THE BOTTOM LINE:

The big cap Nasdaq 100 (NDX) stock index barely slowed down this past week and at Friday's 2024 close, is within striking distance of the June '08 and April 2010 highs at 2056/2059. Can the 2007 NDX top of 2239 (made after the major 2002 bottom) be a next area to be tested? We can't rule this out given the strong advance that's been underway since the 1040 bottom of early last year.

Since my trading style tends toward being cautious when market volatility gets extreme, along with bullish sentiment and overbought indicators, I wasn't fully on board with index call options. My feeling is that I can always be long the (QQQQ) stock when I want to participate but deleverage.

In my most recent Trader's Corner article written this past week (Thurs, 9/23) on the subject of a momentum indicator, stochastics, that I use less than the somewhat similar Relative Strength Index or RSI, I also did a 'mini' technical update and noted the following about the Nas Composite (COMP):

"The telling pattern I've found in the Bollinger Band indicator, is that after upper or lower volatility extremes are reached and when prices go SIDEWAYS after that (e.g., for 2-3 days or a greater number), trend reversals tend to occur. This pattern (sideways after intraday lows or highs reach the lower or upper Boli bands) is seen in all the numbered examples below (with the COMP chart) except #1. The sideways trend seen in example #6 was premature in suggesting a 'final' bottom. I am assuming that the recent BB extreme may mark a tradable top but not enough subsequent price action has occurred to say definitely; a top IS consistent with historical patterns."

The COMP chart I was referring to (as of Thursday's Close):

Since COMP had taken out its prior highs (at points 1 & 2 above), which (finally) reversed its intermediate-term trend from down to UP, it was somewhat speculative to look for a possible top rather than a consolidation before another push higher. I didn't short the moving tech freight train of course, as I respect strong momentum, but was somewhat surprised to see tech so back on fire on Friday. But then I don't trade so much on the latest 'news'.

The market tends to go from extreme to extreme. Now, as if by magic, the bulls see few problems ahead with earnings, especially in the tech sectors. The bulls may be right of course when looking out 6-8 months, but from a trading standpoint its high risk to buy inflated call premiums. Shorting bucks the trend, so that's high risk too. I saw a good risk to reward equation at NDX 1700-1750; bearishness then wasn't as extreme as recent bullish sentiment, but you didn't have a LOT of company in buying calls.

After this foray more into strategy questions, I'll next comment on what the charts are projecting and suggesting in my individual index commentaries.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) is bullish in its pattern but is of course lagging the tech heavy Nasdaq. I doubt that SPX is going to break out above resistance implied by the upper envelope line, or to above 4% over its 21-day moving average.

There is substantial resistance in the 1173 to 1182 area in my estimation. If the index keeps going in its slow but steady climb this zone is the where there's substantial overhanging supply (of stock). Any signs of a reversal in this area will suggest exiting long calls and other bullish option strategies.

I'm not looking for a major decline when a correction does begin. It's possible of course that buying churns through supply and goes directly to re-testing major resistance at prior highs around 1217-1220. I think it more likely that the market backs off some before making a run at this pivotal prior top.

As I noted last week: If SPX makes a decisive upside penetration of 1129-1131, it could be headed to the 1170 area next." SPX has achieved this breakout above prior highs, turning its intermediate trend higher, and a further advance seems likely. I don't feel this would be another major up leg just yet, given the overbought condition suggested by the RSI and what may be the start of an 'extreme' in bullish sentiment.

I've noted resistance on my chart at 1154, then at 1173, extending to what may be a major 'supply' overhang beginning around 1182. Near support is at 1120, with next key technical support at 1100-1105.

SENTIMENT:

Bullish sentiment, as seen with my CPRATIO indicator above, spiked up again along with the strong advance of Friday. I get most alert for the possibility of a downside reversal when there are a number of such 'spikes', such that they pull up the 5-day average to at or near 1.9 or above. We're not quite there yet.

My take on this market is that there's a lot of just moderate or tepid bulls and the 'public' is so shell-shocked still and out of the market (except for watching their 401k statements from time to time), that we're not yet in a period when people are throwing money at stocks or equity calls. When market sentiment goes from tepid enthusiasm for stocks to red hot lusting for equities is when tops tend to form. Stay tuned on this!

S&P 100 (OEX) INDEX; DAILY CHART

I envisioned the S&P 100 (OEX) chart last week as good for a move to the 520 area and the index has gotten within a hair's breath of that. What next? Since OEX has cleared its prior highs of the past few months anyway, this suggests that the index should stay ABOVE prior highs at 510-512. The big question is whether both S&P indices can move above fairly major prior 'breakdown' points; in OEX's case, overhanging supply begins at 532 and extends to 537. If OEX clears this area, next could be a possible challenge to the prior (April) highs in the 550-555 area.

It's not often the case that a further up leg like this gets tacked on when the RSI for example is at an overbought extreme. Of course overbought/oversold are relative terms that pertain to the occasional major momentum moves. If you want to judge how much higher OEX can get, watch the Nasdaq, as the strength in the tech stocks is such a big influence in pulling the S&P stocks higher.

I've noted near resistance at 522, then at 532, extending to 537. Near support is around 508, then at 500.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) had a decent move on Friday propelled especially by strength in AA, CAT, DD, HD, IBM, KFT, KO, MRK, PFE and UTX. Except for IBM and UTX, these are mostly consumer/consumer cyclical stocks. But, if the prospects for the consumer are brightening, even a little, these companies should see more earnings growth ahead.

I don't see a LOT of upside for the Dow, but we can't rule out a move to the 11200 are over the next couple of weeks. It depends on whether there's a shake out before a push to retest those highs or not. And that's hard to predict. There is a lot of buying coming in of late. On the other hand in most market cycles, an overbought situation such as we're in, often precedes some type of correction, even if a sideways 'time' correction. Again, as with the S&P, it's almost more important to watch the tech heavy Nasdaq. As soon as its advance slows down, the Dow will be right behind it. You can also watch the 10 current strong movers I list above to gauge if the Dow Average is going to follow through with Friday's strong bullish action.

I've noted near resistance at 10920, then well above 10000 (which is more a media talking point of importance), at 11200.

Near support is seen at 10640-10600; then at 10450 just because it’s the pivotal (trading wise) 21-day average; when prices carry to the upper envelope line and show that kind of strength, pullbacks often won't carry below the average.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Now that the Nasdaq Composite (COMP) Index is on fire so to speak and is rather far 'extended' on the upside relative to past months, I kept the Bollinger band indicator on my COMP daily chart to see that visually. The Boli bands normally 'contain' 95% of trading in a stock or index. If you want an explanation of Bollinger Bands and how they're used, this is contained in my recent (9/23) Trader's Corner article. You can see this online by clicking HERE.

As I wrote last week: "I'm also well aware of the 5 percent of the times of occasional big moves, where prices rocket higher (or lower), pulling the upper Boli band along so to speak. I don't see what would set off such a buying stampede currently." Well, that came on Friday with some reports that business investment is picking up, etc. I may have also discounted the positive backdrop of the Fed saying earlier this past week that it's prepared to take other stimulative actions beyond what it has engineered with current rock bottom interest rates.

COMP is at an overbought extreme, as measured by the 13-day RSI, suggesting that bearish economic or market related news coming up could set off a bunch of profit taking selling, which sets off more selling, with traders/investors then backing off from buying dips. Keep this in mind as trading progresses in the coming week.

Next move for COMP could be to or above 2400, perhaps to the upper band, currently at 2412. Technical resistance then extends up to the 2466 area. On the downside, key near support is 2300. A close below 2300 that wasn't reversed (back to the upside) the next day would suggest that a correction was underway. COMP support below 2300 looks like 2246, then 2200.

SENTIMENT:

Bullish sentiment, as seen with my CPRATIO indicator above, spiked again with Friday's strong advance. I get most alert for the possibility of a downside reversal when there are a number of such 'spikes', such that they pull up the 5-day average to at or near 1.9 or above. We're not quite there yet.

My take on this market is that there's a lot of just moderate or tepid bulls and the 'public' is so shell-shocked still and out of stocks (except for watching their 401k statements from time to time), that we're not yet in a period when people are throwing money at the market and participating in options. When market sentiment goes from tepid enthusiasm for stocks to red hot for equities is when tops tend to form. Stay tuned on this!

NASDAQ 100 (NDX) DAILY CHART:

Once the Nasdaq 100 (NDX) rocketed above a very key resistance at 2000 this past week, there was a wave of short-covering. Momentum traders bought just because of this breakout and surge in buying. As I noted last week, NDX was the first of the major indexes to reverse its intermediate-term trend to UP (the long-term trend never had reversed to down). Now, the Index is within striking distance of prior highs in the 2059-2055 area. It seems unlikely that NDX is going to get this close to challenging these prior tops without re-testing this area.

I also expressed caution last week due to how 'overbought' the index was getting. That's still a legitimate concern, so guard profits on long calls by being alert to signs of a reversal pattern. 2038 also marks the current intersection of trendline resistance noted on the chart below. Next potential resistance above this trendline comes in around 2060. The high for the past several years, not the all time NDX high, came back in November '07, suggesting potential major resistance at 2200-2239.

Near support is at 1972, with key lower support in the 1900 area. 1850 looks like the beginning of major support.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The chart of the Nas 100 (QQQQ) tracking stock is bullish of course as it tracks the NDX. I figure resistance is from where QQQQ closed around 49.7, on up to 50.5-50.65. Recent highs, in fact the Friday Close, are now fully 6% over the index's 21-day moving average as I raised my upper envelope by another percent. Such an envelope line is not potential 'resistance' the same way that a prior major high is, but does visually keep me focused on just how far 'extended' prices are relative to an important benchmark moving average; i.e., the 21-day average.

The higher prices get above certain benchmarks like this, the greater the probability of at least an interim top. If prices just go sideways because of an overbought situation, that's an important consideration in how long to stay with QQQQ calls. If long the stock, this consideration is not as important, at least as long as you don't mind a possible ride back down to support in the 47 area.

Near support: 47.0

Next support: 46.5, then 45.3

Near resistance: 49.6, the recent Close

Next resistance: 50.5 - 50.65

RUSSELL 2000 (RUT) DAILY CHART:

For a change the Russell 2000 (RUT) chart is not as bullish as the Nasdaq, in that it is possibly stalled at its prior 672 high; resistance which extends to 677. RUT did bounce from support implied by its 200-day moving average, but that's not a great bullish 'accomplishment'.

RUT needs to clear its prior highs and for more than a day or two to suggest that it could have a next leg higher, such as to technical resistance around 720.

Near support is 649, extending to 640. Next support technical support then looks like 630, extending to around 620.



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.