THE BOTTOM LINE:

It's natural for technically oriented traders to think that a stumble in this extremely overbought market is the start of a 'normal' correction; e.g., a more substantial correction (25%, etc) of the prior upswing, as opposed to what we've been seeing with just very minor and short-lived dips.

Friday's downside action bears watching if only because bullish sentiment was so very high. In terms of the daily CBOE equities call to put volume ratio, there have not been days where equities call volume was 3 or more times put volume since two instances in Jan-March 2000. On Wednesday of this past week, CBOE equities call volume was 2,980,219 versus 964,143 for puts.

This market had some other indicator warnings via very high recent RSI readings, as well as a certain way of measuring the CBOE Market Volatility Index (VIX) that I've started following with some market timing possibilities.

What I describe with VIX is not an end-all be-all of technical type indicators and like 'sentiment' models, one that only provides an alert that a top may not be far off, such as within 1-5 days. This way of looking at VIX per my first chart tends to make for a 'leading' indicator like sentiment and in a VERY strong bullish phase may also produce a couple of bearish alerts before an actual tradable top forms.

When VIX starts having daily readings that are 5 percent OVER its 10-day moving average, some at least short-term strength tends to follow. Conversely, when VIX falls to BELOW 5% of its 10-day average, some weakness/under-performance can come next.

As seen above with the VIX chart, the second rise to the area of the upper envelope line (marking 5% above the 10-day average) in early-February preceded the rally we're still in now. On the downside, instance #1 of a dip below the -5% line of VIX led to a minor downturn, after a bit of a lag. Instance #2 led only to a short-term 'flattening' out of the trend for a few days. The 3rd and most recent instance of VIX falling below 5 percent of its 10-day moving average preceded a sell off (on Friday 4/16). VIX then shot up on Friday which may mark the start of more two-sided trading swings.

I'm still evaluating how well the above model will work as a predictor of upcoming market action, but wanted to update this as a follow up to writing about this topic last week.

A significant factor that suggests Friday's action is the start of a more difficult period for the bulls is the extremely high recent sentiment readings you'll see on my S&P 500 and Nas Composite charts below. A good test of whether bullish sentiment has really taken hold so to speak is to see how high the readings will stay if/when the market resists a further decline or rebounds a bit. Assuming equities call volume remands high relative to puts it will suggest more selling pressures ahead.

It's kind of perverse (blame the market) but the stock market only rarely produces a few weeks (or months) when you can just keep buying and adding to positions and you will profit. The more that other traders/investors pile in on the same side of the market, the greater the risk of a shakeout.

This coming week should be interesting. I suspect that they'll keep this rally going a while longer, but it looks like its time to take profits on call positions and other bullish strategies on further rallies or exit on breaking support and to be alert for opportunities on the short side. (I bought a few SPX 1200 puts after the VIX Monday sell 'alert' described above, waiting until upside momentum slowed so significantly on Thursday and was glad to get in before those premiums inflated on Friday's weakness.)

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

There is no major 'damage' to the bullish pattern in the S&P 500 (SPX) and the Friday Close held its minor up trendline. If there were a couple of closes below 1180, the chart would start to look more like at least a minor top had formed.

I know I've written about the high (overbought) levels over 70/75 reached in the 13-day Relative Strength Index (RSI), but those kind of situations can go on for some time. What tends to have a finite life so to speak is to have such a high and prolonged level in my CPRATIO indicator seen below. A correction was bound to come.

However, precisely because there are still many willing buyers I don't envision a sharp sell off just ahead. More likely will be some up and down, and more 'whippy', price action; with lower levels to come later on.

I indicated last week to look for SPX technical resistance at 1200, extending to 1218 and the Index got to 1214 before backing off, closing below key resistance at 1200. We have to look for this recent 1214 high now as near resistance. Next resistance comes in at 1230-1234.

Key near support is at 1178-1180, then at 1160, with fairly major support at and just below 1140.

S&P 100 (OEX) INDEX; DAILY CHART

This most recent rally in S&P 100 (OEX) ran into trouble after the Index got fairly close to resistance implied by the high end of its uptrend channel. I'd have to rate the chart as still bullish, although with suspected topping action which would get a bearish boost if OEX started falling below 540.

Support at 540-537, extends to around 532. A next important chart support is implied by the major up trendline intersecting around 522 currently.

Key near resistance is at the recent 555 high. I can't remember the exact reason I wrote last week that: "I don't envision resistance coming in before 555 currently..." but it was an exact stopping point, so far anyway. Next resistance looks like it falls in the 561 area.

I also noted last week that: "OEX is quite overbought in terms of the both the 13-day and the 8-week (not shown) RSI... This situation does suggest caution in getting complacent in a bullish viewpoint. Be alert for trend reversals as always, but even more so currently." I did also say "respect the trend" (until it looks suspect). On a short-term basis the bulls need to prove they are still in the driver's seat.

DOW 30 (INDU) AVERAGE; DAILY CHART:

11000 may prove to be a tough area for the Dow 30 (INDU). Still in pretty solid uptrends are AXP, BA, CAT, DIS, HD, HPQ, INTC and MCD. BAC and JPM of course got whacked given the damage done to the current 'king of the street', Goldman Sachs.

The Goldman bunch has been very smart for a long time but they can also skirt the letter of the law when it comes to their interests. Not like Lehman, but they may have a tough problem with the publicity affecting client confidence ahead.

In the oil patch CVX is still holding up, but XOM is starting to fade. All in all from looking at the 30 stocks, I don't anticipate a strong surge ABOVE 11000. The Dow may need a 'rest' period and consolidation time, such as between 10800 and 11000.

11000-11050 is the key near support, with next support at 10850-10825, extending to 10800. Fairly major support should be found around 10600.

Near resistance can be anticipated at the recent 11154 high, with next resistance projected for the top end of INDU's current uptrend channel, at 11335.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) remains centered within its bullish uptrend channel and at most 'filled in' its recent upside chart gap, where the Index found support. Only a close below 2450 would suggest a deeper correction beyond what has been, so far, just a minor 1-day affair.

Near support is at 2450-2442, then in the 2400 area, extending to 2385. Fairly major support should be found around 2300.

Near resistance is at 2500, extending to the recent high at 2518. Next higher resistance is likely at or near the upper end of COMP's uptrend channel, currently intersecting around 2550.

In my S&P 500 comments I made note of the obvious in looking at my 'sentiment' indicator regarding how extreme trader sentiment had gotten, climaxing mid-week with equities call volume over 3 times put volume. This kind of 'imbalance' is unsustainable over the intermediate term; maybe for a while yes, but for weeks and weeks, no.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) is bullish in its chart pattern and will remain so absent a close below 2000. Even a minor one day dip below 2000 would not be overly damaging to NDX's bullish chart but a couple of days running of this would suggest arrested upside momentum and a likely deeper pullback ahead.

Near support below 2000 is seen at 1950, with major current support expected around 1876-1880.

Near resistance at 2041 is of course implied by NDX's recent intraday peak, with next higher resistance implied by the upper trend channel boundary at 2070.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The pattern is the same as the underlying Nasdaq 100 (NDX) chart, in terms of no technical 'damage' implied by Friday's 1-day sell off. The NDX tracking stock (QQQQ) almost touched resistance implied by the upper end of its uptrend channel, so a reaction/pullback was not surprising. Some bearish news, sooner or l-a-t-e-r always seems to come out when the market is as overbought as this one.

Near support is at 49-48.87, then around 48-48.2, with next technical support at 47.0

Near resistance is 50-50.2, with next resistance in the 50.6 area as implied by the extended upper trendline.

Daily trading volume jumped on the sell off, as it pretty much always does with the Q's. On Balance Volume (OBV), as would be expected with this running volume indicator, turned down with the lower Friday close. OBV from here should point up or down with higher or lower closes. Sometimes there's a bullish or bearish divergence with OBV versus price action, but not often.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart continues to mirror the pattern in the Nasdaq, so I don't have much more to say here. RUT continues to trade in its bullish uptrend channel and could be headed still higher. If the S&P takes a further significant hit, the Russell and the small cap universe is going to see some spill over selling.

Key near resistance is implied by the recent high at 725, with next higher resistance in the 747 to 760 range.

Near support is 706-700, with next lower support at 680, extending to around 670.

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.