THE BOTTOM LINE:
Technically, the patterns in the Nasdaq Composite (COMP) and the Nas 100 (NDX) are encouraging for the bulls in what comes next, with minor bull flag consolidation patterns suggested as both COMP and NDX went to new highs for their most recent advance; these indices now need only push above 2509 in COMP and 1847 in NDX (45.4 in QQQQ) to follow SPX, INDU, RUT and NYA into new high ground.
My most recent TRADER'S CORNER article, seen in Wednesday's (2/14/07) Option Investor Daily newsletter had more on drawing trend CHANNEL boundaries and selection of which highs and lows to use for this construction. Ideas of how to draw the low end and/or the high end of such channels can and does change over time as market action dictates or suggests and NYA provided a recent example of this. Also, the question came up regarding different TIME frames in trading as regards long, intermediate and short-term trend parameters. For example, analysis of the long-term trend might suggest that the market was at or near a top, whereas there might be a low forming on a short-term or even intermediate-term basis.
My most recent Trader's Corner article of this past Wednesday can be seen in your saved 2/14 Option Investor news (market) letter or by clicking here.
NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY and HOURLY CHARTS:
Key or near support in the S&P 500 (SPX) is suggested at the up trendline as highlighted by the green up arrow at 1440. Next levels of support come in at 1433, then in the 1416-1420 area. The primary technical resistance suggested by the upper trend channel boundary in SPX intersects around 1495 currently. Some closer by technical resistance may come into play at 1465 as suggested by the hourly SPX chart seen below the daily chart.
Index options expiration unwinding and related activity appeared to have a bullish bias from Tuesday on. The March calls were quite active going out on Friday even the far away 1525 strike. Bullish 'sentiment' increased on Thursday and Friday as suggested by the jump in total equities call volume relative to puts.
There is a minor uptrend channel within the larger broader channel parameters that suggests that some selling pressure might come into play around 1465 in the early part of the coming week.
The hourly RSI reading hasn't been reaching the upper extreme recently. One more push higher would put the 21-hour Relative Strength Index into that zone and might set the stage for another downswing. Sometimes of course, the oscillator extremes don't get hit but a sideways to only slightly lower pullback puts the RSI back to an oversold reading; and to at or near the low end of the hourly trend channel. Stay tuned on how long this will continue, since sooner or later the market will do something outside the same pattern. Since mid-July however, SPX has been in the same broad hourly trend channel as outlined below.
The noteworthy aspect to the S&P 100 (OEX) chart is how buying has been enough to keep the Index from slipping below the low end of its multiweek narrow trading range, but not enough to cause a break out above the recent line of resistance apparent in the 670 area. An upside penetration of 670, not reversed the next day, would suggest at least another 5 point rally, to 675.
Looking at the 655 to 670 15 point trading range that OEX has been in and assuming that a next rally phase could also tack on 15 points, a next rally target could be 685. In terms of the uptrend channel, major resistance is suggested at 695 on up to 670. Meanwhile, the OEX continues of course to lag the broader market significantly, so 695-670 is a far away target currently.
Pivotal near support is at 660. A close below 660 would suggest that upside momentum was faltering. A close below 655 would suggest a downside (intermediate) trend reversal, with potential back to the 640 area.
It's interesting to note here also that as prices have trended more or less sideways, the RSI has been trending down. This kind of divergence can suggest a trend has declining 'relative strength'. It may not signify anything of particular importance trading wise, given that the play has been in other sectors than the big-cap S&P 100. OEX could be construed as a favored put candidate for when this market does correct significantly. But then too there's the question of whether the Index will also LAG the S&P 500 and Dow on the way DOWN. What goes up the least, often tends to come down the least.
DOW 30 (INDU) AVERAGE; DAILY and HOURLY CHARTS:
The Dow 30 (INDU) remains bullish in its pattern as the average kept moving higher last week and made a decisive new high for the current move as well as of course a new all-time high. Technical resistance, perhaps only minor, might next be found in the 12800 area as noted at the trendline connecting the various highs over the past few weeks. Major resistance around 13200 is suggested far above current levels if INDU keeps tracking higher in its broad uptrend channel.
Support is assumed at the last two downswing lows, first at 12536, then in the 12430 area. A close under the first or both of these prior lows, especially under the later, would be bearish.
The hourly chart highlights the way that INDU is tracking higher within a consistent channel. This chart is also included as a different potential resistance area shows up at the top end of the current hourly channel, at 12923, as noted at the red down arrow.
The Dow on Friday hit a near-term 'overbought' condition in terms of the 21-hour RSI. The last 100-point short-term downside correction occurred when this extreme in the hourly RSI was seen. In terms of consistency, the Dow which tends to trade very 'technically' or predictable in technical analysis terms; for one, it's rather amazing in the way that its short-term up and down price swings are forecast so often by use of the 21-hour RSI. You can make money off the combination of the hourly chart patterns and this setting in the RSI, if you can manage shorter-term trading in DJX calls and puts.
The 'length' setting in the hourly RSI (as seen above) of 21, a fibonacci number, works well for all the hourly index charts, but especially so in the DJIA. Sometimes the extremes come ahead of the actual top or bottom of course, so the chart (pattern) and things like trendline breaks or key reversals then become crucial but the lag time after an overbought extreme hasn't usually been huge before a correction sets in.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
It appears less and less likely that a bearish chart interpretation for a complex Head & Shoulder's (H&S) top could be correct in the Nasdaq Composite (COMP). The last rebound from the area of the up trendline and the way recent gains were held over Thurs-Fri suggests that COMP could now be ready to challenge and take out its prior high at 2509. Absent a double top forming in the 2509-2510 area, I would take a bullish stance on COMP here. But, watch the old high and trendline support at 2470. Next lower supports are at 2450, then in the 2420 area.
My estimate of the next resistance levels in the Composite is at 2550, then 2600-2610. The top end of the broad daily chart uptrend channel intersects way up around 2667-2670. Tech would really have to catch fire for COMP to take this kind of run again. Seems doubtful, but the current trend has this overall trajectory until proven otherwise.
Forget the temporary 2-day reversal seen the week before last in the Nasdaq 100 Index (NDX), as prices stabilized in the area of the up trendline and then rallied substantially this past week, making a new closing high for the current move (underway since the low made 3 weeks ago). Yet to come of course is a test of the prior high at 1847. Major resistance begins in the 1860 area.
Trendline support is in the 1795-1800 area, with next support at prior recent lows at 1765 to 1775. Next support I've indicated at 1742 on the chart below, but the absolute intraday low on the early-January low was at 1732.
As with the Nasdaq Composite, the bearish interpretation of this chart is that of a possible Head & Shoulder's top pattern. This is more clearly apparent in the Nas 100, but I would down play a possibility (of a top) given what looks to be a consolidation before a push up to challenge the prior high. With the expiration related activity of last week behind us and a shortened week ahead, the upcoming Tues-Wed trading sessions should tell the tale on the larger-cap Nasdaq stocks.
I include the hourly chart as it best shows the sideways trading range in effect since late-November. I've marked 1748 as support on this chart as the low end of the trading range, based on a cluster of hourly lows made there and disregarding the one spike low below this level. The last significant high was marked by an 'overbought' extreme in the 21-hour RSI. If NDX gets up to the prior high and is showing a similar overbought reading around (RSI) 70, it seems doubtful that there would be a next up leg, as in a move to well over 1850.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
I continue to have some speculation whether the Nasdaq 100 tracking stock (QQQQ) chart pattern of higher highs and lower lows that has been traced out since November, is that of a 'broadening top'. However, the most recent move has been higher and bullish. Possible resistance at the old 45.4 high is a next challenge for the Q's. Beyond the prior high, next technical resistance comes in around 45.8 in my estimation.
Near support is at 44.0, then at the prior 43.6 low and lastly at 43.3; a close below 43.3 would suggest a possible retreat to the low-42 area. I anticipate QQQQ working higher ahead.
Support for a bullish outlook would have been enhanced with a stronger recent daily volume increase, but this is a secondary consideration right now. Stay tuned as to whether the daily volume picks up on an approach to (and/or through) the prior top.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) chart, while bullish in its move to a new high, also had an overall narrowing price range between the various highs and lows, reminiscent of a bearish rising wedge. I am not acting on any such bearish chart interpretation, just noting all that I see. I would have enhanced bullish convictions on a decisive upside penetration of 820, with such a move suggesting further upside potential of 25/25+ points.
Pivotal technical support in RUT is around 795, at the trendline and shown at the green up arrow, with next lower and key support at the prior (down) swing lows made in the 775-778 area.
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.