THE BOTTOM LINE: My take last week on the sideways to slightly lower price trend of the week before last that followed the strong market advance into mid-August, was that of a 'normal consolidation'. Once the market completes a strong run up to the point where an Index is registering an 'overbought' extreme in terms of the RSI and Stochastic Indicators, the typical next phase is what is called a 'consolidation' phase or a period of either a pullback in prices OR a sideways trend.
Consolidations, I like to say, are of two types: Price and Time. A typical pullback or retracement of some portion of a prior advance (e.g., 25 to 50%) is a typical 'price' pullback. Such downswings are still part of consolidations or pauses in an ongoing trend only.
In a very strong advance, an overbought condition may be moderated by prices going sideways for a period of TIME; thus my term of a 'time' consolidation. This type of pause is what the market came out of this past week when prices of all the major stock indexes broke out to new highs for the move.
I also took it as a definite bullish sign that my 'sentiment' indicator, the CBOE Equities daily call to put volumes ratio, hasn't been showing anything near an extreme in terms of a bullish conviction by traders. By the way, I didn't get my usual Friday e-mail from the CBOE and their web site has been down today (Saturday), so I don't have Friday's call/put ratio which would be usually be the last point in the call-put line seen under my OEX chart.
In the case of the OEX, the breakout was to a new high since its advance began from its July 2002 low. Of course, for much of 2004 and all of 2005, into early this year, the market in terms of the OEX has been locked in a broad trading range, representing the mother of all consolidations so to speak.
I'll deal with any revisions and updates to my technical view of the major stock indexes in the section below. Overall, the trend remains up across all major indices, but especially so in the big cap S&P market segment. The Nasdaq, in terms of the Composite Index (COMP), has retraced just half of its prior decline. Quite a contrast to the S&P 100 breakout to a new high.
MY WEDNESDAY TRADER'S CORNER COLUMN:
In my most recent Trader's Corner (8/30/06) article I described the basics of how Point & Figure (P&F) charts are constructed. It is interesting to note that as of this past Wednesday, the S&P 100 (OEX) HAD achieved a bullish breakout about it's previous top according to the P&F chart construction method but NOT according to the standard bar or candlestick chart. By the end of the week, in terms of the bar chart, a move to a new high was seen. You may find this P&F article of interest just for seeing the comparison of the two chart types.
To read or review this article, check your 8/30 OI Daily (e-mailed) market letter, or click here to go to the relevant web page.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX);
The next upside objective for SPX continues to look like a re-test of the prior 1327 high. An objective to around 1335 is suggested by the measuring implications of the Head & Shoulder's bottom described on the chart below. A close under 1290, not reversed the next day, would suggest a loss of the strong upside momentum that we've been seeing in recent weeks. The next lower support is around 1280; major support is at 1260.
A move to the area of the prior 1327 high that stopped there would set up a potential double top, which should be watched for.
The S&P is just about at the level where it's starts being at an 'overbought' extreme in terms of the Relative Strength Index (RSI). In a strong trend it will happen that extremes like these are reached in this indicator. But this technical aspect shouldn't be used as an automatic sell or sign to get out of calls, as such (overbought) readings can continue for some time.
An overbought extreme registering for this indicator does suggest caution and being guarded in protecting option profits as well as suggesting to not take out new 'buy & hold' positions after there's already been such a strong run up already. Bearish news will tend to have an amplified effect in an overbought market and sharp drops can and do occur in these situations.
THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) broke out to a new intraday and closing high relative to the May top. Ideally in maintaining a strong bullish chart, the prior high and recent resistance at 604 will tend to 'become' support. 597-598 is the next near support area, with pivotal support at 595. By pivotal here I mean that a move below this level suggests upside (trend) momentum has faltered and stock selling may well continue to take prices lower.
The 'minimum' upside objective implied by the H&S bottom pattern is to 612. I would say that 612-615 is a target for this price swing, but not much higher without a correction setting in first. I am watching the 604 area with keen attention, as a double top pattern would still be made if OEX fell in the early goings next week and kept declining.
I said last time that "... a rally failure below 604 is less likely than at least a re-test of the prior 604 high, which is the key near resistance." Now it remains to be seen how much of a further up leg will develop. So far so good, but stay tuned!
SENTIMENT AND OVERBOUGHT CONDITIONS:
I take the recent relatively low levels of bullish sentiment to be bullish. Seem contrary to what you would expect? This is exactly so in the theory of 'contrary opinion'. Tops more often come AFTER there is at least a one day reading that reflects a strong level of bullishness and call buying, relative to puts, typically intensifies to well above present levels; e.g., daily CBOE equities call volume expanding to double that of put volume.
DOW 30 (INDU) AVERAGE;
Near INDU support and buying interest should develop around 11,400, with next lower and pivotal support at 11,300 to around 11,276.
The Nasdaq Composite (COMP) Index chart is bullish, but COMP has reached a pivotal area, half way back to the prior high relative to its July low.
Near resistance is at 2233-2235. Nearby and key support is in the 2125 area.
It looks like the next higher percent retracement level of 62%, to 2235, could be reached judging by the recent strong upside momentum. Some of the key Nasdaq stocks appear to have started renewed rally phases. At 2200, this last rally in COMP has now had a move equal to the first rebound off the July bottom. While sometimes equal, a more typical or at least a common pattern is that the second rally phase or wave is more prolonged than the first.
What I would expect or anticipate: either the rally falters at a retracement of half/50% or upside momentum continues strong. We should know on this soon.
I said last time of the Nasdaq 100 (NDX)..."Prices have traced up a bullish 'flag' type consolidation, suggesting at least a move up to the 1600 area; but, this should happen soon if it's going to." It did! Or almost, in terms of touching 1600.
In terms of this actively traded index, the key upside target around 1600 in the Index is very near at hand. If this level is pierced, there's NDX potential up to the 1626-1635 area.
Near support is 1540-1550. It looks more likely NDX would reach 1635 before a pullback would take the Index back to the 1550 area again. The wild card is the overbought condition. If the march higher continues without much interruption and only minor pullbacks, I would exit NDX calls in the 1635 area.
QQQQ support is around and just under 38.00, with major support at 36.25. The key resistance levels are now 39.25; then more significant resistance I think at 40-40.15. I continue to look for higher prices still with an objective to the $40 area.
This most recent advance did not occur with a concomitant surge in volume, which
is a slight cautionary note along with the dip in the money flow index. This
could be just preparatory to another upswing also.
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 YOU are thinking or wondering about. Yes!
NOTES ON MY 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.