THE BOTTOM LINE:
It looks increasingly like the S&P will break out to the upside, rather than the downside, of the 1540-1490 trading range it's been in. It has been now two lows and upside reversals at the bottom of this range and two times reversing at the top of this range, but with SPX now seeing strong upside momentum heading back to what first looked like a possible double top.
TECHNICAL REASONS TO ASSUME THAT THE S&P WILL BREAK OUT TO THE UPSIDE AHEAD:
The foregoing reasoning and assumptions still should take a back seat to what actually happens. To prove the bullish case and provide a bullish case for a new up leg, SPX must pierce 1540, the S&P 100 (OEX), 707 and the Dow 30 (INDU), 13692, especially on a Closing basis. And without then seeing anything like a rally failure after that, such as in the FOLLOWING trading session.
I did note last time that the Oil stocks might be making a top, based on my read of possible resistance being hit in the Oil Index (OIX) chart and the oils being 'overbought' as a group. Given the increasing weight of oil stocks in the cap-weighted S&P, it's hard to see the S&P not being very influenced by the OIX sector. However, it now looks like there's a breakout move going on in oil stocks. Whereas OIX has been in a certain well-defined weekly uptrend channel, it may be now be establishing a broader trend channel implying more upside potential to come. A rally in the S&P should last as long as the oils are also in the same trend. And overbought markets sometimes hit more than one extreme reading as measured by the overbought/oversold indicators like RSI.
I haven't minded being mostly out of the market since early-June as I tend to get chopped up when trading options when the Indexes stop trending strongly. If I could predict how long that the major market indexes would be range-bound, that would be ok for doing spreads. But I find the time duration of these things very hard to predict. It used to be a rule of thumb that market only trend, or trend strongly, on average (only) about a third of the time. These back and forth whipsaw shorter-duration price swings are my special hell if I'm in the market heavily! It only takes 2-3-4 strong trending periods annually even if relatively short, to make a very profitable year.
If you get on board a few strong trends with good entry and exit points, then the trick is to not give the money (your profits!) back. I know that I would be shoveling those profits back to the market if I didn't surrender the compulsion to trade in these whippy periods. I have friends that can't NOT trade and then lament that they 'coulda, shoulda, woulda' done something different than the trades they did.
Of course I don't want to denigrate the excellent strategy of say buying puts on the recent second Dow or S&P top, with a stop just over the prior high; AND/OR buying calls, shorting puts, etc. on the second and most recent S&P low, once prices held the first bottom and with an exit point just below the point where prices rebounded. The key is to get in EARLY in a trend, right as a reversal is happening, even if the next price swing isn't a huge one. Assume it's a top and take a few point risk as soon as prices reverse at a prior high. 'Assume' it's a bottom if prices hold a prior low. Your risk is small at that point using an exiting stop just under a double bottom low.
If reward potential is 40 points in SPX such as back up to the top of a trading range and you buy right, such that risk (e.g., your iron-clad stop point just under a double bottom) is held to 5-7 points, this ratio is a very favorable risk to reward.
MARKET NEWS and INFLUENCES:
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S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has rebounded strongly from the low end of its multiweek price range, suggesting now, for the reasons noted above, that the likelihood of an upside breakout above 1540 is high. If there is this upside penetration of what might have been a double top at 1540, and there's a move above 1540 equal to the 50 point range SPX has been in for the past few weeks, a 'measured move' objective would be to around 1590.
Near support is at 1513-1515, with pivotal and main support in the 1490 area.
I rate the likelihood that prices won't at least challenge the prior highs as slim. The changes of a triple top I rate as low; the probability of SPX decisively piercing 1540 looks to be high. The index could remain in the same 1540-1490 trading range its been in, but this outcome seems merely possible, not likely.
Given the very strong advance that preceded the recent lateral move and the fact that it looks like there's another challenge to the prior top ahead, I give the benefit of the doubt to an upside breakout, consistent with the dominant uptrend that preceded the consolidation of recent weeks.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) has been in a 685-707 trading range, but the recent strong rebound is renewing expectations that the recent rally will carry through the prior highs. The kind of back and forth pattern, after a strong preceding advance, most often ends in an upside breakout. If OEX pieces 707 look for upside momentum to build further and for a next move up to the 720-723 area.
I would use the 21-day average as a benchmark for near technical support, which suggests buying interest coming in on pullbacks to 696, with the key or pivotal support at 685 at the line of recent lows.
I anticipated a slow market this past week, what with a lot of people off the Street and at the beach, but in the age of being able to execute from anywhere, money managers are putting cash to work if stock prices are moving. Index funds invest simply if prices move higher and individual investors have gotten into a buying mood, as evidenced especially in resurging tech stocks.
We saw resurging bullish sentiment along with prices. When it gets real extreme again, the market may be vulnerable to another correction. It will be most interesting to see how much bullishness develops when (I find myself not even saying 'if') prices exceed the prior 707 high in OEX and the prior highs in SPX and INDU.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The chart pattern is still mixed in that there has not been a breakout to a new high in the Dow 30 (INDU). It just feels like there will be that type move. After a prolonged advance, the pattern of an a-b-c-d (down, up, down, up price swings) correction, most often precedes a renewal of the dominant trend or a breakout. Stay tuned on this.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index looks to be headed again to the top end of its uptrend channel just over 2700 where I would anticipate resistance or selling interest coming in again.
Near support should now be found on pullbacks to the recent breakout point at 2635. Main support is in the 2600 area.
NASDAQ 100 (NDX) DAILY CHART:
Same chart pattern as the Composite, only with the Nas 100 Index (NDX) having a target to 2017 or so before expected resistance might set in. Near support is at 1950, then in the 1920-1922 area. A close below 1920 would be bearish but the uptrend would be intact as long as there was no retreat below 1900.
Above 2000 will begin to place NDX in an 'overbought' situation, but I'd take a move to the upper trend channel to be a trigger to actually take profits on calls bought in on the last dip to the low-1900 area. Hey, we should all be so lucky as to get a 100-point move so 'easily'. Of course, we're not there yet but it's been pretty smooth sailing so far! Love those I-phones!
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) may be reaching some technical resistance, judging by the stock having reached the top end of an existing uptrend channel. No magic about that upper line, but I don't quite see the Q's charging above 49. If it does, look for an attempt to reach $50, which is likely to be threshold or benchmark level and possible tough resistance.
Near support is up to 47.5, with pivotal or key technical support around 47 even. Only a close below 46.7 would suggest a potential reversal of the current uptrend.
Volume was declining from one day to the next on this recent advance, which made it seem like a 'weak' rally. However, the On Balance Volume (OBV) indicator was rising, which WAS consistent with the price trend. Sometimes watching the absolute volume numbers from day to day will not give as true a picture as OBV. If OBV starts declining while prices go sideways, this divergence tends to warn of a fall in prices ahead.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) has key resistance now at the prior 856 high, with near support at around 842. If 856 is pierced I don't see any major resistance developing unless RUT gets back to its uptrend line intersecting just over 880 currently. I wouldn't look for a fast move to that area, but if 882 was reached, this would only begin to fulfill a measured move objective; e.g., based on the move from 856 to 820 and back again, equal to 36 points and added to 856 (if pierced), equals actually 892. Mainly, I tend to watch that trendline as to what happens there if reached.
Conversely, if 842-840 gives way, next technical support is around 833-834, with major support in the 820 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.