THE BOTTOM LINE:
I would inject a cautionary note for anyone getting overly bullish here, at least in the near-term or the next 2-3 weeks. And I do in fact see some (bullish) caution as evidenced by my recent call to put sentiment figures as seen in the OEX chart below. There are some price levels that have to be pierced to suggest that this market is just going to go back up to its prior highs and resume the bull market we were in prior to the big summer corrections. I'll discuss the levels I suggest watching as key support and resistances in my individual index commentaries below.
While I also think the major downside correction has run it's course and am not looking now for lower lows relative to the recent bottoms (the upside reversal at 1370 at SPX's long-term up trendline, looked pretty convincing for a bottom), I can also see a lengthily period ahead of a potential sideways trend or a range-bound market as the problems related to an economic slowdown and Fed actions play out this fall.
SHORT-TERM, we've reached overbought extremes again in the S&P, Dow and Nasdaq, or nearly so, in terms of the 21-hour RSI; certain extremes seen with this length setting has often 'signaled' that the major indexes were at or near a short to medium-term top. The same has been true of the downside extremes.
I attempted to define the usefulness of multiweek/multimonth hourly charts and how accurate the RSI extremes can be in defining tradable tops and bottoms in my most recent Trader's Corner column; written on Thursday this past week (not my usual Wednesday). If you want to go to this (8/30) Trader's Corner column if online, you can click here.
From this article I'll update the S&P 500 and Nasdaq Composite on an hourly closing basis, along with the RSI indicator set to measure 21 trading periods or the hourly bars in this case.
In the S&P 500 (SPX), an hourly close above 1479 and an ability to mostly stay above this level thereafter, is needed to suggest that SPX was again headed to a key test of the 1500 area. The recent high is not being 'confirmed' by a lagging RSI however.
As you'll see above with the Relative Strength Index (RSI) indicator applied to the SPX hourly chart ABOVE, I noted for my aforementioned Trader's Corner column the extremes that signaled tradable tops and bottoms since late-May. With one exception, these extremes have been quite accurate in pinpointing trend reversals and trading opportunities.
I don't rely just on seeing these extremes as a trigger to go into calls or puts, but this model is very helpful in at least not blundering into trade entry in the direction of the latest move when such a trade would also put me into an overbought or oversold situation. Especially so when the dominant trend has gotten rocky and a lot of volatility comes into play in sizable two-sided price swings.
In the Nasdaq Composite (COMP), the key hourly closing level to beat is at 2626. The Nasdaq, which has been leading the market higher on this rebound, has already exceeded its most recent hourly closing high made 8/24. Meanwhile however, the 21-hour RSI is back into the overbought zone that has marked several tops in recent months.
There is a significant gap between price action and the RSI, as the recent hourly price peak has registered a LOWER reading in the RSI indicator than when prices were at lower levels as seen above. This kind of divergence has bearish significance in suggesting a possible top coming up; not always, but this is the outcome often enough that it gets my attention. And, unlike price/RSI divergences seen on DAILY charts, if there is a reversal ahead it develops much quicker; i.e., in hours, not days.
In the Nasdaq 100 (hourly chart not shown), which has been outpacing the Composite, I'll just note that the key hourly closing high needing to be pierced to keep this bull move rolling is much closer at hand: an hourly close above 1994, with this area then acting as support on subsequent pullbacks. The NDX Friday Close was 1988.7.
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S&P 500 (SPX); DAILY CHART:
With the S&P 500 (SPX) Index, along with most of the other major indexes, there are two key areas of potential overhanging resistance: first, at the 62 to 66 percent retracements levels and second, the prior high after which the second down leg developed; i.e., the rally high that ended at the 8/8 price peak.
Per my last week's comments, resistance implied by the 62-66% retracements levels is at 1484, then at 1492. Above this area, critical or pivotal resistance is at 1504. IF 1504 is pierced and not reversed (back to the downside) in the day(s) after such a move, look for a possible move that winds up at or near the July top. Such an advance is not what I'm expecting since I'm not anticipating a test this soon of the 1500 area in SPX; regardless of the soothing talk from the Fed and the modest measures taken so far by the Administration to help a limited number of homeowners in distress, mostly the better credit risks.
Near support is at the 21-day moving average, currently at 1453. Key support below this level is at 1432, at the last (down) swing low.
S&P 100 (OEX), DAILY CHART:
The (S&P 100, OEX) index has rebounded to near resistance in the 690 area but doesn't look like it will charge through it or resistance just over that at 693, as suggested by a 66% retracement of the July August decline. I've also noted on the OEX daily chart below the area of what is likely to be even tougher selling pressures which is if there's an advance to the 700 area again.
Close by support is likely to be found at 677, the current 21-day moving average. The most key near support, which needs to hold to suggest much chance of a move back up to the summer peak, is at 670.
Whether to exit S&P calls around recent highs, regardless of entry close to recent lows or not, is not an easy question. I don't want to stick around myself and see if the market is going to have a second up leg; e.g., equal to the first. I don't usually anticipate that a market that has had a major correction such as the one we've seen with its high volatility, will resume the prior trend all that easily or quickly.
Yes, we've had a rebound and a pretty strong one off the bottom, but we're also reaching the area where rallies have to prove themselves; i.e., is a retracement only of the prior (down) trend OR a resumption of the prior bull move? Hard question to answer: guess I'm cautious too.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) is also nearing key resistance in the 13,500-13,513 area; above this level pivotal resistance is anticipated at the prior upswing high at 13,696.
Near support is at 13,200, then in the low-13000 area (at the recent 13,035 low).
It looked to me like short covering into the long holiday weekend, but I don't believe this rally has staying power. Do I want to short it? Well, I'm not THAT convinced as I never UNDER-estimate the perceived magic of the Fed and the prospect of an interest rate cut ahead. Well, it does make some sense, as interest rate cuts tend to stimulate the economy and keep earnings trends positive. But, this outcome is not a given either.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index, unlike the narrower gauge big-cap Nas 100, looks like it may start to struggle now that COMP has retraced a fibonacci 62% of the July-August decline. 2610 is resistance that often comes in at the 2/3rds retracement (66%) level. And, lastly, even more pivotal resistance based on an actual prior high is at 2628.
First technical support is anticipated on pullbacks to the 2537 area, at the current 21-day moving average. Pivotal support, also implied by a prior reversal is likely at 2500.
I don't believe that the Nasdaq is going to lead this market back to the promised land of ever-rising stock prices. There are some hot tech stocks no doubt, but I don't think that leadership has shifted from the S&P, rather there are a few more underplayed stocks in this segment of the market and they got the play recently. However, I don't rate the likelihood of this market focus continuing as all that great.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 Index (NDX) has been on a tear and NDX has not exceeded its 66% retracement. If COMP had done the same, I would feel more of an expectation that this might signal a round-trip 100% retracement back to the 2060 July peak in NDX.
The index does have another, even more key hurtle ahead potentially, which is to also get above its prior upswing high at 1995. Stay tuned on that! I don't see NDX closing above 2000 for any prolonged period in the near-term. Since I've been wrong before in such confident predictions, I'll change my tune on a close above 2000, followed by (mostly) a further springboard rally from there.
Key support is at 1929-1930, with the most pivotal next lower support at 1900.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Well, unlike the underlying Nasdaq 100 Index, the tracking stock (QQQQ) is in a position to challenge it's prior 49.06 rally high on the way potentially back to the July top at 50.66. I'm not impressed by the daily volume levels on this most recent advance, but prices are king and they have been on move higher. On Balance Volume (OBV) is headed in the right direction (higher), so we'll see how it plays out. I'm not on board any longer and am happy to let someone else fight for the last couple of points.
Support is at 47.5 at the average, then at 46.7, the recent pullback low before the Q's took off again last week.
RUSSELL 2000 (RUT) DAILY CHART:
Talk about change in leadership: mid to small cap stocks no longer rule so to speak. It looks to me like the Russell 2000 Index (RUT) is going to have trouble breaking out above 800-803, which I think may be the upper end of its price range for some more weeks to come. If there is a close above 800, not reversed in the next day or two after that, 810 is my next target, then perhaps to around 820, which is fairly massive resistance implied by the low end of the trading range before that. Think about it, many who bought at the low end of that range and didn't lighten up on the big break, will have plenty of stock for sale.
Near support is at 780, then in the 767-770 area. I wouldn't be surprised to see RUT back to the 750 area again at some point in the fall. I rate that chance as more likely than a move to 835 or above.
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.