THE BOTTOM LINE:
The Nasdaq market, which led the market up and got the most overbought looks to have started a significant correction as it broke below trendline support. Not so the S&P and Dow, which haven't broken any technical support levels yet. The Dow just didn't go sideways like the S&P, but advanced, as GE, HPQ, IBM, MMM, and WMT rallied. GE is especially noteworthy as it's a significant bellwether stock.
Since the Nasdaq has led the market for many weeks, it's hard to believe that further weakness in the Composite (COMP) and the big cap Nas 100 (NDX) will not have a knock on effect. Both COMP and NDX had reached quite 'overbought' extremes both in terms of the daily AND long-term weekly charts. As I wrote last time: "In terms of the daily and weekly charts, the major indices are all at or near overbought extremes; especially so in the Nasdaq 100 (NDX) index." Moreover, NDX started correcting after the index hit resistance implied by having retraced a fibonacci 38% of the huge March 2000 to October 2002 bear market decline.
COMP and NDX provide examples of my most recent Trader's Corner (1/19/11) article on bull and bear trap reversals . A 'bull trap' reversal pattern is a way of describing what occurs when, after a prolonged run up, prices go to a new high, and then within the same trading period or 'bar' (e.g., on an hourly, daily or weekly chart basis), prices collapse. In this case, this type reversal pattern was apparent on a weekly chart basis (not shown). Such price action can end up 'trapping' those with bullish positions if they don't recognize this initial warning of a downside reversal for a lengthily period.
Since the various indices are going their own way so to speak, best to look at each index in turn.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index chart remains bullish, although upside momentum stalled this past week. SPX did rebound a bit from support implied by the 21-day moving average. I'm watching to see if SPX closes below this key average (at 1272 as of 1/21) and especially if further selling pulls prices below SPX's up trendline, currently intersecting at 1250. If so, the chart turns near-term bearish, with next key support in the 1200-1174 area.
Near resistance is at 1295-1300, then at the upper trend channel line intersecting around 1337 currently.
The RSI as seen above has retreated from an overbought extreme but not by much so far. If prices weaken and the 13-day RSI gets back to a 'neutral' 50-45 range, that may signal enough of a correction that the S&P will rebound. Bullish sentiment dropped in this recent stumble but it remains to be seen whether puts will see enough volume relative to calls to pull my CPRATIO indicator into its 'oversold' zone.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index's chart remains bullish but there is now a line of recent resistance defined by highs this past week that occurred around 582 and which could suggest a top for now. Resistance above 582 at the upper channel line comes in at around 597 currently, but which undoubtedly extends to 600.
So far there's been no decline below support suggested by the 21-day moving average. Next support is highlighted at 570, then at OEX's up trendline currently intersecting at 558.
DOW 30 (INDU) AVERAGE; DAILY CHART:
It's unusual to see the Dow 30 (INDU) average having a decent weekly performance relative to the other major indexes. The chart remains bullish as prices track upward within the Dow's broad uptrend channel. The Dow remains overbought in terms of the RSI both on a daily and weekly chart basis, as with the Nasdaq, making INDU vulnerable to selling on any significant bearish news as was the case with developments with Nasdaq bellwether AAPL.
As I noted in my initial 'bottom line' comments, GE, HPQ, IBM, MMM, and WMT led the way higher this past week in INDU. GE is especially noteworthy as it's a significant bellwether stock.
In terms of whether further Nasdaq weakness spills over to the Dow, I'm watching for any decisive downside penetration of INDU's 21-day moving average, currently at 11685. Next support is anticipated in the 11600-11520 area.
Resistance is projected for the 12000 level, especially since the even 1000 markers in the Dow tend to be milestone levels. Above 12000, potential resistance implied by the upper end of INDU uptrend channel, comes in around 12200.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Weakness in the Nasdaq Composite (COMP) Index pulled the index below it's up trendline and 21-day moving average. The likelihood of a further decline is now high. What was technical support at COMP's up trendline is now highlighted as initial resistance, at 2715. Should the Composite rally back to above its up trendline, resistance next comes in at recent intraday highs around 2765-2767, with a next higher resistance around 2800.
Key support comes in at 2650, then at 2600. I'd rate the chart now as mixed, but more definitely bearish if COMP closed below 2650.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has lost the strong upside momentum of recent weeks as the index fell below its up trendline. A 1-day break of this trend wasn't anything noteworthy when it happened in late-December, but our recent two consecutive days of this is another story. Friday's close was at the 21-day moving average. The close at the lows of day, although on an expiration, suggests still lower levels will be seen ahead. It may be that we'll see a rebound from the average but I don't believe it would be long-lived.
Support is highlighted next in the 2237 area, then at 2200. A close below 2200 would be a definite bearish development, especially if there wasn't a bounce back the following day.
Initial resistance is at an extension of the prior (bullish) up trendline and which next intersects (Monday) around 2317. Next resistance comes in around 2330-2331.
I've been watching to see what would develop if/when NDX hit 2330, a potential longer-term resistance implied by that level representing a 38% retracement of the 2000-2002 major bear market. This recent bearish stumble came after the index reached major overbought extremes in terms of the 13-week Relative Strength Index and the MACD ('mack-dee') or the Moving Average Convergence Divergence indicator, also on a weekly chart basis (not shown).
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) chart is reflecting the same bearish stumble as NDX naturally. The initial trendline break was accompanied by a good-sized jump in daily volume but not so much on the second day of weakness (Friday). A primary volume consideration is whether the On Balance Volume line (OBV) is trending in the same direction as prices, which OBV is doing. I consider it likely that the Q's have yet not reached a bottom to this recent/current pullback.
Near support: 55.6, then 54.9
Next support: 54.0
Near resistance: 56.9
Next resistance: 58.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has had a similar bearish break below its up trendline as seen with the Nasdaq charts and I see lower levels ahead, but perhaps with an intervening rally. A rebound back up the up trendline that was pierced this past should now represent technical resistance around 794. Further resistance comes in the area of recent intraday highs at 808.
Support implied by the 50-day average is at 766, with chart support next at 740. RUT would have to close below 700 to turn the intermediate chart picture bearish. What we have so far is a short-term correction.
GOOD TRADING SUCCESS!