THE BOTTOM LINE:
The Nasdaq 100 Index (NDX) has pushed to a decisive new high for this current move and the Nas Composite (COMP) is within a hair's breath of it, but both indexes are of course very far below their 2000 tops. This is in contrast to the S&P 500 (SPX), which has only to push above 1553-1555 to reach a new all-time high and join the Dow 30 (INDU) in the advance it made previously into record high ground. The key resistance area for SPX remains 1553-1555 and then up around 1580, at the top end of its weekly chart uptrend channel.
A technical/chart development that suggests that the economy and hence the market could be in for some long-term trouble is seen in the Dow Transportation (TRAN) Average as it declines, while INDU is back up near its highs. TRAN is threatening to fall under its long-term up trendline on a weekly closing basis. Classic Dow Theory in action would suggest that a falling TRAN means that the shipment of goods is declining, even if the output of the Industrial stocks is holding up. If this means an inventory buildup, INDU will also fall later. The whole pattern could be pointing toward a recession. The longer-term outlook is not an immediate concern in index options trading strategy.
This past week's fall in bullish 'sentiment' among options players, in the midst of a pause and a mostly sideways trend in the S&P and the Dow, bodes well I think for a move to beyond the July highs. Consolidations that hold most of a prior sharp advance are generally part of a still bullish pattern.
Assuming that we see moves to above the mid-July tops, I'm not looking for subsequent rallies that carry beyond, or much beyond, 1580 in SPX, 742-745 in OEX and to around 14,200 in INDU, although there is one chart target suggesting a possible climb to the 14,300 area. In terms of the Dow, what's another hundred points!
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) Index remains bullish in its pattern, that of a consolidation that has maintained lows above the key prior 'breakout' point. The chart picture here suggests that SPX is in a good position to challenge its previous all time high in the 1555-1556 area. Stay tuned on that as the main event. If there is a decisive upside penetration of the old highs, I'd look for 1580 as a next objective and possible strong resistance as I noted in my initial comments.
Key support is in the 1505 to 1500 area. A decline below 1494, especially on a closing basis, suggests that more weakness could follow, such as back to 1470 and below this level there's downside potential back to the 1440 area.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) chart started to break out some to the upside near the end of this past week and the KEY test lies ahead for a rally attempt that pierces the prior high at 720. If 720 is exceeded and prices keep trending higher, one possible objective is to as high as to the 740 area; it's noted as 744 on the chart below but that target should be viewed as plus or minus a few points.
705-700 is the key technical support area, but I'd view a close below the 21-day moving average, currently around 697 as pivotal for suggesting that OEX was vulnerable to a decline back to the 688 area or lower.
Bullish sentiment as suggested by my indicator has fallen in the past week. While not at a contrarian bullish level, this recent drop looks to me to be somewhat supportive for a further rally ahead.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average this past week managed to creep past resistance in the 13870 area, which gave the appearance of an upside breakout above a bull flag consolidation. So far however, upside follow through has been underwhelming. No doubt there's significant nervousness about buying on up to the prior top; it's 'after you' on that score!!
If buying keeps up and the prior 14022 high is pierced, I anticipate both short-covering and new buying coming in. At that point a next leg up, if equal to the upswing of 2 weeks ago, would project potentially to the 14342 area as highlighted on the chart below. I'd also note that resistance implied by the top end of a well-defined weekly chart uptrend channel (not shown) comes into play around 14,200 and Id be surprised to see a weekly INDU Close above this level.
Support should be found in INDU around 13733 on down to 13690, and with pivotal lower support at 13500. A close below 13500 would suggest that INDU was vulnerable to a further pullback (below 13500) of 200-300 points.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index is now of course very close to testing its previous 2725 high. Given the strong preceding rally, I anticipate that COMP will go to a new high. If prices stall in the area of the old highs or even the high to date for this move, it's going to look like a double top formation. A double top pattern is always a strong bearish indication, so I wouldn't want to give short shrift to this possibility.
However, on an intuitive 'feel' basis, I could see COMP giving heartburn to those short and in puts by going to new highs ahead. Stay tuned on that! I also find that the decline in bullish sentiment on my indicator to be supportive for another shot up. Assuming there is a decisive upside penetration of 2725, a further advance to the 2775-2780 area is possible. 2835 is my current maximum upside objective.
On the downside, near support should be found around 2656 on any pullback. Pivotal support? COMP shouldn't fall below 2644 to 2630; prior recent highs should offer some support ahead if COMP is going to maintain a bullish chart.
NASDAQ 100 (NDX) DAILY CHART:
As I said last week, "betting against the Nasdaq 100 Index (NDX) exceeding its old high at 2060 seems foolhardy". No fools here. Moreover, my NDX target for a move to the 2100 area (or a bit beyond) has been reached. What now?
NDX has reached the beginning of what is usually 'overbought' territory as seen on the RSI indicator below. On a weekly chart basis the 8-week RSI (not shown) has also reached 70, but higher readings have been seen there before a pullback set in. 2100 should be a 'natural' area of resistance, especially in an overbought situation. However, the trend is also strongly up and price momentum rules until shown faltering. 2150 to 2160 are my most bullish price projections.
Near support should be found at 2060 to 2050, with a next lower technical support at 2020, at the current 21-day average.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
If the Nasdaq 100 Index tracking stock (QQQQ) was just another stock (of an individual company) I would be, and I have been, questioning the staying power of a rally where daily trading volume keeps declining. Fewer buyers are coming in on the way up.
However, I'm becoming convinced that it's more important with QQQQ to see On Balance Volume (OBV) in an upward trend, not necessarily absolute daily volume. The key chart aspect is that the Q's pierced its 50.66 July top and is approaching $52, a target I named last week. I don't currently have an upside objective beyond 52.25.
Prior resistance around 50.66 should now offer near support, with 50.0 as a next lower pivotal support, extending down to 49.7.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) hasn't had the upside follow thought above 810, then 820 that I've thought it could reach and exceed, so this index continues to play the laggard relative to the big cap universe. Unlike the S&P, RUT is barely holding a sideways trend above its 'breakout' point at 800-803. Below 800, support/buying interest is likely to next develop around 783 on down to 774.
If RUT continues to hold key support at 800 and another rally develops following the S&P, a key test on the upside will be overcoming resistance around 820. Pivotal intermediate-term resistance continues to look like 832-835, with major resistance back up at prior highs in the 856 area.
RUT could get a rally going if the S&P gains upside traction, but I'd rather be in S&P and/or DJX calls given the potential for short-covering and technical buying if its summer highs, not that far overhead at this juncture, are pierced. In comparison, RUT has less attractive prospects (its stocks are less in favor currently) and could have a struggle to even reach or 'fill in' its late-July downside gap at 835; in fact, 832-835 is an area to consider buying RUT puts.
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.