THE BOTTOM LINE:

HAPPY NEW YEAR! 2010 saw some solid index gains. The S&P 500 (SPX) was up 12.7% for 2010 and the Nasdaq Composite, up 16.8%.

The Nasdaq 100 (NDX) (and the Russell 2000) have been leading the market but a recently faltering NDX has pierced its 5-month up trendline and its declining upside momentum may be the 'canary in the coal mine' that's an early warning of an overall market correction.

Although price action on the low volume seen during the recent holiday period, is not always a means to judge the market, the charts are starting to look toppy. We could well get a rally in coming days as the recent sideways trend has 'thrown off' a short-term overbought condition, but January should see some profit taking selling. Profits on stocks that are taken in January won't of course be taxed for 15+ months (until tax time in April 2012). It doesn't make sense to sell stocks in strong uptrends just because you won't get taxed on any gains for more than a year, but when you are looking at some sales as part of rebalancing a portfolio it's tempting to do it in January.

There are some ways now to measure potential resistance in terms of some major retracements of the last big decline (November 2007-March 2009). NDX has retraced 100% of that decline and therefore shows a potential double top. (If/when NDX breaks out above 2239, there's no longer a bearish double top possibility.) The Dow 30 (INDU) has reached potential resistance represented by a 66% percent retracement of its prior major decline. Weekly overbought/oversold indicators like the Relative Strength Index or RSI are showing overbought extremes (not shown) for the major indexes, as is the weekly MACD indicator.

It is true that investors (hello!) are finally putting more money into equity funds than they're taking out, but there may still be a wait and see attitude by fund managers as to the market's ability to tack on a further up leg just yet.

All in all, this looks like the place to finally exit bullish options strategies. Or, put another way, I suggest its now become risky to bank on more upside. Putting on bearish positions is another story. We can't say that the dominate trend has reversed, but there's probably at least a limited pullback ahead; e.g., if SPX came back to trendline support currently, the index would test 1222, OEX would do the same at 546, ditto the Dow in the 11300 area, COMP to 2630 and NDX (its already pierced its up trendline) has next technical support beginning at 2150 and extending to 2085.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index remains within its longer-term bullish uptrend channel but upside momentum has waned recently. A key question is whether a more prolonged bout of selling comes in January. The 1250-1243 area is a key near support zone. If SPX closes below its 21-day average, it may then go on to test trendline support in the 1222-1225 area. Conversely, a decisive upside penetration of 1263 could suggest a run to the 1300-1310 area.

High bullish sentiment readings started falling from a 12/10 peak. Still, bullishness measured by daily equity call to put volumes has been fairly high until this past Friday. The RSI has been hung up at a bullish extreme for awhile now but is starting to drop, reflecting a lessening of upside momentum. These are not trend 'timing' indicators per se but do reflect the pattern seen ahead of many corrections. Can the market buck the odds and keep climbing? Sure. But many professional investors/fund managers assess stocks as fairly priced currently and some overpriced relative to earnings potential.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index's chart remains bullish although the index started drifting sideways during the pre-holiday low volume period. The 560 area is a key near support. A couple of closes below this level would suggest potential for OEX to go on to test trendline support, currently at 546. Repeating from last week, the intermediate trend wouldn't shift to down unless the prior (down) swing low at 527 was pierced.

Conversely, a decisive upside penetration of 568-570 would point to still further bullish potential but I'd be wary of chasing rallies in the current market. Major resistance probably begins around 585, extending to 600.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Upside progress in the Dow 30 (INDU) average has stalled around 11600. The chart remains bullish in its pattern, but there should be concern by the bulls as to how much longer this rally will continue without a deeper correction setting in. A decisive upside breakout above 11600 would suggest renewed upside momentum and a potential next advance to the 11700-11720 area.

Near support is at 11475, then at 11375, extending to the up trendline currently intersecting around 11300.

Stand out Dow performers continue to be AA, CAT, CVX, (DD has flatlined at 50) GE, HD, (maybe IBM, if it breaks out above 147) KO, VZ and XOM. 8 stocks in solid uptrends don't look like they can/will pull up the other 15-20 that are correcting.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart remains within its broad uptrend channel but appears to be falling toward a test of trendline support around 2630. 2600-2593 is an area that needs to be held to maintain a bullish chart. Fairly major support is anticipated in the 2510-2500 area.

On the bullish side, an upside breakout above near resistance at 2675 that went on to piece 2700, would turn the trend solidly back up within its uptrend channel. Major resistance looks like it begins around 2800, extending to the 2007 highs in the 2860 area.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is the one that should cause those in bullish trading positions some concern as it has recently fallen to below support at the low end of its broad uptrend channel. NDX lead this market higher and it may now lead it lower. Stay tuned for the early going this coming week. NDX did hold at its 21-day moving average on Friday. I've noted 2200 as support, then around 2150. Only if the prior 2110-2085 lows were pierced on a closing basis, would the intermediate trend shift to down.

Key near resistance is at 2237-2239. 2239 was the intraday high reached at the top in November 2007 and the major peak hit by NDX in the past 8 years. I estimate a next resistance level to come in at 2300 but there's no prior high to go off from, unlike the case with the 2239 prior major top.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) chart has the same near-term mixed chart as the NDX of course.

Daily trading volume continued to be quite low and On Balance Volume has been falling. This week I'd anticipate a sizable jump in daily trading volume if the Q's started falling below 54. Next support then is expected around 53. Fairly major support should be found at 51-50.8. Only a close below 51.45, that lasted more than a day, would turn the intermediate trend lower.

Near support: 54.0

Next support: 53.0, then around 52

Near resistance: 54.9

Next estimated resistance: 56.5

Major resistance: 58.5

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), our stand out index performer, has finally slipped on some year end profit taking after its upside momentum stalled in late-December. Key near support is at 780, then at the current intersection of the up trendline at 765. This will be a key chart test if reached.

I noted last week that "A pullback to near the low end of the uptrend channel, followed by another strong up leg would be a characteristic move given the strong bullish pattern RUT has been in." However, "The seasonal bullish tendency does wane some after the end of the year."

I've noted near resistance at 793 currently, then up around 820, at the upper end of RUT's uptrend channel.



GOOD TRADING SUCCESS IN 2011!