It's wasn't hard to see technically that the market was due for a pullback but the timing of when, hard to figure. My indicator showed that sentiment registered more bullish on Friday, as traders were buying calls on the first break. But, my suggestion is to wait. Due to an approaching short-term oversold, a rebound ought to set up early in the week, say by Tuesday; it's also equally likely that there'll be more downside after a first bounce back, so I'll wait.
As far as further upside potential, the big cap 100's, both S&P 100 (OEX) and Nasdaq 100 (NDX) ought to be able to at least equal their prior highs from early this year. The Dow (INDU) is seriously lagging, but it may play some catch-up later, assuming this economy is so sound. Interestingly, (ominously?), on a weekly closing basis, INDU has not been able to retrace more than 2/3rds of its March to April decline. It's way lagging.
Runaway rallies, especially led by tech can really stretch out. It (the market) can look like it will never come down as I mused in my midweek (8/3) update. Yes, I actually did update in the middle of the week. Feeling a little sheepish maybe that I kept saying that this rally was overdone, but the broad indices just kept going up.
As soon as I wrote about the unknown timeframe for a break, the next day saw it start. Hey, I can be an 'indicator' too! As soon as I dream that maybe the emperor really HAS clothes, I'm about to wake up.
MARKET NEWS and INFLUENCES
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S & P 500 (SPX); DAILY CHART:
The advance for some time in the S&P 500 (SPX) had daily highs 'hugging' the upper end of its uptrend channel, showing visually the slowdown in the momentum relative to the sharp run-up from the low end of the channel I've outlined in the chart below. My 1245 target was seen, not 1250.
The SPX decline quickly reached support around 1225, but key support looks more like 1220. If 1220 is pierced, SPX could fall to the 1208-1210. If a rally sets up from around 1220, SPX could rebound back up to as far as 1240. Downside potential from there could be back to 1210. It seems less likely that the index will go on to new highs without another downswing.
I've often noted the tendency for a sideways to lower trend in the RSI, while prices kept making new highs, to suggest an eventual sharp break. As soon as SPX broke its well-defined hourly uptrend line (not shown) at 1238, the correction was underway. The hourly trendline supplied the timing 'trigger'.
S & P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) was lagging the broader S&P 500. It's trend was sideways, suggesting it would at least fall to the low end of the prior range, which was around 571. The close under this level on Friday was bearish. Downside potential looks to be at least to around 565. Near resistance is at 573-575.
Major support looks to be in the 560 area. The OEX has a tendency, to see two-stage declines. After a rally sets up, and which may not be far off, odds favor another decline to lower lows than on the first downswing. It's the second decline that should set up a call buying opportunity.
I got an e-mail query as to any put suggestions. There are of course likely to be still significant two-sided trading swings. That's the pattern OEX is still in. I favor potential put buys either if OEX rebounds quickly to 580, or later (after the market again gets more oversold) reaches the prior peak and looks like a double top was setting up.
While I didn't suggest it, puts taken out at the high end of this recent range around 577, with a stop/exit point at 581, was a promising trade of the type I like; i.e., a 'defined' stop point just over a well-defined 'line' of resistance not far away, with ample downside potential (e.g., to 567) relative to the risk (stop) point.
Major resistance is expected at 586-587, at the prior high from early this year.
My sentiment indicator was actually quite telling after all. Downside reversals have more often begun CLOSER to the time when peaks in bullish sentiment reach the 'overbought' zone seen above.
However, this peak DID mark the start of what was a relatively narrow price range (7 points) of 3 weeks. There was never a significant upside breakout after bullish sentiment got to the highs seen. I learn something every week, month and year!
DOW 30 (INDU) AVERAGE; DAILY CHART:
Dow 30 (INDU) resistance around 10700 area proved to be the stopper as was apparent its being stuck in a relatively tight 100 point range; the longer that went on, the more likely that selling would take out the low end of the range. The close under 10600, at the 21-day moving average, suggests some more downside ahead, such as to the 10500 area and support implied by a pullback to the prior up trendline. Major support is at 10300.
If in puts, a tight stop would be at 10610 and an objective to 10510. Wait on buying any DJX calls to see how support shapes up, especially around 10500. I would rather buy into (puts) a deeper correction, especially one taking INDU back to the lower end of its uptrend channel.
INDU has this tendency for the 21-day stochastic to mark the upper end of its price ranges. A precise 'timing' signal its not, but its useful in setting up a watch for where resistance is setting up, positioning in puts and then WAITING.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite index (COMP) finally hit its upper channel line where this marked at least an interim top. The close under the prior high at 2190 suggests potential for more weakness ahead. It's not surprising to see selling coming in around the area of a prior top like this. Eventually COMP could reach 2260 or higher.
Near resistance is at 2200; then, at 2207. Near support look s like 2170-2172; below this area, I have a 2145 downside target.
COMP had a declining trend in its RSI peaks, along with its move to a higher high. It can take a while, but a break always comes after this kind of pattern, but it doesnt necessarily mark any kind of major trend reversal.
NASDAQ 100 (NDX); DAILY CHART:
I thought that Nasdaq 100 (NDX) chart might at least touch its prior highs in the 1634-1635 are from earlier in the year; it got quite, at just over 1628.
The recent high was one more 'touch' to the upper trend channel and all that was needed to set up what may be the start of a significant correction. As NDX lagged the Composite, it has fallen less dramatically; and, it remains to be seen whether it will pierce 1592, potential support noted by the green up arrow on the chart below.
I continue to see 1560 as key support, 1635, then 1640 as key resistance. Major resistance implied by the late-'01/early '02 peaks is at 1710, extending to around 1735.
Trading strategy wise, I don't see enough yet to suggest more than what I did already in taking profits on calls once NDX got up around 1610, and higher. A break of 1592, not reversed the next day, would suggest downside potential to the 1560 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 (QQQQ) stock magic number was $40. It got a bit higher, but not to the 40.3 prior high and a 'natural' target since it was the prior high.
39.2 is key near support. A break of this level could lead to a drop to where I have highlighted next lower support around 38.50. If some of you were smart enough to short in the 40 area, an exiting stop is not hard to figure as just above 40.3. I take 38.50 as a target if there's a close under 39.2.
As I said in my last commentary, I would have been nervous NOT taking profits on long QQQQ stock in the 40 area as it was going up on less and less volume. There were fewer and fewer willing buyers and I subscribe to the 'greater fool' theory; I want some 'fool' to buy it at higher prices than I paid!
Good Trading Success!
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