THE BOTTOM LINE:
The S&P 500 (SPX) is now back to the top end of what may be a 1400 to 1300 or so trading range. SPX might get up to 1425-1435 but if reached, the Index will likely have tougher going above this area. In terms of the Dow 30 (INDU), I think we can anticipate significant supply or selling interest in the 13000-13050 area.
I updated in my Wednesday Trader's Corner article...what I've taken to calling my 'golden' indicator...the 21-hour RSI buy 'signal' seen on the hourly charts when the S&P indices dipped under or touched RSI 30; the Dow's RSI dipped into its oversold 35-30 zone as did the Nasdaq Composite (COMP) and Nas 100 (NDX). To review any golden bits of technical wisdom I might have dropped or not, see the Wednesday OI daily letter, either saved or online if you don't archive the letters. (I save all for a week, longer for one that conveys info I want to keep.)
Influencing a buy of OEX calls, besides the 21-hour RSI extreme, was another bearish sentiment extreme on 4/15, seen as always with the OEX chart further down and the same day's double bottom low, especially apparent on the hourly chart below. (NDX also looked bullish after it 'filled in' its big upside gap from 3/31-4/1 and found buying interest in the 1780 area.) I wrote last week that I figured there would be at least a couple of dips into the oversold zone on an hourly chart basis and there were two. Points made about the OEX are highlighted on the hourly chart:
The 21-hour RSI is now showing a highly 'overbought' condition on a short-term basis. Does this make THIS extreme a 'signal' to buy puts for the major market indexes? Yes, if price action confirms, such as by the broader S&P 500 (SPX) failing to pierce the top of its trading range year-to-date. A close over 1400 in SPX, not reversed in the next 1-2 days, would be bullish however. In a market like this one with a lot of cross currents and bearish influences I will use JUST an hourly RSI overbought extreme as a guide to get out of calls and not speculate on how much more I might be able to make on the upside.
Next is the companion hourly chart for the Nasdaq Composite (COMP). Beside the second dip into its oversold zone, I found it bullish that COMP started rallying from a low that was above its prior low. True, only slightly above that prior low, but if they rang a BELL at these reversal points, we would be living in a fantasy world of easy-peasie trading that is never going to exist. But sometimes it's kinda easy.
I don't even have to apply the 'retracement' charting tool to the above charts to judge pretty accurately that each index retraced one-half of its prior advance before it rebounded and then bullishly went to a new high for the move. Retracements of 50% are the most common ones before there's another price swing in the same direction as coming into the correction.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I wrote last week that the "bullish potential in the S&P 500 (SPX) was 'broken' when the index failed again to rally to a high that exceeded its prior top, which once again defines the high end of a likely trading range." Well of course SPX came roaring back to close the week slightly above the last two rally peaks. SPX hasn't quite exceeded its 1395 high Close dating from after the mid-January breakdown.
1395-1400 still looks to be a key resistance. A close above 1400 that is not reversed in the following day or two would be a bullish breakout above the trading range that the index has been in for many weeks now. In that event, a possible test of resistance implied by the 62 and 66 percent retracements at 1423 to 1436 could lie ahead. However, I think that this market is too overbought now to maintain itself above 1400, at least for very long.
If there were a rally that carried the Index into the 1430-1435 area, I'll be looking to buy SPX puts, with stop protection at 1440 and an objective for a decline back to the 1350 area.
Near support is in the 1360-1357 area, with next lower support levels at the two prior lows, first at 1324 then at 1313.
S&P 100 (OEX) INDEX; DAILY CHART:
The sharp 3-day rally this past week carried the S&P 100 (OEX) Index to just over the near resistance I pegged last week at 638-640; I also then noted what I assumed would be tougher resistance at 648-650. A close over 648, not reversed the next day, is needed to suggest that OEX could head up to resistance at 662 implied by a Fibonacci 62 percent retracement. A close above 662 or a bit above, at 668, would suggest that OEX could move back toward 700.
I'm getting ahead of myself on projections. Let's see if OEX can add to its recent gains first. I showed the hourly OEX chart with its extreme overbought reading in my initial 'bottom line' commentary above that we went out with on Friday; i.e., in the 21-hour Relative Strength Index. Based on this factor alone, at a minimum, OEX should trade sideways to lower in the coming week.
You can also see with the S&P 500 chart above that the 13-day RSI is as high as it's gotten since this indicator's October peak. We're at the top end, or nearly at the top end, of this year's trading range. It seems doubtful that bullish earnings surprises are going to be such that they will continue to cause short-covering and bargain hunting type buying; and, the potential effect of options related expiration activity is not going to be present in the coming week(s) either.
Revising support levels, I estimate very near support now at 630 to 625, then at 615, extending down to pivotal support at the recent 610 intraday low. The 600 area is the beginning of major support in OEX.
When support developed in the 610 area, coupled with the hourly oversold reading I've described, I got into OEX calls but was also happy to take a fast profit at 640 and I tend to use pre-set objectives. I have no suggestions or trading recommendations regarding calls currently. I favor put purchases if the index got to 645-648 and stalled. More price action is needed. I'd rather sell into a rally than buy puts on weakness.
Last week, on tax day (4/15) there was again a dip in my sentiment indicator to a level I define as 'oversold/extreme bearishness' as noted at the green up arrow. This day coincided with bottoming action in the indexes and it is not surprising. I've seen it before; where the exact day of a bottom shows the most activity in puts relative to calls. The jump in bullishness by week's end was as high as we've seen in some weeks, but not yet what I could call an extreme. It's possible, while not seeming likely to me, that this recent rally will extend and bullishness will get closer to ITS 'overbought' extreme, which would give some reason to adopt a contrary trading strategy; i.e., bearish.
At the risk of missing some part of a move, in this market environment I don't want to chase prices higher and join in with rapidly increasing bullishness as reflected in a sizable pick up in equities call volume relative to puts.
DOW 30 (INDU) AVERAGE; DAILY CHART:
In my previous Index Trader I estimated that the 12200 area would be a next support for the Dow 30 (INDU), thinking that this might coincide with another oversold hourly RSI reading, which has been accurately forecasting reversals. I noted also and continue to find significant, INDU's rounding bottom pattern, which suggested the potential to find support at 12000-12050 as noted by the green up arrow there.
Well, INDU didn't do the 'obvious' thing of re-testing the prior low at 12200, but dipped to around 12270; once there INDU had two, almost three, days with lows in this same area, which became a bullish tip off that selling was drying up. It wasn't so obvious on the daily chart, but again, I always urge traders to closely also follow the hourly chart, where a minor 'rounding bottom' pattern was apparent.
I knew an analyst, in fact the head technical stock analyst at PaineWebber, now UBS, that plotted the hourly Dow on a large continuous roll of graph paper that snaked around his office walls. I was just starting to use plotting software at the time that didn't require such labor, but there was something that grabbed you about those BIG wall charts!
Speaking of rounding bottoms, on a longer or intermediate-term basis, I'm still leaving the circular line on my Dow daily chart below that traces out a possible rounding bottom. This projected line is another way to plot potential support on pullbacks ahead. I would find it significant if there was a pullback to that line followed by a rebound; OR, find it telling if INDU plunged below that implied support.
The key resistance still looks like it will come around 13000 and a bit above, at 13500. I'm sticking for now with retracement measurements, suggesting potential resistances, of the last (December-January) decline and not yet the bigger move from the October (14198) high to the 11635 intraday low in late-Jan. I wouldn't assume that the recent rally is the start of a new up leg unless the Dow climbed above 13000 and started to build support in the that area on pullbacks.
Near support should be found now in the 12750 area, or the line of prior resistance (prior resistance, once broken, often 'becoming' new support later), with pivotal support at 12500 and significant buying interest/support implied at the recent 12270 swing low.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index rebounded stronger than ever on the Google inspired rally, taking out or piercing the most recent prior rally highs in the 2390 area. The close over 2400 is bullish if it can be sustained; although COMP has been in the 2400 area briefly before, or actually a bit higher, at the early-February intraday rally peak at 2419 with the high Close on that date at 2413.
We'll see this week if this recent rally has staying power. One thing to look for is a minimum pullback and more or less sideways price consolidation. If another rally sets up after a bit of backing and filling or COMP just continues higher, initial resistance is 2413-2420, then at 2438, representing a 50% retracement of the late-December to mid-March decline. The 2500-2505 area looks like major resistance at this juncture.
Near support is around 2350, at the low end of the Thursday-Friday upside chart gap, although this isn't highlighted (by me) on the daily chart below; next support is in the 2300-2287 area, then at the recent (down) swing low at 2260.
NASDAQ 100 (NDX) DAILY CHART:
Rebounding after a 'minimal' sell off and a couple of days' closes below the pivotal 21-day average, the Nasdaq 100 (NDX) Index came back strong, rallying above the prior 1886 high on a big upside gap propelled by Google's 20% gain. Another close or two over 1900 is needed next to suggest that this recent rally has some staying power.
Important as a test of trendline resistance, a close over 1930 would be bullish. Next resistance then be likely around 1960. A rally failure and reversal in the 1930 area would look favorable for buying puts, setting an exiting stop at 1935 with an objective on the trade for a decline back to support in the 1850 area.
Anticipated support in the 1850 area stems from this level being the top end of the aforementioned upside chart gap and the low end of upside gap areas, will often act as support; just as the high end of downside gaps may bring in selling and act as resistance. Next support is anticipated at the recent 1776 (down) swing low, with the next lower (and a key) support coming in around 1750.
I exited NDX calls held on the loss of upside momentum after the Index's move up into the 1880's; I improved my cost basis a little on call repurchases when the index appeared to find support in the 1780 area last week; I was especially also influenced by the oversold picture presented by the 21-hour RSI which isn't shown here, although the Nas Composite hourly chart and RSI had the same bullish (oversold) pattern as NDX, as presented in my initial 'bottom line' comments. [Now the hourly RSI is showing an overbought picture and I'm still a (somewhat nervous) holder of some of these calls; the strong rally on an expiration Friday was a too tempting sell for the others.]
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Continued low volume, but the Nasdaq 100 tracking stock (QQQQ) keeps going up, following the underlying NDX index. I didn't note it on the chart, but near support is anticipated to lie at 45.75, at the top end of the Thursday-Friday upside price 'gap'. The next technical support is down in the 44 to 43.7 area, and then at 43.1-43.0.
Besides implied resistance around 46.8, the level of a 50% retracement of the late-December to mid-March decline, a key anticipated technical resistance is in the 47.5 area, at the down trendline. This trendline has two points to define it. IF the Q's get up TO this bearish down trendline (currently intersecting at 47.5) as noted on the chart below and the stock then reverses lower, this 'line' of resistance will then look to be a significant technical obstacle; and becomes a better defined trendline, having 3 points to define it.
Conversely, if QQQQ pierces 47.5 and manages to climb further above this level in subsequent days, such price action would suggest upside potential to 48.7; and an outside maybe for a move back up to the 50 area. I doubt it but I don't want to get to caught up in just presenting a bearish viewpoint here. There's enough bearishness out there as it is so this view is well represented already! (And this rally has not been going up on any kind of big volume expansion that would suggest many new willing buyers coming in.)
RUSSELL 2000 (RUT) DAILY CHART:
I didn't anticipate that the Russell 2000 Index (RUT) would stage a turnaround from where it did, but once the S&P and especially the Nasdaq, took off, RUT followed along but not robustly.
The Index has rebounded back to the 720 area and the Friday close squeaked above this level finally. While the Friday intraday high again touched 724, at the late-February intraday price peak, the 721 Close was above that period's closing levels. The 730 Closing high from early-February remains to be tested. This recent rally has also retraced (again) 50 percent of the late-December to March decline, which is often about as much of an advance as is seen within an overall bear trend.
There is cluster of potential resistance points just overhead from Friday's 721 closing level that RUT needs to churn through to suggest it could go on up to next resistance in the 740 to 746 area. Given the closeness to an overbought reading in the RSI, I would rate the likelihood of a RUT tacking on another 20-25 points from here as somewhat unlikely.
If RUT did get up the 740-745 area, I anticipate wanting to buy puts. If you have been in calls from the 645-650 area or otherwise and are still holding them, I'd take profits on a further rally or if the index starts weakening noticeably.
Key support is in the 680-683 area. Key resistance is at 730, then at 740-746.
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.