It of course has been some time since this market has had much of a (downside) correction and it can also be said to be 'overbought' by some conventional technical measures. However, like the saying about the horse, this bull has the bit in his teeth and is on the run. Willing buyers are in charge and this market appears poised to go still higher. An unusual thing here, occurring with occasional markets in a prolonged advance, is the lack of extremes in bullish sentiment
. Of my indicators, my way of measuring bullish/bearish sentiment is suggesting that this market isn't done climbing as bulls are not yet throwing caution to the wind.
Moderate and not overly 'extreme' bullish sentiment is almost a 'given' for the occasional strong advance that the bulk of traders/investors don't quite 'trust'. Moreover, there isn't enough of a dip to give much of a cheaper buy in. Even though the rise since late-August may be technically extended (looking like a set up for the 'usual' correction), it now seems that a primary indicator to watch for topping action is the options call to put ratios. For more on my way of measuring bullish/bearish sentiment and its extremes, you can go to my Trader's Corner article on this subject by clicking HERE.
On the subject of this market being overbought, by some measures it isn't, such as in terms of the weekly MACD (the Moving Average Convergence Divergence) indicator. I featured the MACD as the topic in my most recent Trader's Corner (10/7/10) piece and which can be reviewed online HERE and is seen below with the MACD applied to the weekly Nasdaq Composite (COMP) chart.
At least in terms of the S&P, I last was forecasting either more of a sideways/lateral move OR a corrective pullback. We saw however only a brief sell off in the early part of this past week in a dip that only carried close to the SPX 21-day moving average. A pullback ONLY to the area of this key average, followed by another strong rally, suggests we're in a still strong bull move. This kind of market tends NOT to behave in a typical technical fashion. I wasn't anticipating another leg up so soon! This is the kind of market that, when there are (bearish) concerns due to one economic report or another, the market just 'climbs the wall of worry'.
The primary competing asset class for equities seems to be gold currently. Not real estate, not low-interest bonds, etc. When there are few if any alternative mainstream investments for our 401k's, etc, investment money moves into stocks.
A 'benchmark' breakout move I wrote about last week was when a pivotal line of SPX resistance got decisively pierced at 1152; this level represented a 2/3rds retracement of the April-July decline. An upside retracement of more than 66%, as I often say, suggests that a retracement of 100% (of that prior decline), is increasingly likely. This pattern suggests, at a minimum, that SPX will retest its prior highs in the 1220 area. For COMP, a similar retest of its prior peak would occur at 2535.
In terms of the Dow 30 (INDU), the weekly close above 11000 was important technically also as it puts INDU into what looks to be a substantial zone of supply or potential stock for sale. If INDU clears 11087-11115 next, it would suggest that the prior top at 11258 would be a next target.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart has gone from slightly mixed in my read of it last week to bullish as the index cleared its prior minor 'line' of resistance at 1150. The 1150 area also represented the level where SPX had retraced 66% of the prior major decline. Odds now favor an eventual retest of the prior high in the 1220 area. SPX does have to first clear the 1182 level, a prior key 'breakdown' point and a level of possible supply overhang or stock for sale.
I'm putting considerations of the faltering RSI, as this isn't a market that is going to be 'ruled' by technical considerations. It is a market being driven by a current fundamental assumption that corporate profits will continue to do ok in 2011; not much talk of a double dip of late!
I've noted resistance on the chart at the red down arrow at 1173, then at 1182, with major resistance in the area of the prior high around 1220. Near support is bumped up to 1140 this week, with next support noted in the 1110 area.
Bullish sentiment, as seen above, has been declining on balance this past week, as the market has moved higher. This is almost a picture perfect case of the market likely to have an 'extended' up leg. An exception to other indicators (e.g., overbought models) that can't be relied on to suggest upcoming tops in exceptionally strong moves, is my call to put ratio for equities and here my indicator is suggesting no topping action yet.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX), which I was seeing last week as somewhat 'mixed' has cleared up that confusion by its decisive upside penetration of 520-522 resistance. This move put OEX above the important 2/3rds retracement 'milestone'. Rallies that take prices above the 66% retracement level of the prior decline, suggest some likelihood that an index or stock goes on to challenge its prior high; i.e., in the 553-555 area.
Judging by prior highs and the prior 'breakdown' point, overhead resistance is first at 532, extending to 537. Fairly major resistance has be assumed for the prior top.
I've noted near support again at the 21-day moving average, which keeps moving up of course in this trend. Next support is suggested in the low-500 area; I've pegged it 504, which would 'fill in' a prior upside price gap.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow is no longer mixed or 'stalled' as it pierced 11000 this past week, which predictably go a lot of media attention. Of course the media folks no very little about the market but they know an evening story.
Leading the rally were good to outstanding moves in AA, CAT, DD, DIS, DD, GE, IBM, JNJ, MCD, MMM, PG, WMT (our 'usual suspects' so to speak) and CHV and XOM (not our usual suspects). When you got 14-15 stocks, of 30, in strong moves and only 2-3 correcting (e.g., AXP, T), this is a formula for still higher INDU levels.
I'm speculating that the 11087 area, the top end of an uptrend channel, may bring in some resistance/selling pressure in INDU. However, the main focus over time is going to be what resistance occurs if/when the Dow gets back up to its prior highs at 11220-11258. The odds of INDU at least retesting its 12-month highs look good given the present strong advance.
Near support is highlighted at 10753, again at the 21-day average. I've pegged next support now in the 10600 area.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The chart is bullish in its pattern. The Nasdaq Composite (COMP) Index before this past week was stalled in the area representing a 66% retracement of its April-July decline. This area was exceeded with COMP's breakout to and (slightly) above 2400. When retracements go over the 2/3rds mark of such a major prior decline, the chances increase substantially for at least a retest of the prior high; i.e., for a 100% retracement back to the top.
Bullish sentiment has been declining on balance this past week, as the market has moved higher per my bottommost indicator. This is almost a picture perfect case of the market likely to have an 'extended' up leg. An exception to other indicators (e.g., overbought/oversold models such as the RSI) that can't always be relied on to suggest upcoming tops in exceptionally strong moves, is my CPRATIO (call/put ratio) for equities and here my 'sentiment' model is suggesting no topping action yet.
Technical resistance may be found beyond 2400, at 2434, with fairly major resistance at the 2535 12-month high.
Near support is noted (at the green up arrow) at the 21-day moving average at 2345 currently, with next support estimated at 2300.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has made a new Closing high and appears to be ready to achieve a decisive upside penetration of the top end of the index's recent narrow 1970-2030 trading range. All systems go in terms of the chart. The RSI has hit a recent extreme suggesting an 'overbought' situation, but such extremes around 70-75 will often occur 2-3 times in power moves.
Unlike the S&P and the Nas Composite, NDX has retraced nearly ALL of its entire prior decline. It is unlikely that the index is going to get this close to retesting its prior high, especially given the strong move it's in, without at least challenging its late-April top. Moreover, it also seems unlikely that a double top would set up either. We should however also take note of significant resistance implied by the 2056 high that occurred at the peak of the recovery rally into June 2008 (made after the 2239 high of Nov '07) and the 2059 NDX top of this past April.
I also noted last week a mildly bearish divergence implied by a declining RSI, and a key indicator of momentum, as prices went sideways. The reason I say 'minor' in regards to such a divergence, is that the price trend was sideways, not UP. A rally in the face of rising prices AND a falling RSI is more potent in suggesting a possible top. The occasional power moves on the upside often create situations where the usual technical type indicators don't often suggest upcoming reversals. The exception is seen in measures of trader sentiment and my indicator here is suggesting no topping action yet.
I've noted 2042 as potential next resistance, at a rising trendline connecting and intersecting the area of numerous prior highs and of course at the 4/26 intraday high at 2059, the prior 2010 top.
Near support is highlighted at 1950 and the current NDX 21-day moving average, with next support noted at 1900.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The chart is bullish as the most recent Close took QQQQ, the Nasdaq 100 tracking stock, to a new closing high above, for the most part, the top end of its recent trading range. Friday's low also bounced from support implied by a steep uptrend line. The slope of this trendline suggests a rate of change that is at the top end of what we normally see in the indexes. This rate of (upside) velocity almost always has a limited life. However, I would be somewhat surprised to see much of a downside correction until/unless the stock first retests its prior high around 50.65.
I wrote last week about a bearish divergence that was seen by a falling On Balance Volume (OBV) line, as prices were going sideways. This minor divergence didn't prove to be predictive of a price correction. Volume is always a secondary indicator. As I tend to be 'suspicious' of rallies that have up trendlines that approach vertical, I made more of the aforementioned divergence pattern than was probably justified. This is a market where the uncertainties about future economic growth for now have been 'decided' in favor of slow but steady earnings growth.
Near support: 48.7
Next support: 47.0
Near resistance: 49.85
Next resistance: 50.5-50.65
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart has closed at the level representing a 66% retracement of its April-July decline. Assuming RUT clears this level, there's good potential for an eventual retest of prior highs in the 742-746 area. Retracements that go beyond 2/3rds of a prior decline, suggests a better than average chance to extend the advance to a 100% retracement back to the prior high. RUT is in a very strong uptrend as it typically is when the Nasdaq indices are also in very strong moves. RUT is unlikely to experience much of a down correction until Nasdaq does. Nasdaq will lead.
Near support is at 670-660, extending to 652, the current level of the 200-day RUT moving average.
Judging still by the 66% retracement level, RUT closed at immediate overhead resistance around 693. Next technical resistance is at 720, with further resistance seen for the area of the April highs, at 742-746.
GOOD TRADING SUCCESS!