THE BOTTOM LINE:

Sellers in last half hour whacked the market on the last trading day of the year. Various 'reasons' were cited. I chalk this up to (mostly) nervous profit taking ahead of a long weekend and an 'overbought' market condition. Tony Soprano couldn't have done a whack job as it seemed to come out of nowhere.

The S&P 500 (SPX) dropped back under its recent 'breakout' point and back into its prior trading range. I don't see this as marking a major top but this is typical of the kind of sharp reactions that can occur when the market is relatively overbought, as is the case currently. Nevertheless January should be an up month especially based on historical trends.

Bullish sentiment remains quite high among traders and this is a proverbial 'fly in the ointment' that suggests not being too complacent and over-leveraged in bullish positions. By the way, I don't suggest buying index options on chart 'breakouts'. The premiums get too jacked up too quickly in options. You can do this in index futures for a short-term trade sometimes.

HISTORY:

The S&P 500 (SPX) was up 23% in ‘09. The Nasdaq Composite (COMP) was up almost twice that as COMP gained nearly 44% on the year!

The first January following the end of a bear market has been pretty consistently strong, with an historical average 3.7% gain for stocks since the 1930s.

In the wake of the 14 bear markets since the crash of 1929, the S&P 500 index has risen 12 times, posting gains ranging from 0.7% in 1933 to 12.3% in 1975. (Two exceptions were January '39 and January '03, when SPX fell 6.9% and 2.7% respectively.

U.S. stocks in general tend to have fairly strong performances in January. For the Dow 30 (INDU), December, August and January have been the strongest months on average over the past 100 years. One nice thing about INDU is its LONG history.

There are some investment-related aspects to this seasonal tendency, especially investors selling underperforming stocks for tax purposes in the case of individuals and funds so as to look better in their year-end statements. This process usually extends through early-December. Then from mid-Dec through January investors tend to put new money to work in a search for 'undervalued' stocks that they think may outperform the market in the new year. This has often benefited small-cap stocks. In December, the trend seemed to have been at play as the Russell 2000 (RUT) was up 7.9% for the month, compared with 1.8% for SPX.

The VIX (the CBOE volatility index) and what some call the stock market's 'fear gauge', ended 2009 substantially lower than where it started. After opening in the year just ended at a relatively high 39.6, reflecting market uncertainty among traders, the VIX closed out 2009 at a more or less normal level (by historic standards) at 21.7. HO-HUM.

It seems, according to a (Wall Street) Journal article I read the other day, a number of investors are searching for better returns than the miniscule interest on money market accounts, etc., by selling covered calls. The thinking is that the best gains are behind us and 2010 may be a mostly 'flat' to slightly down year, or with just limited gains given the big run up in 2009.

With sort of 'normal' volatility returning to the market the call premiums won't be as fat, but if the market doesn't run away to the upside, or tank, the income aspects of covered call writes (while holding on to the stock) may work out as anticipated. Being a natural contrarian I find it hard to believe that the average individual investor is going to wholly succeed in this but maybe they'll turn out to be right or mostly right. A market outlook involved (a 'flat' 2010 market) may reflect an emerging consensus.

For sure, earnings prospects and trends are going to have to take over from the push provided by the stimulus. And profits don't look right now like they are going to come back strong in 2010. I myself am glad I don’t have to forecast the year ahead. I'll stick to trying to predict the coming week or two or few.

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MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

My 'minimum' objective for the S&P 500 (SPX) to 1149-1152 remains intact. I'm staying with that target although I also last week highlighted near technical resistance around 1140-1142. SPX got up to 1130 before it came off. SPX may have simply expanded its trading range, which will be especially apparent if the index drops again back to support in the 1100 to 1080 price zone, where I'd again be a buyer, with exit point if SPX falls below 1070.

Resistance is at 1130, extending to 1142-1145. Above this area, SPX would be in new high ground for the current move which makes it hard to project 'resistance'. Major resistance still looks like it would come in the 1180-1200 area.

The RSI again looks like it may drop back to, or under, a neutral or mid-range reading again rather than falling to an 'oversold' area. Rallies have been occurring when this has happened for the past few months. How long this pattern will go on is not knowable, but it's been fairly consistent since mid-August.

MARKET 'SENTIMENT'

Bullish sentiment in terms of its recent 5-day moving average numbers is showing a high level of bullishness. When this has occurred at least in the prior two months that SPX has been in a trading range, prices have pulled back to the at least the low end of the trading range.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) didn't follow big brother SPX in achieving a bullish 'breakout' above the top end of ITS 2 month plus trading range, as the index again was stopped in the 520 area. 520 becomes an even more pivotal resistance. I've noted 520-524 on the chart below as the key near resistance. Next resistance is in the 535-540 zone, with major resistance suggested by the top end of OEX's uptrend channel, currently intersecting near 550. Technical support begins around 509-507, extending to 504 and then to the 496 area, at the low end of the uptrend channel.

It would be consistent with the multimonth trading range to again see the OEX retreat to the lower end of this price range.

DOW 30 (INDU) AVERAGE; DAILY CHART:

I've highlighted an updated trading range for the Dow 30 (INDU) Average as 10580-10520 on the upper end and 10235-10200 on the low end. Support implied by the low end of INDU's uptrend channel is at 10345 currently.

Resistance above 10580 looks to be not much above recent highs, at 10650. Above this is a guess, but 10800 could be a next target on a renewed up leg.

There is not a lot more to say about this chart as INDU remains locked in its relatively narrow trading range as volatility damps down. The longer this sideways trend goes it would suggest the more potential there could be for substantial follow through on a decisive upside or downside penetration of the areas of repeat highs and lows that form the Dow's rectangle pattern.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) ran into selling and a lack of renewed buying once the index got up to 2293-2295. If you look at an hourly chart (not shown here) the line of stone wall resistance COMP hit in this area is especially apparent. Above 2295 to 2300, I estimate next resistance coming in around 2350.

2240 looks like a next support area, with even more pivotal support for the Composite being the line of prior highs around 2215 that COMP pieced on the strong rally that started two weeks back. Below 2215, support extends to around 2180.

Bullish sentiment has been on the high side recently and these numbers may need to come down some before the market will be in a position to mount a next sustained rally.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) also hit a solid wall of resistance/selling at 1881-1882. I think that resistance would extend up to 1900-1905 if/when NDX gets up into this area again. If there was a breakout above near resistance, a next upside target and further resistance, is at 1950.

NDX looks headed lower and its next support around 1852, then at 1825, with further support extending down to 1808-1800. The chart will maintain an overall bullish pattern as long as we don't start seeing the index closing under 1800.

The NDX started to come back down after the 13-day RSI got into the overbought zone noted on the chart below. The Nasdaq 100 index has been pretty consistent in seeing pullbacks develop after its 13-day Relative Strength Index got to or near an overbought situation as highlighted below on the RSI portion of the price chart.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has what looks to be substantial resistance around 46.3. If this area was pierced on a renewed rally attempt, I've noted next resistance as 47.

Short-term momentum is down now so support levels become key areas of focus ahead. Near support is at 45.5, then comes in around 44.8 and lastly, at 44-43.7. A close below 44.0, that wasn't reversed (back to the upside) the following day would turn the chart bearish.

I am missing recent volume figures on couple of recent days and haven't been able to refresh those numbers. However, daily QQQQ volume didn't spike on the last day of 2009, so the selling that came in late in the session wasn't part of any major liquidation, at least not yet.

A final note: my QQQQ short-term trading system has gone from long (on 11/30) to short on 12/28.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has pulled back to what could be a strong line of support around 625 after stalling in the 634-636 area. Above this recent resistance, I've note next resistances on the chart (red down arrows) at 646, then at 660.

Below 625 support, a next key support comes in around 607, at the long-standing up trendline dating from March of last year. A Close below this trendline would be technically bearish, especially if not reversed the following day.

As noted in my initial comments, small cap stocks have an historical tendency to do better in the early part of the year as January brings some new or recycled money into the investment game and the RUT stock grouping contain some that look relatively 'cheap'.

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.