THE BOTTOM LINE: We've been in a strong market move and trying to pick a specific price target for a top or stopping place for a pause or pullback is tough; tougher than bottoms usually. My further upside expectations for the indexes are based on the weekly charts and their well-defined uptrend channels, shown and discussed in my individual index commentaries. At this juncture when old recent highs are being surpassed, it's time to start paying closer attention to the longer-term weekly charts.
We may start to see some backing and filling (sideways) now that new highs have been seen and buyers could turn somewhat cautious heading into October, a not always favorable period. We have a slowing economy. The bullishness in a hoped for 'soft landing', where the Fed stops tightening, is the bullish story and not earnings expectations in the next two quarters.
My recent trading advice was to take profits on S&P and Nasdaq index calls held from lower levels, as it looked like a double top might be setting up in the S&P 500/SPX (not in the S&P 100/OEX as it had gone through its prior peak), especially given that the index was overbought. With Nasdaq, what I thought might be the stopper was the retracement of 2/3rds/66% of the prior decline, which can be a tough resistance point. However of course, the rally powered on to some degree this past week.
I went back to some 'homework' and ran a study on the history of double tops in bull markets, which is how this current market certainly has to be categorized, and double tops in a bull market are not all that common. I also pointed out in my most recent Wednesday (9/27) Trader's Corner article that a double top needs to be 'confirmed' by a Close below the 'confirmation' point, which is the downswing low prior to the second top; SPX 1290 in this case. That's the technical story; fundamentally, never underestimate the economic hope implied by the Fed easing up on the rudder!
MY WEDNESDAY TRADER'S CORNER COLUMN:
In my most recent Trader's Corner (9/27/06) article which was more about 5 'high potential' (in terms of predictive value for the trend ahead) chart patterns, especially the double top, the Head & Shoulder's, and (new) the 'broadening' formation; e.g., a broadening top/broadening bottom.
To read or review this article, check your 9/27 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); DAILY CHART:
Such measured objectives are sometimes not quite reached, many times they are and surpassed. The rally above and beyond the prior 1327 high takes out the possibility that there was a double top forming. 'Confirmation' of a double top of course never came either, as there was nowhere near a pullback that would have taken prices to a CLOSE below the prior 1290 low (made before the push to the 1327 previous peak). Taking out puts on the basis of an 'assumed' double top had limited risk however, IF exit was made just over the prior high OR when the pullback rebounded from near support implied by the 21-day moving average.
Weekly chart analysis (following the daily chart) provides some idea of the next potential 'resistance'. It's hard to figure on the daily chart. SPX is trending higher within my 2 percent upper band (relative to the 21-day average), but this tells us nothing about a price target. It will sell off when it does and call holders should be alert given the overbought condition.
Look for near support at the 21-day moving average. If pierced, anticipate at least a short-term decline, unless prices pop right back above this trading average the next day. Pivotal support is at the last (down) swing low at 1311. A close under 1311, suggests that the next prior low around 1290 may get 'tested'.
The weekly chart shown after the daily chart will give a better 'take' on any major resistance and suggests that OEX doesn't hit major resistance until or unless it gets up into the 660 area.
If INDU doesn't correct further from recent highs, I figure near resistance and selling interest coming in to play next around 11,800. Near support is in the 11525-11475 zone. A close under the prior 11475 low, not reversed the next day, suggests a deeper correction than seen in the past few weeks, such as a decline that carried to the low 11,300 area.
How long can the 21-day stochastic 'hang' up here in 'overbought' territory? A long time when we get in a run like this, characterized by enough disbelief in its staying power. About the only other thing to be said about a prolonged overbought situation like this is that just when I, or you, decide that we just (finally) 'HAVE' to buy some calls, it will be over! Just kidding...sort of...not really!
On an hourly chart and indicator basis, the short-term momentum is headed lower based on the past 3 days sideways movement. Near support is at 2220 down to 2208. Below this area, the key/pivotal support is at the prior 2147 low. Figure support in COMP around 2150, give or take 3 points. A close below 2150, not reversing higher the next day, would suggest slippage of another 25 points or so, but I don't have lower targets currently than that.
Near resistance looks like 2300. Major resistance suggested by the weekly chart begins in the area of the old highs around 2350. I anticipate COMP eventually reaching its prior highs but not getting above them as this area offers possible tough resistance for the Composite. Technology stocks look like they are in a decent recovery but the charts are not suggesting a major bull move.
However, if COMP climbs back INTO its major uptrend channel, then this would suggest to me that COMP was back into a bull market phase; one with upside potential of 200 points; to 2550 or so.
The Nasdaq 100 (NDX) has trended the same as the Composite in terms of piercing expected resistance at the 66% retracement level; this around 1640 in NDX. As with the Composite, the shorter-term hourly chart (not shown) is suggesting a possible start to a correction, such as back first to the 1615 area. Key technical support is implied by the prior low at 1558; if this level is pierced, look for next support around 1535.
Anticipated next resistance is up around 1700, then at the prior intraday peak at 1720. While NDX may turn around and rally again before coming down, it's due for a correction. Take the money and run seems like a good idea for those holding call positions.
I was a little early in exiting myself, but I prefer that to trying to hold on for the last possible points, but I tend to look at trading mostly on a probability basis; i.e., what is the likelihood of this move continuing 50 points higher versus correcting 50. When those two possible outcomes appear about equal, I won't take or stay in the 'bet' so to speak.
I don't have lot more to say on the Nas 100 tracking stock, or QQQQ, other than the price levels. Resistance is at 41, then 41.50-41.75. Major resistance is at 43 at the 'line' of prior highs.
Near support is at 39.8-39.6. Key technical support is implied at the prior 38.3 low, with a next lower technical support at 37.75.
Good Trading Success!
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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.