THE BOTTOM LINE:

Most stocks and stock groups continued to advance this past week and all the major indexes (the Dow lagged a bit) saw further gains, including the NYSE Composite Index (NYA), which had a decisive breakout above its line of prior highs. Oil Stocks (OIX), the Gold & Silver Index (XAU) and the Semiconductors (SOX) saw good gains on the week.

The market is now registering overbought extremes on a 2-week basis, not as much as measured on an 8 and 13-week basis. Bullish sentiment also hit 'overbought' daily extremes on 4 of the last 5 trading sessions. So far, economic news that could have been construed bearishly has been taken in stride. However, we should anticipate that something may come along that could cause a sharp 1-2 day shakeout.

No doubt in last week's action we're seeing the January effect that I wrote about previously, as new or 'recycled' money is being put to work. I wrote last Saturday that: "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." There were two years that were exceptions. There are (almost) always exceptions!

How much higher from here? The most bullish case I see is that the major indexes again make it the upper end of their broad uptrend price channels. A further advance to as high as 1200 in the S&P 500 (SPX) and around 2000 in the Nasdaq 100 (NDX) are possible eventual price objectives.

I find it hard to believe that the S&P and Nasdaq are going to have such further advances in a straight line from here given the near-term overbought extremes in price and sentiment that I've noted. I believe we can also anticipate seeing continued support/buying interest on pullbacks, such as back to former resistance levels or, in some cases, back to the low end of the aforementioned uptrend channels which will be seen on the charts.

CHART OF THE WEEK:

When perusing the hourly index charts at the end of this past week, I was struck by how the sideways trading ranges, such as here seen with QQQQ, led to predictable technical outcomes once there was a decisive upside penetration of the upper end of the rectangle pattern highlighted below. A 'minimum' upside objective for such a breakout is for a further advance at least equal to the 'width' of the rectangle. A 'maximum' objective is equal to the length of the rectangle, equaling a move to above 50, but that's a much more speculative take on this pattern.

I would also note that typically each end of the trading range should have at least two 'touches' to the same area. The low end of the highlighted trading range had 3 moves to the same approximate area although the lowest low dipped the furthest. Nevertheless, the trading range or rectangular formation got defined pretty clearly.

In a bullish trend a 'length' setting of 21 (see above) on the hourly index charts has proved to be optimal in showing oversold extremes (the 35-40 zone or below) where rallies can be anticipated. The upper RSI extremes in a bull market don't as reliably predict where pullbacks will develop.

The reverse is the case in bear market trends as overbought extremes (around 65-70 or above) will tend to forecast corrections ahead more often than not.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The chart remains bullish in its pattern. My next S&P 500 (SPX) index price target to the 1150 area has nearly been achieved as the index pieced resistance at 1140-1142. SPX looks like it will continue higher. I've noted possible next resistance around 1160, with major resistance in the 1200 area, at the upper end of SPX's broad uptrend channel.

Pivotal support/buying interest should be found on pullbacks to around 1120, at the emerging recent uptrend line and in the area of the 'line' of prior resistance, which should now define a support point.

As noted in my initial overall market comments and as you can see on the chart below, the RSI is suggesting that SPX is at a near-term overbought extreme, although there's also nothing to say that we won't see still higher (RSI) readings ahead, such as was the case back in September.

SENTIMENT

Bullish sentiment readings for my CPRATIO model as I've circled on the chart above have reached what I consider to be extreme or 'overbought' levels. What does this mean in the near-term? Maybe nothing much in the near-term, but at least suggests a cautionary trading stance in taking on new positions.

We've seen slightly higher CPRATIO readings before and extremes in my indicator don't suggest much more than a possible correction 1 to 5 days out from this most recent extreme. The EXTENT of any correction isn't predicted from this or other type overbought indications.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has achieved a decisive upside penetration of what had been a strong line of resistance at 520 a breakout move that continues OEX's bullish chart pattern of higher pullback lows with higher relative highs made on rallies.

What had been resistance at 520 should now represent a key near support. Failure to hold above 520 on balance would be a near-term bearish chart development. Even more pivotal support should be found at 505-500.

Potential technical resistance is a hard calculation to make. My estimate of next potential resistance comes in around 540. Major resistance is estimated to lie in the 550 area currently.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average remains bullish in its pattern but has also been lagging gains in the S&P recently. We're yet to see a decisive advance above near resistance in the 10600 area. Stay tuned on that. Tech stocks in general and some of the commodity related stocks not in the Dow have been garnering more attention and money recently.

INDU is not always the bellwether average that it has been in the past but it still is still important as a benchmark and can sometimes give us the best 'technical' read on the market. Maybe INDU is indicative now as upside momentum slows with the Dow stocks overall. Because the still mostly sideways trend continues with INDU, the Average is also not yet at any kind of 'overbought' extreme in terms of its Relative Strength Index. While the Dow managed a 100 point gain from late-December above 10500 resistance, this isn't much of a rally for INDU.

I've noted next resistance levels as 10700 and 10800. Major resistance begins around 1100.

Although I didn't mark it, very near technical support is at the higher up trendline seen below, currently intersecting at 10512. Main trendline support comes in around 10360, at the low end of the uptrend channel; support below this is suggested by the prior downswing lows at 10230.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) this past week mostly stayed above its line of prior highs (resistance) at 2295, maintaining a bullish chart. Since COMP has advanced above my previous price target at 2300, I continue to see a possible next upside objective and potential resistance, coming in around 2350. Major resistance begins at 2400, extending to around 2450 in my estimation.

Near support should be seen on pullbacks to the 2250-2258 area, with pivotal technical support at 2200, at the low end of COMP's uptrend channel.

Daily and 5-day bullish sentiment readings (above) have reached 'overbought' extremes as noted in my S&P commentary. These readings could climb still higher if COMP heads next to the 2350 area or above. Continued extreme bullish readings in my sentiment indicator is a reason to be watchful for what might kick off a larger correction then seen in recent weeks.

I'm reluctant to say exit long calls at current levels or some preset higher target as I continue to just keep a close eye on the market. Especially, to be alert to any dips below last week's lows as an advance warning regarding a decline in upside momentum.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) looks poised to test near overhead resistance around 1900 given its new high Close for the current move. If NDX clears 1900 on a closing basis, a support which then holds the following day, a next projected resistance is in the 1950 area.

Near support is noted in the 1850-1854 area, with pivotal chart support at the 'line' of prior intraday highs at 1815-1816. Next key support comes in at 1777, extending to 1759.

From the 'Santa Claus' rally into the prior first week of 2010, tech stocks have done a lot to lift the overall market. Some in this sector have slipped a bit recently. I'll be watching to see if INTC can climb above recent highs at 21, CSCO above 24.8 and AAPL above 215.6 to name a few of the tech leaders or bellwethers.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is of course mirroring the Nas 100 index. With the stock we can get a related read on investor/trader interest with the QQQQ volume trends.

Daily trading activity was decent on Friday's rebound from the 46 area. The On Balance Volume (OBV) line turned up on Thursday's so-so day, which was a bullish omen ahead of Friday's rally. If the trend is our 'friend', then QQQQ continues to look like our bullish buddy.

Near technical support now is up to 45.5, with even more pivotal technical support at 44.5, at the low end of the Q's uptrend channel.

Key overhead resistance is suggested at and just over 47, at 47.3. Major resistance should be found on any eventual advance to the 49 area, with major resistance then extending to 50.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) continues on a bullish track, as the index cleared resistance at 640-642 on Friday. I project a next significant resistance as coming in around 660.

Key support is at the prior line of intraday highs at 625. That previous resistance, once pierced, had 'become' a new support, was evidenced in the recent (week ending 12/31) dip to 625 level followed by a strong rebound this past week. Next support is noted (by the green up arrow) at 615 or the low end of RUT's uptrend channel. Major support should be found in the 603 to 593 price zone.

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.