THE BOTTOM LINE:
Now, after the rebound became a rally and a rally afterburner pushed stocks strongly higher last week, the question is how HIGH can the market go? Easily I think to re-test or exceed the prior high, especially in the S&P and Dow indices, possibly in the Nasdaq Composite and Nas 100 and Russell 2000 Index (RUT), although exceeding the old high in the Nasdaq may be more iffy. I'll save further commentaries for the specific major indexes below.
MARKET NEWS and INFLUENCES:
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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The chart traced out a bullish flag pattern this past week after the S&P 500 (SPX) closed above its 21-day moving average, suggesting a move still higher. I think that SPX could get up into the 1460-1466 area next. 1461.5 would equal the old high (we need however be alert for the possibility of a double top) and 1466 is an objective implied by the aforementioned flag pattern as highlighted on the daily chart below.
I'm using two upper envelope lines, set at 2 and 3 percent respectively, relative to the 21-day average. Since the last LOW was 3 percent under the centered moving average, we could see SPX get to 3 percent over before it would start to be 'extended' on the upside and probably slowing in its advance.
Near resistance is at 1445, then in the 1460-1461 area. Near support is 1410, then in the 1400-1395 area.
The recent pullback equaled a 38% retracement as noted on the weekly chart next; a fibonacci retracement which is about the extent of a 'maximum' correction in a strong up/bull trend. In a more two-sided trading range market corrections will often go to a half or more.
Note that the 8-week RSI got to the top end of the 35-40 zone that I consider to be 'oversold' on a weekly index chart in a strong intermediate to long-term advance. This alone is not enough to suggest going into calls, but putting this measure together with the retracement amount and things like the bullish upside reversal pattern (e.g., a lower low for the move followed by an immediate strong rebound), was enough to suggest both exiting puts and buying calls.
The S&P 100 (OEX) has key or pivotal resistance at the prior 'line' of tops around 670. Above 670, 680 looks to be major resistance. 644 is near support, with further technical support at 630-631.
I can envision SPX getting to a nominal new high but OEX forming a double top. However, if the Index can pierce 670, look for a possible move up toward 680. A close above 680 would put OEX back into its prior major uptrend channel and suggest that a second up 'leg' could be underway. Conversely, a close below 645 not reversed the next day (back to the upside) would be bearish for the chart.
The upper extremes on my trader 'sentiment' scale are not always useful in a bull market in making trading judgments at least to buy puts, as witnessed by the last such extremes in the 'overbought' zone (see above) where the market thereafter proceeded to move more sideways than down. Having an idea of the top end of a price range for a while IS useful for other option trading strategies of course.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Near resistance in the Dow 30 (INDU) is at the prior 'breakdown' point at 12,610, with a next pivotal resistance in the 12,800 area. A close above 12800 and an ability to trade higher from there would suggest further upside potential to the 13,000 area. I think chances are good that INDU will reach at least the 12,700 area; from there I'd rate the odds better than even for a push on up to re-test the prior 12800 top.
Near support is at 12,300, then at 12,200-12,180; a close below 12180 that's maintained the next day also would be bearish for the current (chart) pattern.
It's easy to gauge overhead resistance in the Nasdaq given the downside gap that got created early in the month. In the Nasdaq Composite (COMP), resistance implied by the overhead (price) 'gap' begins at 2471 and extends to 2492. If this gap area gets 'filled in' in part or all, followed by price weakness, this would suggest that the recent rebound has run its course. Conversely, a decisive upside penetration of the gap area suggests that a next upside objective to at least a re-test of the prior 2531 high.
I think it's quite possible that COMP will get to or near 2500, but I lack any strong conviction the Composite is going to clear the old high and move on (up) from there. If the Composite pierced 2500 to 2530 and kept going, a next up leg could reach 2900 before hitting technical resistance implied by the top end of the Index's broad weekly chart (not shown) uptrend channel.
Pivotal technical support is in the low-2400 area. A close below 2400, not reversed the next day, would suggest that COMP might be locked in a 2500-2350 trading range ahead.
The overhead gap area in the Nasdaq 100 Index (NDX) suggests that a key bullish test for NDX is an ability to push above the 1807 to 1820 price zone. A close above 1820, provided it was not a one-day affair, would suggest a re-test of the prior 1851 high. I don't see NDX clearing this prior high anytime soon, but hey, I've been wrong before. I suggest exiting calls held from lower levels on a move up toward the prior peak. If you bought calls down anywhere near the lower envelope line, why try to hang in for the last bit of upside!?
Near support is at 1760, 1745, and lastly around 1734. If NDX sinks again to 1720-1715 but not below on a closing basis, this may mark the low end of a 100 point trading range between 1720 and 1820. (I will gladly participate in a dependable trading range market anytime one presents itself!)
The NDX weekly chart is of interest in showing two technical trendlines of different degrees of potential resistance, one intersecting at 1858 this week and the other up at 2053 at the top of the broad uptrend channel shown below; the upper channel line (around 2053), if reached, would of course be a substantial new high relative to the current move.
A weekly close over 1858 would suggest that a new up leg could be underway. Conversely, the inability to get above the prior 1851 high or the 1858 weekly chart trendline resistance shown below, would suggest tech continuing to act as a drag on the strong NYSE market.
Key support in the Nasdaq 100 tracking stock (QQQQ) is at 43.0-42.6. Key resistance is noted is at the two ends of the chart gap at 44.5 and 44.76. A daily close over 44.76 would suggest that the recent advance was gaining further traction. The key test for the bulls then is at the prior 45.55 high. Ability to trade above the old high would suggest potential for a new up leg as noted above with the underlying NDX index.
The Russell 2000 Index (RUT) has key support at 795, then down in the 780-776 area. Key near resistance is at 815; above 815 of course looms the prior high at 830. I look for this high to at least be re-tested. But pay close attention to what happens on a return to resistance implied by the previously broken up trendline (around 815 currently), as highlighted below.
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.