THE BOTTOM LINE:
Momentum has slowed in one segment, but picked up in tech, showing the continued rotational corrective nature of this market: that is, as valuations get rich in the most attractive sectors, investors and money managers start looking for value in underplayed stocks, stocks with lower P/E's, etc.
I can't see why this won't continue. It's hard to say when a deeper, more significant, correction will happen. I tend to think March has the potential for this as happened in two of the last three years. This current move could keep going on into May but ... speaking of overbought/oversold as I'm about to mention, this market has been at an overbought intermediate-term extreme for some 3 months now and sooner or later the probabilities for these things suggest the market should experience more than just a shallow correction.
Of course a correction could be a substantial and more prolonged pullback in prices than seen to date OR a 'correction' could also take the form of a sideways move, such has been the case in the S&P 100 (OEX) since the beginning of the year. In its sideways/lateral trend of the past 7 weeks, OEX has seen its 13-week RSI come down from a high of 77 down to 63 at the close on Friday; a 'neutral' reading would be 50.
ON ANOTHER NOTE:
However, on the hourly charts, use of the Relative Strength Index (RSI) with a length setting of '21' (i.e., measuring 21 trading hours) has given many useful 'signals' of areas to look for corrections to set in as was demonstrated in the article. I will be showing more hourly charts with the RSI indicator in future Index Trader columns. This most recent of my Trader's Corner articles can be seen in your saved (Wed.) 2/21 Option Investor news/market letter or by clicking here.
MARKET NEWS and INFLUENCES:
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S&P 500 (SPX); HOURLY CHART:
As I note above, I've been working a lot with the HOURLY charts and 2 of my first 3 shown are longer-term hourly line charts. Since the RSI is calculated on the close of every hour, I also been tending toward the use of Close-only line charts, as will be seen the hourly OEX and INDU. My first chart, of the S&P 500 (SPX) is a HLC (High Low Close) bar chart which is why you get the darkened in areas as the hourly range (highs and lows) gets squished together over a multimonth period like seen below.
On the subject of the RSI indicator, I note on the 21-hour Relative Strength Index where the high and low extremes occurred based on readings of 70 and of 35; typically or frequently, 30 is used as the lower 'oversold' extreme but in a strong bull trend like this, 35 begins the 'oversold' area. By the way, when the RSI dips above or below the line, the sell and buy points respectively tend to come when the RSI dips back BELOW the upper line or rises back ABOVE the lower line. I use chart analysis side by side with the overbought/oversold extremes; e.g., buying calls when a higher relative low is made after a first low or lower subsequent highs are seen on declines.
There is a trendline that has been 'defining' resistance in recent weeks that intersects up in the 1465 area and I anticipate resistance/ potential selling pressure in the 1460-1465 zone in SPX. The Index is coming down toward an hourly oversold reading again and if does in conjunction with a pullback to 1445-1447, SPX calls would look like a buy again, with an exit point at or just under 1440.
In the close-only 'line' chart of the S&P 100 (OEX) chart shown next resistance is indicated at 670. Prices have dipped now under the low end of its uptrend channel, in my latest construction of it anyway, demonstrating probably that OEX still remains locked in a relatively tight trading range.
Technical support is suggested at prior lows in the 660, then down around 655. A daily close under 655, not reversed the next day (back to the upside) would show a significant loss of upside momentum and suggest further weakness, perhaps back to the low-640 area.
On the RSI graph above I made note of the approximate point value of the price swings made from the point where a high or low extreme (at the red or green overbought/oversold zones) was seen, until the following extreme when one followed. Most of the time, OEX went from RSI extreme to extreme with trading swings worth pursuing in calls and puts. These were trades of more than 1-2-3 days in most cases. Although the hourly chart was used with an hourly oscillator type indicator, the 21-hour duration makes for a slower moving shift that didn't require constant monitoring, making it suitable for the most of us that don't trade index options sitting in front of a screen all day.
DOW 30 (INDU) AVERAGE; HOURLY CHART:
The Dow 30 (INDU) is coming down again close to up trendlines and the low end of uptrend channels, one trendline dating from July and a more recent up trendline defined by hourly (closing) lows made from mid-November. Support is suggested around 12,630, then in the 12,540 area and lastly around 12,430.
Resistance is suggested at around 12835, with major resistance at 13,100. Given an approaching short-term 'oversold' reading in the hourly RSI as shown below, look for a next low to set up soon. The likely area, somewhere between 12,630 to 12,540.
The last RSI extreme was seen at the upper end of the level lines representing the 'overbought' and 'oversold' areas and it looks like the next extreme could be made at or below the 'oversold' lower (green) line. The past points where such extremes occurred is shown above as noted by the down (red) and up (green) arrows. The extremes on the 21-hour RSI highlights usefulness of this indicator for suggesting areas of opportunity in calls and puts in the Dow Index (DJX) options.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bullish in its pattern as the Index finally pushed to a new intraday and closing high. If the trendline shown below that connects 3 prior highs continues to define technical resistance, look for potential selling pressure to come into play around 2564 in the coming days.
Support as suggested at the intersection of the COMP daily chart up trendline as shown below is at 2485, with the next lower support coming into play around 2445-2440.
As has been the case of the lagging S&P 100, the Nasdaq 100 Index (NDX) has also paused in the area of its prior high, in this case at 1847. Should NDX achieve a decisive upside penetration of this prior high, look for the next resistance to begin around 1890.
Support is in the 1810-1800 area, with strongest technical support coming in around 1740. As NDX has been following COMP higher, look for the recent high to be cleared. If not, the Index will likely drift lower back toward 1800 and perhaps lower still by another 50 points.
Another push higher will put the 13-day RSI up to a an 'overbought' reading on the RSI; the last two corrections have developed after overbought extremes occurred in this indicator with the concurrence sending the Nasdaq 100 (NDX) tumbling in the time since this Index more or less started tracking sideways in the past 3 months.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Not a lot more to add this week on the Nas 100 tracking stock, QQQQ: the prior 45.4 top was hit and turned out to offer at least minor resistance on Thursday-Friday. Next technical resistance is at 46.
Support is at 44.5, on down to the 44.30 area. There remains this possibility of the QQQQ chart pattern of higher highs and lower lows traced out since November being that of a 'broadening top'. Not so, if there's a close above 46 and prices work still higher from there.
Near support is at 44.0, then at 43.6 low and lastly at 43.3, with my analysis unchanged (from last week) that a close below 43.3 not reversed the next day (back to the upside) would suggest downside potential to around 42. Also, as per last week, I anticipate QQQQ working a bit higher ahead but probably not going above 46 anytime soon. Stay tuned on that!
QQQQ daily trading volume didn't increase much on the recent rally, and On Balance Volume (OBV) turned down on Friday. Nothing warning the bulls here in bright neon lights, but I would be cautious and err on the side of taking profits on stock bought at lower levels on signs of a (downside) reversal.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) chart saw a break out above the narrowing price range or triangle pattern formed by the two lines connecting the various prior highs and lows. In fact, the breakout move saw 3 days worth of daily lows stop right at the (trend) line that had previously represented resistance. Prior resistance once pierced, offering later support. A bullish chart, with an upside target to around 850 suggested.
Key or pivotal support is in the 802-799 area.
Good Trading Success!
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.