THE BOTTOM LINE:
A tough market to figure out on how much upside there is on this leg, but options traders seem to have no fear of plunging into calls. This past week is the first time in a long time that I've seen several back to back days when CBOE daily equities Call volume was over a million. Those numbers were seen in each of the first 4 days of the past week! Needless to say, my 'sentiment' indicator, since it's based on an equities call to put volume ratio, has been registering a highly bullish outlook.
Hmmm, the January 20th expiration should be interesting. In the Index options, the January calls are seeing a lot of action; well, the FEB (110) DJX calls were on the CBOE most actives list on Friday. All this near-term bullishness makes me want to tip toe away from this possibly 'overheated' fray. When the market started losing momentum Thursday I exited half of the Nasdaq 100 (NDX) calls I owned (bought Jan. 3rd. when Index prices shot back above the downside price 'gap' of 12/29-12/30). Tuesday and Thursday being common reversal days anyway.
Not that I don't think the market can or will not go still higher, but some technical objectives as far as minimum (upside) targets have been met and mostly, it's getting too 'crowded' in the bulls camp; and me not liking crowds anymore!
By the way, my Wednesday Trader's Corner piece was on the subject of what price 'gaps' can tell us or suggest about reversals, as well as 'minimum' price targets for some price swings. That article is seen by going back to your OIN Wednesday e-mail or may be viewed online by clicking here.
As the public, the proverbial 'little guy/gal', gets back into the market more heavily of late, the Russell 2000 stocks are coming back into favor. The Russell 2000 Index (RUT) didn't so much correct much price wise, as consolidate in a bullish 'flag' pattern: suggesting a further advance to 720-725 (Fri: 708.4).
I'm also getting the strange feeling again that I should sell my stocks and buy gold. Maybe if I lie down the feeling will pass. A surefire sell signal in gold is when I buy it. I'll let you know!
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
If 1307 is exceeded by Monday, 1312 by Friday, SPX would be above my upper envelope line, which suggests the Index is starting to get 'overbought' price wise; e.g., SPX would be further above it's 21-day moving average than is seen about 90 percent of the time in a typical market or trading cycle.
Technically, the prior 'line' of highs around 1275 should now act as a key support, becoming an area of BUYING interest. If this level was pierced on a decline, the Index would not be maintaining a bullish pattern. Once a rally exceeds an old high, technical strength is suggested if the index stays above that prior peak.
Major support below the 1275 area should be found at the trendline, currently intersecting around 1262; 'must hold' support for the bulls then becomes the prior (down) swing low at 1246.
SPX got fully 'overbought' on the last advance. It now remains to be seen whether there's either a deeper price correction into the expiration or after it; alternatively, there could be another sideways/lateral trend for a time, before a next rally attempt.
S&P 100 (OEX) INDEX; DAILY CHART:
Look for immediate support or an attempt for OEX to hold the 584 area on a closing basis. Next support is at 580; key technical support then comes at the trendline around 576; its a rising trendline of course, so estimate 577-577.5 as trendline support by Friday.
The previously broken up trendline now appears to be acting as resistance, consistent with the adage that support, once broken, often 'becomes' resistance later on. Assuming OEX has trouble piercing this trendline again anticipates next resistance above the recent 588.7 high, to be 591-592. Major resistance is estimated at 600, a 'milestone' level for OEX.
I've commented already on the high degree of bullish 'sentiment, but this alone is not suggesting that the current rally won't have a second leg higher. However, this situation plus the recent overbought reading on the RSI indicator does suggest caution in buying new or additional calls absent a further pullback; e.g., to the trendline around 576-575.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Since the public, and the media talking heads, pay much attention to the Dow and this 11k number, it's important in terms of pulling in more participation from people long out of the market, at least actively themselves (versus in 401k stock mutual funds).
Support is at 10880; 10800 is then a next key technical support. If there was a drop under 10800, INDU could fall another 100 points to around 10700, before strong buying showed up again.
Immediate or first resistance is at recent highs made around 11045. Above 11045, I estimate significant technical resistance being at 11175-12000 by the middle to end of the coming week.
Downward momentum is showing now on the 21-day (slow) Stochastic indicator, as there's been a bearish crossover of the two lines. The action of this indicator suggests 'vulnerability' for a further decline, but that's about all; those lines could flip up again. [I don't like buying at the high end of this indicator range and treat it like a car gauge warning indicator where I might drive further but won't race.]
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHARTS:
Key support is at the previous highs around 2275-2280; prior resistance becoming support. 2263, at the 21-day average bears (no pun) watching as to buying interest/support coming in if 2275 was pierced. 2230 is support implied by the up trendline. 2200 is must hold support for the bulls.
An overbought and recently falling RSI indicator is something to take into account in an expiration week as, besides the expiration related influences, an overbought market also suggests potential for increased volatility.
NASDAQ 100 (NDX); DAILY CHART:
Easier to predict is key support as being in the 1715-1705 price zone, the area of prior highs and at low end of the recent upside price gap ('filled in' at 1708). A close under 1700 would be a bearish development. Next support is then around 1658, with significant support likely to develop in the 1641-1635 area.
The last overbought reading in November in the Relative Strength Index (RSI) eventually led to a correction, but was tricky to play in Index options as prices first went sideways for so long.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY BAR CHART:
There was significant resistance in the Q's on prior rallies to the 42.2-42.25 area; look for this area to offer support on pullbacks. 42.00 is also a key support, especially on a closing basis. 41.75 intraday, is an important support also.
I give the benefit of the doubt to a further move higher in the Nasdaq 100, but would see it as more likely or safe to play after this coming week of expiration cross currents; if there was a sharp fall into expiration, buying the stock looks attractive.
Good Trading Success!
Please send any technical and Index-related questions to me at email@example.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!
NOTE: TRADING GUIDELINES AND SUGGESTIONS
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM) strike prices in order not to 'overtrade' my account. Exit or 'stop' points, as well as projected profitable index price targets, are based on my technical analysis of the indexes.