THE BOTTOM LINE:
However, Friday's rebound at least carried the hot as a pistol Nas 100 (NDX) to a close above its upper channel line (at 2164) that I've been working with. Tougher resistance may be found at the upper boundaries of similar long-term uptrend channels at: 2842 in COMP, around 1580 in SPX, 740 in the OEX and 14225 in the Dow 30 (INDU).
A bullish extreme in my sentiment indicator was registered on Thursday Oct 4th, and when this kind of extreme 'signals' an upcoming top, such a top is likely to come within 1-5 trading days and Thursday's peak may have been it but we'll see on that. Definitely, Thursday's highs look like the ones to watch, and beat.
As I recall, this coming week brings an anniversary of the '87 market crash. Unlike then, this market is ignoring bearish economic news and people are buying because others are buying. Hard to say when we'll see even an interim top. I'm wary of the current strong trend continuing a whole lot longer. But, I've been wrong before! Not that I'm bucking the trend here by buying puts, rather I've come out of most calls as my topmost objectives were met recently.
All good traders seem to have had their wipe-out moments: mine was the '87 market crash; my mentor, Mark Weinstein and the best stock index options and futures trader I've ever known, really got serious about learning how the markets work after his big debacle of limit-down days in soybeans futures; and, Victor Niederhoffer, another talented index and options trader, lost most of his personal fortune and enough of his hedge funds' money to get shut down by a heavy and leveraged speculation in the Thai stock market in '97. By the way, Niederhoffer regained a lot of money personally and under management, and his returns had been outstanding again until recently (when he again got overleveraged). No matter how much I say it, not overtrading is as (sometimes more) important as being right on market direction.
This market is going up for some good reasons no doubt, but bidding up stocks beyond where the market is now seems pretty speculative, especially in tech stocks. Google (GOOG) at $637!? A gazillion times earnings? I'd better stick to the technicals and they suggest some risk in holding a lot of index calls at this juncture. And, I'll remind myself again that it's very tough to predict tradable tops in a long-term bull market. Tricky to find, but they do come along.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) Index appears to be stalled in the 1550-1575 area. SPX has been lagging the tech-heavy Composite and Nas 100 Indexes and has not yet decisively tacked on substantial further gains above its 2000 and July 2007 tops.
Does the index break out above 1575 and head to 1600 next or fall back to the area of the 21-day average at 1533? The current chart pattern remains bullish but the coming week is important as to signs of where the index goes from here.
There was the suggestion of a key downside reversal on Thursday, but no price break follow through on Friday. To maintain a bullish pattern, SPX support/buying interest should be found in the area of prior highs as highlighted on the chart below and the area where the index held on Friday. If the 1555-1556 level is pierced, next lower support is 1536-1533, then in the 1520 area.
Key overhead resistance as noted already is at 1580, with next higher resistance probably to be found around 1600.
SPX hasn't gotten quite to 70 in the 13-day RSI as seen above, a level (and above) associated with an overbought market, but this indicator is in its typical upper ranges. The last big top was a point where the RSI was a bit under the 70 'overbought' threshold. There's nothing magical about these readings but high RSI levels tend to be seen with markets that struggle to tack on big further gains. The two up legs since the mid-August low are close to being equal and one reason why my upside objectives for the current move have been fulfilled.
THE S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) chart remains bullish, especially so if OEX continues to hold above the 720 level. It looked on Thursday that there might be a break below this prior high, but the index Friday rallied from the prior day's closing level. As long as the index maintains this bullish pattern (the prior high 'becoming' new support), OEX could head up to test overhead resistance first at 734-735, then at 740-742. I don't currently have higher objectives than 740-742 and, per my same suggestion of last week, I'd exit remaining OEX calls in this area.
Pivotal near support is at 720, 715, and then around 710-708. Significant support is also apparent at 697-700, extending to 690.
With such a relatively high degree of bullishness currently there may not be a whole lot of new buyers that haven't already put their money to work in stocks. What the market does from here also depends on how much cash institutions have to keep bidding up the S&P stocks. Tech stock potential has excited both institutions and individuals, but the Nasdaq is looking frothy.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average is struggling to gain traction above 14000, and has significant resistance currently at 14,200-14,225. My maximum further upside objective in INDU continues to be 14300.
I'd still emphasize my point made last week that the Dow looks most bullish as long as it maintains closes above key near support at 14000. The 13950 area is a next support, with even more pivotal support around 13890, at INDU's current 21-day moving average; finally, I'd highlight important technical support that should exist around 13740.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
My upside target for the Nasdaq Composite (COMP) Index of 2835 was just about met at Thursday's 2834 high this past week. 2842 looks to be resistance implied by the high end of the weekly chart uptrend channel (not shown). This technical resistance may get exceeded and, if so, where COMP would go from there is hard to gauge.
There are some measurements on the long-term weekly chart suggesting that a move to and above 3000 is a possibility at some point. The Nas Composite looks too overbought currently to tack on another big up leg from here however.
Near support is at 2750-2754, with key or pivotal support suggested at the prior high around 2725. 2650 looks like major support.
NASDAQ 100 (NDX) DAILY CHART:
2150-2160 was my 'most bullish' price projection for the Nasdaq 100 Index (NDX) last week and that target has been overshot. Where NDX can or will go above highs already seen is hard to estimate. There may be increasing reluctance to buy above 2200. This is a very overbought index both in terms of what you can see in the upper moving average envelope line and in terms of the RSI.
Risk to (further) reward in buying calls is out of whack in my trade book and it's my strategy to take profits when major objectives are met, so I'm out. I also am not looking to trade against this super strong trend without some definite sign that the trend has reversed.
Buying puts seems tempting in terms of the 'reward' potential in a correction that has to come at some point. But WHEN is the big unknown. If I feel tempted to short such a runaway bull move, I'll lie down until the feeling passes! Been there, done that, no thanks.
Key near support looks like 2118, down to the 2095 area; a close below 2095 would be bearish and suggest that there could be more downside, such as back to 2060-2050, or lower.
NDX got very overbought this past week, according to the RSI, but downside reversals don't always set up on the first such reading but it signals that a correction has an increasing likelihood of developing in the not distant future. Mid-July provides an example.
As far as key component stocks in the Index, Cisco Systems (CSCO) is having what I think is a well-deserved run up, but Google (GOOG) and Apple (AAPL) may represent the outer speculative fringes so to speak. Intel (INTC) is lagging, which is a stock I'd rather seeing leading then lagging a tech charge.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Last week, I projected resistance in the Nasdaq 100 Index tracking stock (QQQQ) at possibly 54.25, and 54 was nearly touched this past week. The sharp sell off on Thursday spooked some owners of the stock as can be seen in the volume spike that day. Interestingly, the upper trend channel on the long-term weekly chart, unlike the underlying NDX index, has not yet quite been reached.
Sometimes the NDX and QQQQ charts don't exactly match in terms of trendlines. In terms of QQQQ, resistance implied by the upper weekly chart trend channel boundary is in the aforementioned 54.25 area. If 54.25 is reached, or if there's another top that forms again around 54.0, I'll look at shorting the stock and risking to, at most, 54.55 on a buy stop. I don't mind risking a little on a speculative short in the Nas 100 stock based on a definite resistance calculation and the sureness of a resting equities stop order. A pullback to 52 is downside potential.
Support is at 51.5-52.0. A close below 51.5 would be bearish, especially if there was not a move back above the 21-day moving average the next day. Major support currently begins around 50 and extends down to the 49 area.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) could be consolidating for a move up to retest prior highs in the 855-856 area. This would look unlikely if near support around 830 was pierced. Major support is in the 800 area.
If the prior high was reached, without a decisive upside penetration of this area, buying RUT puts looks like a trade with good risk to reward potential if a protective exit was 862. I'd estimate the downside potential at that juncture as back to the 800 area.
Conversely, an upside breakout above the summer 856 high would suggest a possible target to 877-880 where I might again be interested in a put play. A number of ifs here, but these are some chart/price possibilities I've calculated.
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.a