THE BOTTOM LINE:

All the major indexes have been consolidating in the area of recent highs, probably ahead of a further run up. While price action looks OK for the bulls, some technical indicators are flashing caution due to being at overbought extremes. The 13-14 day Relative Strength Index (RSI) is back up into its overbought zone and my Market sentiment model reached a level associated with bullish overbought extremes this past week. These readings don't imply that a downside reversal is about to happen and that is a problem for anyone expecting such indicators alone to suggest taking on bearish options strategies.

A characteristic of a bull trend of substantial strength and staying power is that the major indices can stay overbought for extended periods. Something I call (loosely) my 'rule of 3' is that RSI extremes often occur three times, with the third being an actionable bearish 'signal' IF price action concurs; e.g., an up trendline is pierced, etc. What a so-called 'overbought' conditions suggests more than anything is that there's increasing risk of a correction. So, there's risk of a sell off, but don't be surprised to see the rally continue.

The charts remain bullish in their patterns and price action is the 'king' indicator. An up trendline being pierced, a key downside reversal or taking out a prior low is another story. I give the benefit of any doubt as to a further extension of this rally to the fact that the Market's in a major uptrend and until price action suggests otherwise, it's premature to adopt bearish strategies. Putting on NEW bullish strategies, even absent a downside chart/price reversal, is also playing with fire.

Dow Theory is suggesting that a primary bull market is 'confirmed' (again) by the Dow (INDU) and the Dow Transports (TRAN) both going to new weekly closing highs in late-Oct which, after a brief pullback, was repeated in the week ending 12/3.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index is bullish in its pattern as is the picture presented by all the major index charts. There has been a pause in the trend as seen by the minor line of resistance around 1246 as highlighted on the daily chart below. I am assuming that this recent sideways move is only a consolidation of the up trend unless there's a significant dip and a close below 1220 support. 1200 is a key technical support implied by SPX's up trendline. There's no actual reversal of the intermediate trend unless prior lows at 1173 got pierced.

Immediate overhead resistance is at 1246 as mentioned, then at 1260 (not highlighted), and finally at the top of SPX's uptrend channel currently intersecting around 1288.

RSI AND SENTIMENT INDICATORS:

As discussed in my initial 'bottom line' comments above, the 13-day RSI is back into my overbought zone as seen above. While this indicator alone doesn't suggest that the Market is making or has made a top, high extremes do suggest that the risk of a correction is greater than if RSI was a 'neutral' 45-50 or lower. Sometimes, it's not until the 3rd/4th time of RSI getting into this zone that this indicator concurs with a top.

Bullish sentiment got quite extreme this past week in terms of the somewhat 'lagging' 5-day average. Such readings often precede a top but this is also not a trend reversal event, like formation of a double top would be; also, events such as a key downside reversal, piercing an up trendline or a prior (down) swing low.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index's chart is bullish also although we didn't see any headway to speak of above 560. I look for higher levels but am also cautious about getting too bullish here given what I see is an increased risk of a pullback; i.e., as suggested by the minor stall in the context of an overbought RSI.

Immediate overhead resistance is at 560-561, then around 570-571 (not highlighted), and finally at the top end of the uptrend channel, currently intersecting around 577.

Near support is at 546-547, then at the up trendline, currently intersecting at 538. The prior downswing low at 527 is the most pivotal technical support, as a break of this level would suggest a reversal of the intermediate-term trend.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) Average has exceeded and then stayed above its prior high, which is bullish; the consolidation after a new high has kept prices above the prior 11451 top and a characteristic of a strong (up) trend. INDU will maintain the most bullish chart pattern by the Average continuing to trade above its prior high.

No trend reversal is signaled short of a move below 11000 but there are suggested supports at the 21-day average and at the intersection of the up trendline as highlighted below.

I've estimated next resistance coming in around 11570, then at 11730.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains bullish as it has been trading above its prior 2593 high for the past two weeks. COMP ended the week only slightly higher (5 points) than the 12/10 Friday Close. Still, there's nothing yet in the pattern to suggest that COMP can't/won't go higher still. I've pegged next resistance at 2700, then at 2775.

Near and quite pivotal support is at 2600, extending to 2570. The support zone implied by two prior (down) swing lows is at 2488-2460. A close below 2488 (or 2460) would be bearish, especially if weakness continued into the following trading session.

RSI AND SENTIMENT INDICATORS:

As discussed in my initial 'bottom line' comments, the 13-day RSI is back into my overbought zone as seen above. While this indicator alone doesn't suggest that the Market is making or has made a top, high extremes do suggest that the risk of a correction is greater than if RSI was a 'neutral' 45-50 or lower. Sometimes, it's not until the 3rd/4th time of RSI getting into this zone that this indicator concurs with a top.

Bullish sentiment got quite extreme this past week in terms of the somewhat 'lagging' 5-day average. Such readings often precede a top but this is also not a trend reversal event, like formation of a double top would be; also, events such as a key downside reversal, piercing an up trendline or a prior (down) swing low.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bullish. NDX has seen some resistance form in the 2227 area. The recent sideways move is interpreted as a bullish consolidation ahead of a continued move higher. This bullish view is prefaced on NDX holding above key near support at 2200-2183. Major support is expected in the 2210-2085 zone.

I've projected next resistance above 2227 at 2260 and then up at 2330. 2330 represents a fibonacci 38% retracement of the entire March 2000-October 2002 decline.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) has a bullish chart with its recent consolidation holding above the prior key high at 54.0 and always a good sign for a continued bull move; i.e., highs once exceeded 'become' a subsequent support.

Daily trading volume picked up some this past week. On Balance Volume (OBV) is trending sideways. There has often been a correction after a sizable run up that's followed by this type OBV pattern. I'm not predicting a sell off based on this volume indicator but am alert to a reversal given this plus an overbought situation in the Nasdaq Composite. However, NDX is about 10/10+ points shy of a major overbought extreme in terms of the Relative Strength Index/RSI.

Near support: 53.6

Next support: 52.0, then 50.8

Near resistance: 54.6

Next estimated resistance: 56.0

Major resistance: 58.0

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) index continues to lead even the Nasdaq higher. RUT has a strong seasonal tendency to move higher toward the end of the year as money managers tend to rotate out of some of their big cap holding and put some money to work in the small to medium cap stocks represented in the Russell 2000. This is especially true when the big cap stocks have racked up strong yearly gains, and investors and fund managers look to the smaller cap stocks for some further diversification in terms of company size.

My "next target" mentioned last week for 780 has been reached. There is now only what I would consider as 'major' resistance around 800 to be challenged. Given the overbought readings in RSI and by the length of time without a correction, I'm leery of holding call positions beyond 800 (if reached).

Near support is at 746, then at the 50-day moving average, currently at 727. The 700-701 area is a major support as implied by the mid-November low and a strong renewed advance.



GOOD TRADING SUCCESS!