THE BOTTOM LINE:
The potential double top in the S&P and the Dow is still intact, there's a rising wedge pattern I'm seeing in the Nasdaq (more on this further on) and the strong resistance apparent at recent highs in the oil stock index (OIX) are all suggesting further downside pressures in the major market indexes. There is not an overwhelming case yet for a bearish market outlook.
The 5 and 10-day TRIN (Arms Index) flipped to bearish readings (above 1.00) this past week. In the S&P and Dow, the short to intermediate-term moving average I find most telling, the 21-day SMA (Simple Moving Average), has appeared to mark resistance on rally attempts. All in all, not a lot for the bulls to take heart about on a technical basis.
However, it also should be noted that what would suggest 'confirmation' for an S&P and Dow double top hasn't happened yet, which would be if we start to get closes below the key prior lows or the bottoms made prior to recent highs.
A couple of chart updates related to some of these overall considerations.
Because big oil/energy stocks are so heavily weighted in the S&P 500 Index, they are a major influence relating to S&P 500 (SPX) corrections. There has been a strong correlation between periods when the CBOE Oil Stock Index (OIX) has gotten 'overbought' according to the 8-week RSI indicator and SPX pullbacks that follow this occurrence. See my first chart below.
These instances of an overbought (readings above 75) weekly OIX RSI have not yet preceded a MAJOR top in the S&P, but substantial (i.e., tradable) corrections have followed them. The first instance of an SPX decline relative to RSI peak, as highlighted with the red down arrows in both the RSI and the SPX weekly chart, was short-lived and only a 30 point pullback. All the other subsequent SPX corrections, after peak weekly RSI readings above 75 in OIX, were more substantial; of course, we don't yet know to what extent SPX might fall further from recent highs around 1540. Stay tuned on that, but the outlook appears to be for more of a decline.
I mentioned the 5 and 10-day short-term Trading Index or TRIN turning bearish this past week, which are when the 5 or 10-day moving averages of the daily TRIN move above 1.00. Since the TRIN indicator is determined by a formula involving price and volume action in all NYSE stocks, I usually plot the indicator below the NYA chart, as seen below. I would note also that the recent NYA high hit resistance on a return to its previously broken up trendline which has often marked significant downside reversals.
Of course, as with all moving averages, they are LAGGING indicators and often will whip back and forth between what is defined as bullish and what is thought of as bearish; hence the term 'whip-sawed', which describes trying to trade off such indicators. Still, the TRIN indicator is showing that volume is drying up some on the advances and picking up on the declines, which is a recent bearish trend.
MARKET NEWS and INFLUENCES:
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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The chart of the S&P 500 (SPX) is mixed in its pattern, but leans toward a bearish interpretation, as prices keep slipping toward the low end of this current trading range. The 1490 area remains key support. If there were a couple of back to back closes below 1490, SPX could go into a bit of a free fall, as I don't see support coming in before about 1460.
Conversely a sustained move back above 1520 would suggest that the Index could move back up the 1540 area. I rate this as the more unlikely scenario. The market feels 'heavy' in here, but we have to be careful in thinking that any major selling is going to develop given the (so far) willingness of institutional money managers to continue to pump money into stocks and buy the dips.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) remains locked in a 707 to 685 trading range, but with declining upside momentum suggesting the danger that OEX could break 685 and fall another 15-20 points.
If on the other hand, OEX can get back above its 21-day average at 696 currently, the 707 high might of course be challenged and taken out, with upside potential then to perhaps 720.
I'm reminded of the old trading adage to never short a dull market. Our choice is to wait and see which way this market is going to go. Most commonly when I see this pattern, I'm thinking a TOP if forming. Stay tuned on this. With the 4th of July holiday this coming week, I also anticipate a quiet market and this tends to work against any dramatic moves. Summer doldrums time.
Given the fact that the market could be building a top, trader sentiment has not reflected any major activity in puts as a hedge or speculation that the market could be topping out finally. I take sentiment indications here to suggest that traders are probably 'too bullish', given the mixed outlook and potential for a significant top.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The chart pattern is best described as mixed currently.
An exact double top (in the 13,690 area) to date remains the dominant bearish possibility in the Dow 30 (INDU) chart. Only a decisive upside penetration of the prior 13,692 high would negate this picture.
On the downside, the key is whether INDU pierces recent lows and this in fact would be a 'confirming' sign for a double top. Such a double top could be major one, but this interpretation would be based on the S&P 500 reversing from the area of its all-time high. The Dow itself doesn't look like it would hit major resistance until it got up to around 14,000.
The Dow was meeting some selling pressure this past week in the area of its 21-day moving average, suggesting waning upside momentum (and the summer doldrums), setting up the possibility for a decline that could carry INDU back to 13,000 area IF support in the 13,250 area gives way.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index has settled into a possible 2635 to 2535 trading range. A decisive upside penetration of the recent high at 2635 would suggest upside potential to the 2650 area, and above this level over time but I would anticipate only a gradual further rise, not dramatic.
A decline below near support at 2560 would suggest a retest of support at 2535 or even to major support at 2500. A mixed picture in COMP, but this is characteristic of a stalled trend and lateral move.
NASDAQ 100 (NDX) DAILY CHART:
With the Nasdaq 100 Index (NDX) I am wondering if the key chart pattern isn't a bearish rising wedge. This pattern is where there is narrowing of the back and forth price swings on the way up and usually suggests declining amounts of new money coming into the stocks in that index. This is a speculation on my part as to potential for a trend reversal, as the reality is that NDX remains in an uptrend.
The Nasdaq, which didn't go up as far as the S&P type stocks is not falling as far on this pullback, but I don't see how the key Nasdaq indices can pierce its recent highs with what is going on in the overall market. If there is a move to a new high, look for stubborn resistance at 1965.
Support, as noted by the green up arrow comes in at 1909, then at 1900. If the last downswing low at 1876 was pierced and not reversed (back to the upside) the following trading session, such action suggests an intermediate trend reversal was taking place, but I don't also see much further downside beyond a move back to the 1860 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) continues to maintain prices within it's uptrend channel, which is a different pattern than seen with the possibly bearish rising wedge in the underlying Nas 100 Index chart above. Chart patterns for these two are of course normally the same, but this different interpretation is seen currently. What I don't see that is consistent with a bullish chart pattern here is the declining volume in the past two week, while prices have rallied or gone sideways.
Near support is at 46.85, at the current intersection of the lower channel line, the Q's uptrend line. Even more pivotal downside technical support is at 46 even.
Volume has been picking up on the QQQQ declines, which is not great 'confirming' action relative to the bullish uptrend. An important aspect technically is the ability of QQQQ to stay in this pattern of rising relative highs AND lows; i.e., each low has been above the prior low(s). When this pattern changes, the chart would start to look more bearish.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) is in a declining pattern of lower rally highs and resistance implied by its current down-sloping trendline comes in at 844. Above 844, key overhead resistance is at the prior 856 high.
Key support, in fact a minor double bottom low is at 820. Next, and quite pivotal support is at 810 in RUT.
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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.