THE BOTTOM LINE:

The Nasdaq Composite (COMP) and the Nas 100 (NDX) achieved decisive upside penetrations of their prior highs; the S&P 500 (SPX) did manage to nudge above its prior high also. Technical considerations also point to increasing risk of a correction. I'm not suggesting this points to a downside reversal, as we've yet to see even a minor one. Technically, a correction isn't really much to consider until a prior downswing low is pierced.

As a cautionary note, on a longer term weekly chart basis, COMP is as overbought as it was at its October-November 2007 highs as can be perused on my first chart. The primary significance to a trader of an 'overbought' situation is that the more extreme such indicators it tends toward a greater probability of a sharp reaction to bearish news after the bulls have all bought into the most recent up leg.

That said, the most recent week was again an impressive advance and the bulls are as happy as the bears are grumpy. Yes, there are still bears out there! Ones who are economic fundamentalists and can't accept that a still lousy economy could have such a resurgent market. Nothing personal folks, it's just that the market is perverse that way and lives in future hopes on the Street of Dreams.

Speaking of the Street, I pause to remember many of my lovely former Cantor Fitzgerald colleagues who were downed on 9/11/01. I could have been in that rubble pile too were it not for the fact that I was still off finishing my (Essential Technical Analysis) book. I was at the first NYC remembrance ceremony and the second and will go back for the 10th. Their memory still burns bright in me!

CHART OF THE WEEK:

There's not a lot to say about this first chart. It mainly serves as a reminder that if I keep on buying calls, there is increasing risk of a down to this up. And, COMP is now just passing the 50% retracement of its last major downswing and which is about as far as a 'normal' correction gets in terms of a retracement. Once it crosses above a 62-66% retracement however, it would then look more like the index was on the way to making a round trip back to the prior high (in the low-2800 area).

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is on track to possibly tacking on another rally that would carry up toward where I see the main current technical resistance in the 1100-1150 area.

The chart will maintain its most bullish pattern if it can continue to hold above its prior high in the 1039 area. The next most bullish indication will be to maintain closes above the 21-day moving average, currently at 1016. A close below the prior (down) swing low at 992 that was more than a single day affair would be a bearish note. Key near-term chart support levels are at 992, then at 978.

It's hard to peg 'resistance' when an index or stock is at a new high for a move. I've noted a potential rising line of resistance at the previously broken up trendline as can be seen on the chart and which intersects currently at 1102 at the red down arrow.

COMP is also registering an overbought extreme again in terms of the RSI. This doesn't always mean much in an strong bullish trend except that its common to see more back and forth trading swings when an index or stock is at such extremes and is evident in the chart below.

TRADER SENTIMENT:

Trader sentiment is not at quite the same bullish extremes as we were seeing in late-August and earlier in September. As we've seen more back and forth trading swings, options traders who want to buy calls hoping for another sustained advance, don't have quite the same enthusiasm to buy calls. I'd rate bullish sentiment as 'high' but not at an extreme.

Coupled with an overbought RSI on a 2-week and 13-week basis, I'd rate buying more index calls as relatively high risk; i.e., the risk of a 30-50 point downswing is probably equal to a further 30-50 point advance (from the 1050 area). This versus a favorable risk to reward ratio where there's a 30-40 point upside potential versus a 10-15 point pullback risk.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) Index hasn't yet broken out to new highs on a closing daily chart basis. The chart is bullish overall but we have to recognize the possibility of a double top if OEX doesn't climb above 483-485 on a closing basis. When I (often) use the term a 'decisive' upside or downside breakout I mean one that clears a prior high by more than a hair's breadth and then keeps going. Moreover, subsequent pullbacks then find support/buying interest in the area of the prior highs; i.e., prior resistance 'becoming' new support.

Key very near-term resistance is at 483-485; with next resistance in the 500 area. Technical resistance implied by the previously broken up trendline intersects currently in the 513 area.

Support should be found in the 472 area, then at 462. If 462 was pierced, then next support has to assumed at the next (lower) swing bottom around 455.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The chart of the Dow 30 (INDU) looks identical to the S&P 100 in that the Average here hasn't yet achieved a decisive upside penetration of its prior high in the 9648 area. If such a move is upcoming, then next resistance is also hard to identify short of what will likely be major resistance in the 10000 area.

Near support is in the 9430 area, then is assumed to lie at the prior 9253 low. Next support is in the low-9100 area.

Based on the individual Dow stocks and it's instructive to look at all 30 individual stock charts, there are at least half in strong up trends, a handful under pressure (e.g., 5) and 10 that are in more or less neutral sideways trends. There's enough strength in the 30 Dow stocks on balance to propel INDU up toward that magic 10000 area in the coming month.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) index has achieved another bullish upside breakout above its prior rally peak. I've noted potential near resistance around 2100 and then at 2160. There's potential for a next advance to the 2300 area.

On the downside, look for very near-term support in the 2060 area, then at 2010-2000, with next key support in the area of the prior 1958 low.

The RSI is showing an overbought extreme again. This knowledge and a subway token will get you on the NYC subways! In seriousness it’s a factor to keep in mind, even when it's the 2nd or 3rd time an index or stock has registered such a reading. The more times any index like COMP reaches an overbought extreme the greater risk that this instance might preface a deeper correction. I feel a little like the boy who cried wolf too much to even point this out as something to be concerned about.

Bullish sentiment is high among options traders, but again nothing we haven't seen and may have more to do with the potential put buyers having been burnt too much and staying out rather than a rabid rush into more and more index call positions; and, where portfolio 'insurance' (hedging) doesn't seem so necessary.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart has a renewed bullish pattern with its decisive upside penetration of its prior high. I've noted possible next resistance around 1700, then up at 1760. There's potential up to 1800-1825 as a next objective.

It's also hard to figure there will be another 100 point move higher straight away given another near-term overbought market but the charts look good. Price action is king in terms of indicator considerations. You may notice however, that the rallies have been coming after the RSI backed off to a more 'neutral' reading; e.g., 50-45 in terms of the 13-day RSI.

Near support is now assumed to be at 1668 or so, at the prior high, than down in the 1638 to 1628 area. Pivotal support then lies in the area of the prior 1585 (down) swing low.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has the same bullish pattern as the underlying NDX index with its move above its prior 41.1 rally peak. Volume continues to be relatively low compared to what is happening with the move to ever higher highs.

I noted last time that "In a regular stock, low volume rallies are somewhat 'suspect' technically and doesn't provide a confirming volume indication for price action." However, the On Balance Volume (OBV) line has been moving up at an equivalent rate (to prices) and OBV seems to be the key Volume indicator with QQQQ. It's not like an individual stock in some key ways given that it reflects a 100 share index.

Near QQQQ resistance: 42.0

Next overhead resistance: 43-43.25

Major resistance: 44.5-45.0

Near QQQQ support: 41.1

Next support: 40.4-40.1

Pivotal next support: 39.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) tracked along in the same bullish pattern as the Nasdaq, given its breakout above its prior 590 price peak. Next technical resistance around 600-605 may be a little tougher for RUT as coming in at the top end of its broad uptrend channel.

The upper channel line may offer an area of rising resistance and mark a slowing of the recent strong advance. That's a common way these upper channel lines play out. In the case of a decisive upside penetration of the 600-605 area, that would suggest a renewed bullish surge higher.

Near support is now assumed to lie at the recent 'breakout' point (the prior high) in the 590 area. Next support is in the 557-552 area and then slightly lower, around 547.

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

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 (i.e., the put/call ratio). In my indicator a LOW reading is bullish 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 tend to 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.