THE BOTTOM LINE:
There are a few other things to say about this kind of market technically. #1, it's fairly symptomatic of a market that tends to 'hang' up in the upper range of the overbought/oversold indicators like RSI. The S&P indices and the Dow average, even the Nasdaq, haven't come (back) down enough to get even to a minor oversold reading. But neither does the market, the S&P indices specifically, get a new and sustained up leg going. Limited price swings and a lack of sustained moves, results in limited trading opportunities at least in buying calls and puts. It's easy to get chewed up in this kind of market.
A second thing to comment on are the divergent patterns in the S&P/Dow versus the Nasdaq. I noted in my Wednesday 'Trader's Corner' column that the Nasdaq 100 especially has been tracing out could be construed as a 'broadening top' pattern. (Whereas the S&P 500, S&P 100 and the Dow 30 could also be seen as consolidating ahead of a resumption of the dominant uptrend.) For sure, tech is prone to wrecks. The economy is not quite firing on all cylinders as we know and the best straight-ahead conditions for technology stocks is when all or most segments the economy are strong, but without threat of rate hikes.
As to the S&P, I mentioned in the same Wednesday update in our 1/24 Option Investor Daily (Trader's Corner section), that it looked like the sideways trading range, a 'rectangle' pattern chart-wise, had resolved itself bullishly with Wednesday's upside penetration of the high end of the prior trading range.
Due to the press of an active trading day and article deadlines, I didn't take the added moment to ADD my usual warning that apparent breakouts should be 'confirmed' by follow through market action the next day. Thursday did open on a firm note, only to get derailed as the day went on. Friday's reports of the jump in durable goods orders and new home sales then raised the threat of higher rates ahead; same-oh, same-oh.
So, there's still an 'unresolved' trading range in the S&P and Dow. This past week saw only a limited expansion of the upper end of the multiweek price range but no upside follow through. Meanwhile, Nasdaq remains stuck in an overall 'whippy' pattern of higher (up) swing highs and lower (down) swing lows, reminiscent of what may be a broadening top. Tech indices should eventually trend more consistently in one direction or the other; at least that's a common outcome of the 'broadening' type pattern it's in.
IN OTHER WORDS, this market could go up, could go down! And they pay me for this? Lets just go to the major index charts.
MARKET NEWS and INFLUENCES:
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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The upper resistance band in the S&P 500 (SPX) Index got bumped up to 1440, but not much else happened that changed the technical picture here. The Index is still locked in a trading range and the pattern can be viewed as glass half full or half empty. A rectangle top could be forming or this pattern could be one of a sideways consolidation of the prior uptrend. A trading range like this is commonly resolved with a substantial move in the direction of a 'breakout'. Of course, many thought this was happening with Wednesday's close at a new high for this move. A tough market to trade if you're looking for a trend with much staying power!
A couple of closes in SPX above 1440 are needed to suggest that the dominant uptrend will reassert itself with 1470-1475 as a next potential target. Conversely, back to back closes below 1405 would suggest downside potential to the low-1380 area, maybe to 1370.
The S&P 100 (OEX) got above 667 with its new high at 670 and it looked like the stocks in the Index had some mighty MO (momentum) going. I was thinking OEX heading next to the 680-685 area. Instead of course the rally faded quickly. A lot of cross currents out there!
OEX is still locked in a fairly narrow trading range; if the Index comes back down to the 655-654 area again and rebounds again, it's basically just a 15-point range. In the context of the 67 points tacked on by OEX from the Sept low to the mid-December high, a 15-point price swing doesn't seem like much. Still, the market, at least as measured by the S&P and the Dow, is not seeming prone to a big breakdown. Unless stocks here are like housing and the market does a very slow rollover (in prices).
Near support is in the 655 area, with next technical support at 650, then at 645-642.
If there was a break below 655 the RSI would finally get closer to an 'oversold' reading. There are many instances after a major move like we've and with prices just 'hanging' in an area with only shallow corrections, where a next sustained rally doesn't set up until there is at least one low reading (e.g., 30 or 35) registered in the 13-day RSI.
Moreover, what I'm describing with the Relative Strength Index (RSI), with at least one sharp sell off setting up the next rally, is also true of SENTIMENT. Another bearish 'extreme' in sentiment as registered by my Call to Put indicator above might preface a next rally with 'legs' or more staying power this time.
DOW 30 (INDU) AVERAGE; DAILY CHART:
There was one close above key near resistance in the Dow (INDU) at 12,600 but it was a 1-day affair. Resistance is pegged at 12635, with next resistance around 12800, with major resistance at 12900.
INDU hasn't yet on a Closing basis pierced its up trendline or the low end of the uptrend channel it's been in. However, if the Dow can't stay above 12500 in the next couple of sessions, further slippage, especially to the 12350-12338 area, is suggested.
The recent chart looks like a Head & Shoulder's (H&S) top pattern could have been traced out. The top of the 'Head' is 2509 and the two 'shoulders', the other two lower rally peaks, come in at 2450 to 2460 in the Nasdaq Composite (COMP). If the imagined 'neckline' to this pattern was pierced with a decline below 2420, downside potential would look to be to 2320. If the prior lows at 2390-2395 were pierced, without the Composite rebounding back within 1-2 days, the H&S objective outlined also targets the late-Oct 2316 low.
We also can't rule out COMP being just bound in a 2400-2500 trading range (give or take 10 points), for a while longer, especially given all the cross-currents out there fundamentally.
Near support can be anticipated at 2400 to 2390. Major support looks to be around 2315-2320. Near resistance is 2465. Major resistance is estimated at the recent 2509 high, then at 2518.
NASDAQ 100 (NDX) DAILY CHART:
I wrote last week on the possibility that the Nasdaq 100 (NDX) was tracing out a broadening top pattern as suggested by the outline of the two opposite sloping up and down trendlines as seen in the daily chart below of the NDX. The broadening formation, as in a 'broadening top' or 'broadening bottom' is seen sometimes in the indexes, more often in stocks, although its not a common pattern either.
The pattern of lower lows and higher highs marks a wider and wider-swinging price range before a rally begins in the case of a broadening bottom; in the bottom formation the trend is of course DOWN before the pattern begins being traced out. The clue to the trend is when prices break out above the upper line and a pattern of higher relative highs begins after that.
A somewhat 'tricky' aspect to the broadening formation is that the same pattern of lower lows and higher relative highs is seen in BOTH the broadening TOP formation and the broadening BOTTOM. Since the broadening pattern is more often seen at bottoms, I'm cautious to ASSUME that the rarer broadening top pattern is what is forming here. If the lower trendline gets pierced, substantial further downside potential is suggested however.
Buying interest/support looks it could show up again around 1750, next at 1727-1725 at the green up arrow; if the Nas 100 kept falling through this level, there's likely buying interest around 1700, but I don't see major support until 1600. Near resistance is at 1800-1803, with major resistance likely at 1850-1855.
There has been support/buying interest showing up in recent trading around 43.5; pivotal technical support is suggested in the 42.5-42.4 area.
The last big volume jump in the Q's was on Thursday sharp decline, suggesting that longs may be nervous or maybe it was a bunch of trader types that didn't want to ride the stock too far under 45.
Good Trading Success!
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.