THE BOTTOM LINE:

Stocks, especially key big cap tech stocks in the Nasdaq 100 index (NDX), took off again in the first week of the new year in keeping with the so-called "January effect", a tendency for an up January after a down December. No down December was seen but this month so far sees stocks, especially tech, still on a roll.

The January effect has historically been the tendency for stocks to advance during January. This month's rally has in the past been attributed to an increase in buying following a drop in prices in December when investors sold underperforming stocks in order to create tax losses to offset capital gains.

The January effect has usually affected small cap stocks more than mid or large caps. However, this historical seasonal tendency has been less pronounced in recent years because the markets have adjusted for it. Another reason is that it's now considered less important as more people are using 401k and other tax-sheltered retirement plans for stock investments, giving them little incentive to sell at the end of the year for a tax loss.

I did expect a rally in the short-term but generally assessed the low volume slide in the final week of December as a harbinger for the start of a larger correction. WRONG! So far at least, calling a top is a bit of a fool's errand. It may prove very difficult to correctly forecast a top before it becomes obvious.

A cautionary note is that primarily one index, NDX, is where the really strong gains are coming. The S&P 500 (SPX) had a decent advance in the past week, relative to its prior 4 weeks, but not like NDX which blasted through resistance (at 2236-2240) and achieved a decisive upside penetration of the last major NDX top of late-2007. The Nas 100 is still quite 'overbought' as can be seen below with the longer-term weekly Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) indicators. In a fundamentally strong market, technical considerations helpful in a more 'normal' market cycle, don't guide us as much. It's not that such technical indicator extremes don't have an eventual effect, but the lag time can be considerable before a substantial correction sets in.

You'll see on the daily charts of the Nasdaq Composite (COMP) and the Nasdaq 100 (NDX) charts further on how both indexes held (and regained in the case of NDX) their up trendlines. NDX had a 1-day dip below its bullish trendline but NO second day of 'confirming' type reversal action. My general rule of thumb is to see if a SECOND consecutive day 'confirms' a trendline penetration. This was shown by subsequent market action this past week as NDX regained its up trendline at the week's start. Moreover, NDX never closed below its key 21-day moving average.

Where do we go from here? Higher based on the charts, but I would watch for any further breaks of the aforementioned up trendlines. The S&P and Dow are lagging the hot tech sector, but this was sort of business as usual for the market in 2010. I do have trouble seeing how the Dow is going to sustain a lot of further upside progress in that many of those 30 stocks don't have especially bullish charts. The Russell 2000 (RUT) is going sideways and small cap stocks should be doing better, especially in January; moreover, RUT is showing a bearish price/RSI divergence. Bullish sentiment is quite high again but such extremes, at least since early-November, have not directly led to a downside reversal. Such bullish extremes do suggest caution in counting on a huge further advance.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) index chart is bullish. The index didn't match the gains that key tech stocks had as reflected in the Nas 100, but SPX is tracking upward within its longer-term bullish uptrend channel. There is a bit of waning momentum but every time they knock the index down, stocks rebound from their lows by day's end.

The RSI and my bullish sentiment numbers are showing extremes but so what else is new. I've been saying that these indicators provide a cautionary note in terms of piling in with new bullish strategies and am beginning to feel like the boy who cried wolf too much.

The 1250 area looks like the key near-term support, which then extends down the 1233 area, at the current intersection of the up trendline. A decisive downside penetration of the trendline would suggest potential for a move back to fairly major support beginning around 1200 and extending to 1173.

Near resistance comes in around 1278, with major resistance in the 1320 area, as suggested by the upper end of SPX's uptrend channel.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) index's chart remains bullish with OEX now a bit above the mid point of its uptrend channel. In terms of price action alone, OEX looks like it could reach 600 this month. The only thing, as usual, that makes me cautious in terms of adding bullish positions, is the overbought extremes I see in some of my indicators. Nevertheless, price action is the 'king' indicator so to speak.

Near support is now up to 570, extending to 565. 550 is then a pivotal chart support at the up trendline. 590 is resistance implied by the upper end of its channel, but with close by resistance at 576.

As with all the major indexes I suggest that those with bullish positions keep an eye on the 21-day moving average. A close below this key average would suggest a pivotal next day technically; e.g., a second close below the 21-day average would imply a shift in near-term momentum to down. A break of the up trendline would suggest a more significant change in the current chart picture. However, there's no shift in the intermediate uptrend unless prior lows in the 530 area were pierced.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Further upside progress was made in the Dow 30 (INDU) average as INDU worked its way above 11600 resistance. This level (11600) is of special long-term chart significance in that it represents a 2/3rds or 66% retracement of the major decline from late-2007 to March 2009. A next pivotal technical support is at 11400, at the current intersection of INDU's up trendline.

Immediate overhead resistance is at 11740 currently, then at 11800. I don't have a notation of more major resistance highlighted on the chart but if INDU can continue to climb above 11600, it suggests to me the possibility of an eventual move to the 13000 area; e.g., sometime in 2011. Before such a lofty target is reached, INDU would have to climb above 12000, the next big round number for the Dow.

Stand out to good Dow performers are AA, BA (per action of this past week), CAT (but recently stalled), CSCO (with an emerging rounding bottom), CVX, DD (but stalled recently) GE, HPQ, IBM, (KFT and KO are pulling back), MSFT, VZ and XOM. The 30 stocks are a mixed bag, with some that were in strong uptrends now correcting, but a few others coming on strong. All in all not a negative picture but not quite a stand out either.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index chart is tracking higher within its uptrend channel with the latest action being COMP's breakout above the line of resistance I talked about last week at 2675. I've talked in my beginning 'bottom line' commentary and with the S&P commentary that the overbought extremes seen on some of my indicators cause me to shy away from chasing prices here. It's always the case in the strongest trends that technical indicators are of less use in 'timing' a reversal or extension of a rally or decline. What is of use? Trendline breaks for one.

COMP appears to be struggling some to maintain what should now be near support at 2700-2675. My support focus in on the intersection of the up trendline, currently at 2655; next support then noted at 2600.

I've highlighted 2750 as a key resistance. Major resistance is expected at the top end of the bullish uptrend channel, which currently intersects around 2860.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has one of those remarkable charts where you understand the significance of trendlines. As if the index had 'eyes' it broke below its key up trendline, but then jumped back to claim that same angle of ascent that IS an up trendline when it's 'working'. I suspect that some of the enthusiasm for buying still more of hot tech stocks is/was the CES (Customer Electronic Show) in Las Vegas. It's quite the event in the tech world now. Stocks that might have new 'home run' products as presented at the CES get bid up anticipation.

NDX is the bullish hot ticket item and is getting a fair amount of the action in the market again. The chart pattern is very bullish but it remains to be seen if the index can maintain the same rate of upside momentum it has now; i.e., the current up trendline you see on the daily chart. The index is at the lower end of its current uptrend channel not at the high end, so NDX is maintaining its 'lowest' rate of upside momentum so to speak. Overbought indexes and stocks eventually at least slow their gain rate: hence the pattern of sideways for awhile, then a next breakout, then sideways again, another breakout; or, down.

My next anticipated resistance is 2325. In terms of key support points, there's the trendline of course to look at, but it's such a steep line that I don't want to get unnecessarily alarmed if there's a dip below it. I've noted a first key technical support at the 21-day moving average; note how the 21-day moving average 'held' (supported) NDX on a closing basis. Whether looking at this key average and Fibonacci number on a Closing or intraday basis there's something to be learned. In an uptrend, a SHARP break of the line intraday is usually a sell signal. If there's only a slight penetration, with enough buying also coming in to lift the closing level to above the average, it's a clue that the index isn't ready to reverse even its short-term trend.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) chart naturally reflects the renewed bullish (from near-term 'mixed' last week) chart as the NDX and the Q's could be headed for the 58 area, eventually to 60. The key question is whether they get there in a straight line so to speak or there's a dip, then another sizable rally later.

Will wonders never cease as daily trading volume finally had a significant jump on Friday along with prices. This is likely also another reflection of the strong bullish 'sentiment' readings I'm getting as, at a certain ('believer') stage of a bull market, traders get more prone to buying breakout type moves. Previously, we've mostly seen spikes in volume ONLY on selloffs. This market is reaching another stage of bullishness as the rally just keeps rolling along. Fear diminishes and greed ascends.

Near support: 54.8

Next support: 54.0, then 52

Near resistance: 56-56.2

Next estimated resistance: 57.3

Major resistance: 59.5

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT), recent weeks' stand out index performer, has halted upside momentum after hitting the pivotal 800 level, which I've long held to be a pretty tough resistance. Rather than the usual pattern of more small to mid cap stock buying in the NEW year, a lot was done in the OLD and the Russell here looks like it could be in the beginning stages of a correction. I especially note the declining RSI as prices have slid sideways. This bearish divergence often suggests that there will be further pullback ahead. We should have an idea if this is the case by whether RUT next slides below key near support at 780-773. Support implied by the 50-day moving average comes in at 750; from a chart standpoint 720 is key to hold.

I've noted pivotal near resistance at 800, then at the top end of RUT's uptrend channel, intersecting at 827 currently.



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.