THE BOTTOM LINE:
The sharp downturn at the end of the week raised some doubts as to how much higher this rally can carry. I view the most recent high as not likely being a final top. Rather, it's typical of a market that is 1) overbought and 2) where there was a bullish extreme in sentiment that preceded it, which is another way of looking at an 'overbought' condition. The last two price corrections of any degree now have both occurred 3 days after bullish extremes were registered in my sentiment indicator. Bottom line, I don't think we've seen a top, but I dont see HUGE further upside either.
And when the Fed is worried about a slowdown in growth, they are not thinking about raising rates, although they see inflationary pressures too. The market tends to get most spooked about Fed tightening, and they don't look poised to shut down the party. A further slowing of the economy, which gets more pronounced if housing difficulties accelerate and if energy prices keep rising, could eventually crack the bulls case for still higher stock prices. I see more trouble in the Sept-Oct timeframe than during summer.
Per my Wednesday (7/18) Trader's Corner article, which can be reviewed by clicking here, we can't really speak about potential overhead resistance when we've cleared all previous highs, as is the case with the S&P 500 (SPX) or Dow 30 (INDU).
However, quite often the indexes will run into selling pressure or 'resistance' implied by where prices hit the upper boundary of an uptrend channel. I have constructed broad uptrend channels in both SPX and INDU, which I will show next. Weekly chart resistance looks like it will come in around 1570 currently, on a weekly closing basis, in SPX and at 14,100 in INDU.
The SPX weekly line chart is showing closes-only. I said in my last Trader's Corner column, and if you want to review the technique for drawing the channel lines please review that article, it looks to me like SPX could get up to 1600, but would have trouble closing above 1570 in the near term. Of course these channel lines are rising, so the price level for implied resistance will rise too over time.
The Dow weekly chart is next (a standard bar chart) and the upper boundary of its broad weekly uptrend channel suggests that some significant resistance may be seen around 14,100. By the way, showing how such resistances can be seen at work, the recent highs in the Nasdaq occurred right at or in the area of the upper trend channels on the daily charts, which you'll see in the Nasdaq charts further on.
ONE OTHER CHART:
By way of reminding ourselves how charting intraday, daily and weekly time frames will all show different useful things at one time or another, you need only look at the hourly Dow (INDU) chart below to see how the formation of this last short-term top was easily spotted.
A 'line' is formed when there is series of highs made in the same area as we see below on the hourly INDU chart. The two clusters of highs then formed a well-defined double top. You just had to believe that it was a double top! Good point. What would reinforce the idea that a top was forming was the BEARISH price/Relative Strength Index (RSI) divergence. As prices went sideways, the 21-hour RSI indicator was trending DOWN. Prices were holding up and seemed capable of breaking out, but this was occurring on declining (internal) relative strength.
An opposite divergence, but following the same principle of DIVERGENCE, was seen in the late-June price DECLINE, which was accompanied by a sideways RSI (look left above) to form a BULLISH price/RSI divergence; i.e., a declining price trend was occurring over a period when there was STEADY (internal) relative strength.
MARKET NEWS and INFLUENCES:
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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has turned mixed in chart pattern given this past week's retreat to close below the line of prior highs; in a bullish next leg up, such highs (especially a double top) should have acted as support on this recent pullback. The expectation is that a bullish chart pattern will see prior resistance, once pierced, 'become' support on subsequent pullbacks.
So, what now? There is no reversal pattern yet, rather this price action suggests not getting too bullish. The move to a new high, after SPX met repeated selling as it approached 1540, followed by price churn and then a sharper retreat below the prior breakout point, creates some legitimate caution on the ability of the S&P to achieve a new leg up. This is the cautionary case. Look for a short period ahead where SPX continues to trade sideways and stays under 1555 and above support at 1506.
Looking at the bearish case, a downside reversal of the intermediate trend would be suggested if SPX retreated to below the triple bottom low end of its multiweek trading range at 1490. A close below 1506, if not reversed the next day, would suggest weakening upside momentum and a close under 1490 would reverse the medium-term trend from up to down with the caveat that such weakness lasts more than one day.
A more bullish outlook is that SPX doesn't trade much under 1525, its current 21-day average, at least not on a closing basis. How quickly the Index could pierce its 1555 resistance is harder to figure, but over time, the Index should be able to reach 1570 or higher.
Looking at the big cap S&P 100 which is my next chart, and I never look just at one index in isolation, the end of the week retreat held where it 'should' to maintain a bullish chart.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) retreated Friday back to its prior 707 'breakout' point, which so far, has held as a new support. To maintain this still-bullish pattern, the index should maintain closes above 707, or not have more than an isolated close below this level.
Near support is at 703, then at 695. Near resistance is at 718-720, with next and what may be fairly substantial resistance, around 730.
A close below 703 suggests weakening upside momentum, whereas a close above 718-720 suggests strength regained. Only a move below 685 would suggest a bearish intermediate (downside) trend reversal.
My rule of thumb on extremes seen in my sentiment indicator that is above 2 AND where the major indexes are in or close to overbought readings, is to look for at least an interim top within 1-5 trading days after the 'CPRATIO' indicator registers such an extreme in bullishness; i.e., CBOE equities call volume is 2 or more times that of total put volume on that day (1.9 is my actual dividing line and is where the red 'overbought' line seen above is drawn). The real extremes tend to pop up above 2 as you can see above. In a bull market there can be a number of such extremes that may only point to minor pullbacks, if at all.
Interestingly, highs were made exactly 3 days after the last TWO bullish extreme readings noted at the red down arrows on my indicator, after which there have been substantial downside corrections. 'Oversold' readings at the end of a long correction in a still overall bull market are major buy 'signals'. 'Overbought' readings within an overall bear trend are usually major sell signals. What is uncertain usually is if an extreme in bullish sentiment in a BULL market is a major top/reversal 'signal'.
I like to buy puts if I see confirming topping signs in price action within the 1-5 trading day aftermath of such extremes. If such a put play works out, I hope that it turns into a prolonged move, but it may just be a 'trade' and I will be quick to exit if the dominant uptrend reasserts itself. Mostly it's easier to trade in the direction of the trend, but a trade is a trade.
The key I find is to have a risk point that is small, with concomitant fatter (by 3 to 1 or more) reward potential. I don't care which direction. An advantage I suppose of having started my trading career in futures especially, later on, in bonds and stock indexes.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) was getting up toward the 3 percent upper envelope line, suggesting an 'extended' (relative to the 21-day moving average) price, when prices faltered around 14,000. Since there had been fairly heavy speculation that the Dow would get to 14,000 and because of the typical importance of the even-1000 milestones, this was a natural place to expect profit taking selling.
I don't anticipate that INDU is going to just stop on this first try at 14,000 and believe that the Average can make it a bit higher, by 100-200 points, before there might be a more major top that sets up. Stay tuned on that view!
Key near support remains as the line of prior highs in the 13,690 area, with the next key technical support around 13,550. Key near resistance is at 14,010, then up in the 14,100 area, as suggested by my weekly chart musings above. Lastly, resistance on the daily Dow chart comes in around 14,200 assuming INDU hits the area where the trendline made by prior highs intersects at the red down arrow below.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
Speaking of the upper ends of trend channels acting as resistance, the Nasdaq Composite (COMP) Index as you can see by the channel lines below, turned down right from resistance implied by the upper end of its broad bullish channel. I said last week that: "2720 is an area where COMP could begin to run into some profit taking selling and potential resistance suggested by the top end of the well-defined uptrend channel." The high for the week was 2724.7.
Upper channel lines in a bull move can show areas of at least temporary resistance. There's also a tendency for prices to continue higher, hugging the top. A valuable aspect in terms of trading options is knowing where a trend, which would be advances in this case, may really slow down. This in comparison to the last time the index bottomed at the LOW end of the channel. That was a buy with both hands kind of 'signal', with a well defined and nearby stop/exit point just under the lower trendline.
So much for the PAST, what about the future!? Mainly, I am looking for some price churn, so I don't want to be long calls. Pivotal near support is at 2650, and then even more key support is implied by the lower trendline, which intersects at 2620 currently. Near resistance is at 2710, then in the 2720-2725 area; if there was a push to new highs, the upper end of the channel suggests resistance up around 2735 in this coming week.
NASDAQ 100 (NDX) DAILY CHART:
I thought last week that the Nasdaq 100 Index (NDX) was already hitting some resistance, again, implied by its upper channel line. There was one spike above the top end of the uptrend channel on Thursday, but this was a 1-day affair. With charts and seeming breakouts or breakdowns above or below key trendlines or prior highs and lows, I emphasize the 2-day 'rule' where the second day of prices maintaining a second consecutive close (representing a technical breakout or technical breakdown) as 'confirming' that move.
Just as with big cap S&P, NDX is holding up very well up near this potential resistance of the upper channel line. The Index may of course break out above this daily chart channel. A couple of days closing above resistance at 2055 would suggest such a (channel) breakout. A broader weekly chart uptrend channel (not shown here) suggests that major resistance may lie closer to 2100.
Near support is at 1992, with lower support levels around 1980, at the moving average, at 1965 and finally, key or pivotal support at the up trendline around 1950.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
I thought last week that the Nasdaq 100 tracking stock (QQQQ) would start hitting technical resistance around 50.25, where I was thinking it a good idea to take profits on stock long from the area of the last low, which was at the lower end of its bullish channel. Not a bad trade. The Q's did go higher than 50.25 of coursed, making a run to an intraday high at 50.66, which was however short-lived with a Close that day at 50.32.
The stock is going to track the underlying NDX Index, so my analysis is the same on having potential for an upside breakout above the 50.5 area. Here I would measure upside potential to around $52 over the next couple of weeks as the most bullish scenario.
Near support is 49.6, then at 48.6 to 48.4, and finally the most key technical support being at the lower end of its channel, the current intersection of the uptrend line at 47.9.
RUSSELL 2000 (RUT) DAILY CHART:
The most key chart aspect is that the Russell 2000 Index (RUT) reversed right at it's prior high, setting up a potential double top, which would be 'confirmed' if prices retreat to below 820 on a closing basis.
RUT has the most likelihood of all the major indexes of remaining in a trading range over the near-term or next couple of weeks. That projected range would be 856 on the upside and 820 on the downside. The next lower support for RUT is not too far below 820 however, at 810, with next support around 803.
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.