THE BOTTOM LINE:
This market dynamic is unchanged since 100+ years ago in Charles Dow's day. The typical participant in the market doesn't get bullish early when trends are just beginning to change and when stocks are cheap. It takes the market going up for a significant, often lengthy, period to the point where stocks are not cheap any longer, before the crowd (read majority) gets bullish on the market. Call it the comfort of crowds and having many with the same view before confidence is born!
I said last week that an "...an aspect of this multi-month rally in terms of 'sentiment', has been the absence of excessive or heavy bullishness by traders. This in contrast to institutional money managers who don't dare to NOT keep committing more money to stocks in a rally that keeps putting the market higher each month. On Thursday (12/14) however there was enough call volume relative to puts to reach a 'bearish' reading in my call/put indicator; that is, on a contrary-opinion basis, the level of bullishness was high enough to suggest that the rally might be in danger of topping out. Stay tuned on that!"
Tuning in later, the major market indices topped out 2 days after the call/put extreme mentioned (on 12/16). Then, on the pullback this past week, traders did what they finally thought they would be rewarded for doing and had NOT been doing so heavily and bought the dip on Thursday (12/21) only to see significant further weakness on Friday instead. Surprise!
Thursday saw a second 'bearish' call to put ratio as seen on the S&P 100 (OEX) chart below, based on that day's equities total call to put volume ratio. This SECOND occurrence pointed to possible downside acceleration, rather than the interim top which had come before.
Technically, the pattern looks to be of an interim, not necessarily final, top in the S&P and Dow and a double top to date in the Nasdaq Composite (COMP) and Nasdaq 100 (NDX).
MY WEDNESDAY TRADER'S CORNER COLUMN:
My past Wednesday Trader's Corner column, as seen in your Option Investor Daily market letter, was on the subject of how the trend in Open Interest can and 'should' relate to up, down or changing trends in the indexes. For those who missed this read, you can go to your saved OI Daily e-mail of 12/20 or view online by clicking here.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I take 1410 as a 'pivotal' point here, with the ability for SPX to hold above this level, especially on a closing basis, as bullish and the inability to do so suggesting that selling pressure is predominating in the near-term. The 1390 area, then 1380, looks to be the key support levels; 1378-1380 is potential support suggested by prior lows and represents trade at my lower trading 'envelope', set currently at 2 percent under the 21-day moving average.
The 1429-1431 area is resistance; above here, look for resistance coming in around 1440.
As said last week: "SPX was back into its 'overbought' zone (in terms of the 13-day RSI) for the umpteenth time it seems. I pay attention to this mostly as a reminder that a shock to the economy or the market will generally led to a sharper reaction than when the indices have a more oversold to 'neutral' reading according to these type indicators." Just when you think that 'overbought' means absolutely nothing, it finally seems to be associated with the potential for a deeper correction than has come before. Stay tuned on that!
THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) couldn't maintain more than a few closes back above resistance implied by the previously broken up trendline as seen in the chart below. The recent intraday high at 666, a superstitious number according to some, looks to be the top for now. I had been seeing the 660 area as a key OEX resistance and upside target for some time now. Now, it remains to be seen if OEX can stay above 655 on a closing basis (at my support up arrow) on the daily OEX chart 21-day moving average line. 640 is a key technical support, give or take 3 points.
[OEX didn't make it yet to a fibonacci 62 percent retracement of its 2000-2002 decline, which would have been reached at 669. This is a key level in my mind: 669-670 begins potential major resistance and extends up to 689-690.]
I discussed the apparent 'belief in the rally' phase in my bottom line intro, as suggested by my sentiment indicator above; with now TWO readings in the overbought/extreme bullishness zone that is most often associated with intermediate tops. It was interesting to me and insightful into how market psychology tends to go, that FINALLY traders were doing what many had mistrusted doing to date, by buying any appreciable dip.
Many wait and watch, see a trend, but mistrust the staying power of the trend, only to see other traders making money instead (again and again) and finally can't stand being outside this route to 'easy money' and jump in (greed overcoming fear at last), only to finally leap into a possible bull 'trap'. Hey, I've been there and many times, in my education in market cycles!
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow made it to a new high, only to continue up hugging the 'line' of resistance implied by the previously broken up trendline, but not getting back above it. The recent top, as noted at the red (down) arrow, came at 12,490 in the Dow 30 Industrials (INDU) at this trendline. Next resistance looks to come in around 12,600.
Pivotal near support is at the 21-day moving average, currently intersecting at 12,317. A close below this line, not reversed (to back above the average) the next day, is bearish for the near-term trend. 12,250 is next support at a 'line' of prior hourly lows, with major support implied by the prior 12,075 double bottom lows of mid to late-November.
The downward or minus Directional Movement Index (DMI-), based on the Friday close, crossed above the upward/Plus Directional Movement Index (DMI+) line and thereby generated a 'sell signal'. The overall indicator called the Directional Movement Index (DMI) simply shows a 'degree' of upside or downside momentum that may, not always, end up being significant in terms of the intermediate trend of 2-3 or more weeks.
The Average Direction Movement (ADX), the blue line seen above, is not showing a strong TREND yet, which it does only when this line is moving in an upward direction. The ADX line trends in an upward direction whenever the price trend reaches a certain mathematical degree of momentum; this is the case whether that 'threshold' momentum is either UP or DOWN.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has turned bearish in its pattern, with a potential double top, with a sharp retreat and move lower after this top formation. Near resistance is at 2433, at the 21-day moving average; then, at the prior top in the 2468 area.
Near support is at 2390 at the prior intraday low; next support is estimated for the zone between 2330 to 2316.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has the same bearish potential double top pattern as the broader Composite. 1819-1823 is the area of the top that has formed to date and offers the key technical resistance. Near resistance comes in around 1800 at the up trendline that had been pierced; support, once broken, 'becoming' later resistance.
The technical pattern turned decidedly bearish with the close below 1760, the previous low end of the prior trading range, which tended to 'confirm' the double top. Only if NDX was to climb back above 1760 and stay there (again re-establishing its prior range), would the chart regain a bullish footing. Prices however, look headed lower, perhaps back to the 1695-1693 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The prior Nasdaq 100 tracking stock (QQQQ) high at 44.86 didn't get pierced on the most recent rebound. The resulting double top is bearish per the NDX pattern. 43.26 is the prior low that was taken out and now becomes key near resistance; above this level, resistance is at 43.9-44.0. Prices look headed lower in the Q's, with no apparent technical support before the 41.6 level.
Near support is at 43.5, then 43.25; a close below here suggesting a possible re-test of the prior 41.6 low of early-November.
It was insightful to have followed the Money Flow Index (MFI); when it reached its peak and started declining from there it implied that money was starting to come 'out' of the stock and prices have been trending lower on balance since that time. The recent rally that carried prices to quite near the prior high, saw no such thing on the MFI.
Daily trading volume began tapering off since the 'overbought' (above 80) Money Flow reading of late-November also.
Good Trading Success ... and a Happy Holiday!!
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens 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.