THE BOTTOM LINE :
Unlike the more 'fixed' outlook that investors can be prone to on a fundamental basis, trader types need to be flexible and continually evaluate the outlook for the market; this is especially true of technical analysis. I've gone back to the drawing board so to speak and now see that this recent run, the rebound seen from the late-November (11/21 low), may be about over as the major indexes approach tough resistances.
I have been most focused on the bullish implications of upside momentum implied by prices piercing the steep September early-December down trendline; which I was seeing as the upper line of a bullish falling 'wedge' pattern. However, in my ongoing evaluation of my charts and indicators, there are some other, bearish, aspects that have come to the forefront. Key resistances are implied by the following:
Prior (up) swing highs; e.g., at 918-919 in SPX, the 1600 area in COMP
1. The upper end of the downtrend channels especially apparent in the S&P and Dow.
2. The 55-day moving averages. There is a significant amount of focus, even among fundamentally oriented fund managers in the 50 and 200-day moving averages and (upside or downside) crossovers of these two. I look at the 55-day, a fibonacci number, but the 5 day difference is relatively minor.
3. 13-day RSI levels that are nearing levels that have 'signaled' tops in the last few months. There tend to be degrees of overbought (and oversold); e.g., in a bear market, the major indexes tend to top out at lower RSI levels than is typical in bull markets.
4. Bullish sentiment has declined recently, but it has been relatively high for a bear market prone to reversals after minor rebounds of 25 to 38% of the prior downswing.
5. Non-confirmation, of volume. Its been declining on balance during the recent rally; in the indexes, this is apparent on the QQQQ stock chart.
The foregoing analysis doesn't mean of course that there can't be a bullish surprise by a decisive upside penetration of the key resistances not far above this past week's closes. The market can be full of surprises.
As a trader I continually focus on probabilities; e.g., what is the probability or likelihood that the S&P 500 (SPX) advances another 100 points versus a decline of similar magnitude? With my most recent assessment of this, there appears to me to be more than a 50/50 chance of a decline. I'd rank it more like 40/60 or 30/70; e.g., a 40% chance of another leg up versus a 60% chance of another decline.
I took profits this past week on index calls bought at the late-Nov. turnaround, but still hold some QQQQ stock as my remaining 'proxy' long stake where I don't have time erosion in premiums if the market trends sideways in the slow holiday period ahead. Puts (ATM) taken out on the close approach to 9000 in the Dow, the several intraday rallies to above 900 in SPX and to OEX 440, look to have a favorable risk to reward.
Since SPX, OEX and INDU have gotten to or just below the down trendlines seen on the individual index charts, the appropriate exit points for puts are on any decisive upside penetration of those trendlines, especially on a close above the trendlines and even more so if there's a similar second consecutive close. With the Nasdaq 100 index (NDX), the resistance trendline is a bit further above recent highs, although not substantially, at around 1257.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES S&P 500 (SPX); DAILY CHART:
Key near resistance at prior recent highs in the S&P 500 (SPX) in the 918-919 area still hasn't been overcome and if we look at resistance that's also suggested by the top end of the downtrend channel, as well as the 55-day moving average, SPX may have gone as far in this rally as it's going to.
If there is a decisive upside penetration of resistance, a move up to the 1000 area is a possibility. If SPX was going to be have such a breakout and additional up leg, I'd expect support on pullbacks to the 900 area; resistance and resistance trendlines, once broken, tend to become support on subsequent pullbacks.
Near technical support is anticipated in the area of the 21-day average, currently at 867, with even more pivotal support in the 800 area. A close under 800, not reversed (back to the upside) the next day would suggest that SPX could again be headed back toward the low end of its downtrend channel.
I've taken the wedge formation off my daily charts as this pattern isn't as useful as highlighting the downtrend channel and key resistance implied by the upper trendline of the downtrend channel. If resistance here is overcome, then the bullish potential implied by the aforementioned falling wedge channel continues to be operative.
Another aspect to the current technical picture is that the 13-day RSI seen above has reached an area where prior rallies in recent months have faltered or reversed.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) is up against resistance implied by its prior recent highs, the upper end of its downtrend channel and its 55-day moving average. OEX would need to clear 450 to suggest a decisive upside breakout and then the index would need to stay above 445 on a closing basis to suggest that it was regaining upside momentum; OEX is currently 'stalled'. Next upside resistance is suggested by its prior intraday highs at 483 and 495. 500 is a likely to be a key psychological resistance.
Support implied by the 21-day average is at 436 currently, with pivotal technical support in the 400 area. A close below 400, especially if there were two such days running, would confirm that OEX will likely stay within its downtrend channel. Major support begins in the 360-350 area.
As displayed above, below the OEX price chart, there was a Friday retreat in bullish sentiment. Before this, a mildly bullish outlook has been suggested by the CBOE equities call to put ratio (CPRATIO). This indicator has been showing perhaps too much optimism considering that the indexes were approaching prior highs and a possible 'stopper' to the rally.
My 'sentiment' indicator tends to reach lower extremes before substantial rallies set up (the 11/21 'oversold' low) and higher extremes also 1-5 trading days before downside reversals. There was a 12/12 low that has only preceded a minor rally after it, so far at least. There's been no recent high ('overbought') extreme, so that's a minor plus for the bulls.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The chart pattern for the Dow 30 Average (INDU) is remarkably consistent and similar to the S&P charts; i.e., in terms of an inability to exceed its prior recent high, a dominant down trendline and the key 55-day average. A decisive upside penetration of 9000 would be bullish for another up leg, especially if this same (9000) area found buying interest coming in on subsequent INDU pullbacks to the same area.
Key INDU near resistance remains the 9000 area; above 9000, next resistance is well above, around 9500, then comes in at the prior pivotal high at 9653.
Near support, in the area of the 21-day average is at 8539 currently; I could as well say that support is in a zone from 8540 down to 8500. Next support is at 8125 and fairly major technical support should be found around 8000.
I'm not missing holding the Dow Index (DJX) calls I owned from the 75 area, having exited on the Dow rally above 8800. What's the old saying: "you can never go broke taking a profit". Depending on how you trader, this is not to say that you want to take a bunch of small profits since one medium to big-sized loss wipes out a lot of those!
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Key near resistance in the Nasdaq Composite Index (COMP) remains at 1600, then at 1650 at the down trendline and next up in the 1780-1800 area. The very short-term trend is now more or less sideways. COMP looks to me to be quite vulnerable to another sell off ahead. However, a close above 1650 would suggest a bullish breakout and potential up to the 1800 area.
Near support is in the 1500 area, then around 1400; a close below 1400 would suggest definite and renewed downside momentum.
NASDAQ 100 (NDX) DAILY CHART:
With the Nasdaq 100 (NDX), recent tendency to rally looks to be in jeopardy with this confluence of several ways of seeing resistance. Especially important is the ability to pierce prior highs around 1250 or not; in the very near-term the bearish down trendline intersects in the 1260 area. 1250-1260: the key resistance area.
A close above NDX's down trendline that was more than a 1-day affair would suggest renewed upside momentum and the potential to challenge prior highs; first, in the 1380 area, then at 1470.
Initial support begins around 1193 and extends to the 21-day average, currently at 1172. New support and a pivotal one, is at the line of prior lows at 1091. A close below 1090 would suggest renewed downside momentum.
As discussed with the S&P previously, the 13-day Relative Strength Index or "RSI" seen above is approaching the area where prior rallies tended to falter, although this indicator is not at the extreme seen for the period shown in the chart. A key point here is that bear market rallies, if that's what this is, don't typically get to overbought 'extremes'; e.g., reaching 65-70.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
A key added trade data provided by the Nasdaq 100 tracking stock (QQQQ) is what any stock provides: VOLUME information. While price patterns are the primary point of analysis, volume trends are a good secondary or confirming type indicator.
When prices are trending higher but with a declining volume trend (as highlighted with the declining line above the volume bars) as we have with QQQQ, it tends to 'reinforce' what we see with the other suggestions of resistance on the price chart.
The 30 to 30.5 area remains a key near resistance. Above 30.5 there's no apparent chart resistance before the prior high at 34.
Near support is at 28.7, then at 26.8, with critical for the bulls support at 25. I'm holding some of the stock as a 'proxy' long if a rally breaks out above the key down trendlines seen on the major market index charts. My current sell stop is at 28.5.
RUSSELL 2000 (RUT) DAILY CHART:
I'd note the initial bullish breakout in the Russell 2000 (RUT) above its 55-day average, although this hasn't been maintained. The downtrend channel, as is often the case with chart patterns in general is different in RUT than in the S&P and Nasdaq.
RUT has more to go on the upside, to around 570 currently, before it would challenge resistance implied by the upper boundary of its downtrend channel. But before 570, there is the prior 551 high as a 'benchmark' resistance.
Since I also measure overbought/oversold levels differently with RUT versus the other indexes, by using a 21-day RSI, the Russell 2000 could have more 'room' on the upside so to speak. Will it buck the trend, if the S&P and Nasdaq start selling down again? Not very likely.
Key near support is at 440, then 416 and lastly at the prior low for the Sept-Nov decline, at 371.
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
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 favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.