1220. Next support being in the area of the 21-day moving average, around 1210; major support in the 1195-1200 area.

S&P 100 (OEX) Index - Daily chart:
The S&P 100 (OEX) pattern could be seen as consolidating before it pushes higher again, or building an interim top. Given the related peak in the RSI indicator, the slight price/RSI divergence as the last closing high was not matched by a new high in this indicator, plus the prior recent extreme readings in my bullish sentiment indicator, I see OEX as vulnerable to a fall.

A move up to the 578-580 area, resistance implied by the top end of the uptrend channel, prior to a challenge of the 12-month high around 587 (or its prior closing high at 584), can't be ruled out; but I give less weight to this possibility than to a downside correction next.

Near support at 571-570 should be watched for signs of a break. A close under the moving average at 567, not reversed the next day, would be a strong indication that the highs have been seen for a while. Major support implied by the low end of the channel is at 557-558.

S&P 100 (OEX) Index - Weekly chart:
I keep looking at this chart from week to week and find it telling that the S&P 100 (OEX) has not been able yet to get back up into its weekly uptrend channel. As noted by the red (down) arrows, this line of former support now appears to be acting as resistance. A close over 580, with an ability to maintain this level in subsequent pullbacks, is needed to suggest that OEX was clearly back into a longer-term uptrend.

DOW 30 (INDU) Average, Daily chart:
The Dow 30 (INDU) average has resistance at 10700. A close over this level suggests a move to still higher levels. 10570 is near support. 10540 is the next support, then about 100 points lower, or down around 10470.

INDU has reached an 'overbought' condition according to one good measure of this, the 21-day (slow) stochastic. This indicator is not good in exactly pinpointing a top, but does show an area where the market is vulnerable to a correction.

NASDAQ Composite (COMP) Index, Daily chart:
The Nasdaq Composite index (COMP) remains in a 'runaway' uptrend, but has not yet overcome resistance around 2190, at its prior 12-month high and the top of its uptrend channel. A 'measured move' objective, assuming two up 'legs' of equal length, is to around 2250. Stay tuned on that!

Near resistance is 2190-2200. A close over 2190, not reversed the next day, would suggest the further upside potential indicated for 2250. It's hard for me to look at some of the key tech stocks, as mentioned in my 'bottom line' commentary already and figure how further advances in the multitude of Nasdaq stocks is going to be enough to continue this sky shoot, especially given that COMP gives more weight to big-cap stocks. But, I've been wrong before!

Near support is 2145-2150, with major support at 2100.

The Composite continues to be into its 'overbought' zone. That and a subway token (and maybe a bag search) will get you a ride from Manhattan to Coney Island. Overbought/oversold concepts don't help 'time' market reversals very precisely.

An overbought extreme like this does indicate a likely final, and most risky, stage of an advance; call holders beware. Lance Armstrong doesn't need to take the risk of a spill to win the final Sunday stage (race) of the Tour de France, with his overall win sewed up. Just a little aside here, in my July Tour mania.

Nasdaq 100 (NDX), Daily chart:
The long-time leading semiconductors sector (SOX index) has not reversed, but SOX reached my 480 objective this past week. Bellwether chip stock Intel (INTC) reversed to the downside however and I don't know if the rest of the chip stocks will keep leading the SOX, and in turn, the Nasdaq 100 (NDX) higher.

The NDX chart pattern remains bullish but recent highs have hit resistance in the 1610 area, as implied by the top of the uptrend channel in the Index. The Q4 2004 weekly top, formed over 6 weeks, occurred with highs in the 1633-1635 area. Will NDX come this close and NOT challenge that prior peak? While there's a fair to good chance that it will at some point, I look for an intervening correction ahead of that kind of push.

Near support is in the 1570-1560 area, especially at 1560, which would 'fill in' the upside chart 'gap' from the recent strong advance. Below 1560, next support now looks to be 1540, at the previously broken up trendline and the key 21-day moving average. Major support begins at 1510, and extends to around 1480.

The Nasdaq 100 tracking stock, QQQQ: Daily chart:
The Nasdaq 100 (symbol: QQQQ) tracking stock achieved a closing high in the 39.50 area, at resistance implied by the top end of its uptrend channel as seen on the close-only 'line' chart below. 40 is the prior (closing) peak. Further resistance is at the 12-month closing high at 40. It seems unlikely that with the bulls charging ahead, that $40 high will not be tested again. The question is more whether there will be a pullback first, say to near support at 38.50, or perhaps[s back to 38. Major support looks like 37.50.

Assuming QQQQ continues its advance, without much of a correction first, I favor shorting the stock at 40, with a exiting (buy) stop initially set at 40.50. I'll update midweek, if there is a pullback, and look at possible buy points.

The 50-day moving QQQQ average did achieve a long-term bullish (upside) crossover above the 200-day average, a good indicator for the long-term trend, assuming 40 is overcome.

The On Balance Volume indicator continues in a bullish direction. No real sign of 'distribution' selling showing up yet.

Good Trading Success!

Please send any technical and Index-related questions to me at support@optioninvestor.com with 'Leigh Stevens' in the subject line; not only for answer, but also for possible use in my coming week's Trader's Corner article. Your emails are appreciated and where I learn what's on YOUR mind!

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