THE BOTTOM LINE:
With the move to new highs, chart aspects suggesting taking profits on bullish index option strategies were the rally failures at or near resistance implied by previously broken up trendlines. This was especially relevant when the RSI indicator reached overbought readings. You will see these aspects on my individual stock index charts that follow. Summing up this past week's technical picture that suggested profit-taking, I note the following:
Indexes getting NEAR resistance implied by previously penetrated up trendlines (possible 'kiss of death' trendlines) this past Monday, were the S&P 500 (SPX), the S&P 100, the Nasdaq Composite (COMP) and the Nasdaq 100 (NDX). All but the Nas 100 ALSO reached 13-day Relative Strength Index (RSI) readings of 70, which is the beginning of an overbought zone. The Dow 30 (INDU), which had been leading the overall market, got to 74 in the RSI and hit resistance implied by the TOP end an uptrend price channel. The Russell 2000 (RUT) didn't quite reach a 'typical' overbought RSI extreme (at 67.8) but did EXACTLY hit resistance AT its previously broken up trendline.
The above technical/chart aspects were reason enough to take profits on long calls and/or to sell covered calls, etc. Mostly I want to emphasize that there were two good reasons to take profits on calls. This is NOT to say that the larger chart picture has turned bearish, since there's a pattern of higher relative highs and higher pullback lows.
Regarding further bullish potential, the recent pullbacks were only TO but not BELOW technical support levels, as you will also see notated on my individual daily index charts. The prospect for another rally is present. There may however be another somewhat lackluster short-term rally, followed by another minor sell off before there's a stronger and more prolonged rally attempt.
On the bearish side: if prices start falling to still lower levels than seen this past week and there's a break of key near support levels highlighted on my charts, it would suggest potential for a second down leg. I myself don't see a major downside move ahead and think it more likely the indexes either continue the rally interrupted this past week OR move into a trading range market, which would then suggest index option strategies appropriate to a range-bound market.
THE LONGER-TERM CHART PICTURE:
In terms of SPX, the index has been tracking higher WITHIN a broad weekly chart uptrend price channel. Recent lows held the more minor up trendline as noted by the higher green up arrow. To date, SPX has retraced more than 66% or 2/3rds of the October '07 to March '09 bear market decline. Exceeding a 2/3rds retracement of the prior decline tends to bode well for a move to still higher levels and even back to re-test the highest prior top.
One forecast is for a retest of the 1440 area, especially by the fall or year end. Beyond 1440, there's longer-term potential for a move to the 1500 area again. There is no suggested violation or bearish break of the long-term trend unless 1215-1200 is penetrated on a weekly closing basis.
A cautionary note (highlighted above) for the bulls and relative to the direction of prices in the next few weeks, is suggested by a bearish price/RSI divergence, as the recent higher relative highs were not matched by a corresponding new high in the 13-week RSI. This divergence doesn't loom large in my current thinking but it should be noted.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) is bullish in its pattern given the pattern of higher highs and higher pullback lows. What hasn't happened is a move back above the long-term up trendline, which isn't bearish per se. Rather, this pattern suggests that upside momentum, while bullish, hasn't equaled the strong ascent seen in prior months. Momentum has slowed from what it was prior to the March sell off. Given that we're entering a seasonally choppy period, we should wait for trades with compelling technical aspects.
To maintain a bullish near term outlook, look for prices to turn up from the 1335-1340 area, or what was the area of prior tops and prior resistance. A decline below 1320 and to below support extending to the previous low at 1295 would be bearish.
Conversely, a move back above 1370 would be a bullish plus. An even stronger bullish 'signal' is for a move to above 1388 on a closing basis and to above 1400 on an intraday basis.
While I remain predominately bullish, I no longer want to be long calls. In any directional trade that counts on further upside, I like to assess the trade as if it was a new position and whether the further upside potential was significantly greater than the downside risk. I figure my exit point on a new trade is to 1290, and the maximum reward currently is to 1400, so a 50 point risk relative to a 60 point upside is too close to a 1 to 1 risk to reward, rather than a 1 to 3, more favorable, ratio.
RSI and TRADER 'SENTIMENT'
The 13-day RSI hit an overbought 70 (seen above) at the beginning of this past week, followed by weakness after that. This suggests to me that buyers are getting more skittish and sellers more aggressive. The market is hitting a period of more cross currents based on fundamental factors.
Also seen at the beginning of this past week was an overly bullish sentiment reading of 2.0 and the beginning of an 'overbought' trader sentiment. In a stronger trend, sentiment will get into my overbought zone repeatedly. Instead, bullishness fell fast in terms of the CBOE equities call to put ratio (in a daily call/put volume comparison), which suggests uncertainty as to future market direction. Periods of uncertainty in bullish sentiment can lead to choppy two-sided trading.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) is bullish in its pattern in that we continue in a pattern of stair step higher highs and higher reaction lows. Read my commentary above on the S&P 500, for a broader view of the S&P. I was more bullish last week in that I thought that OEX could move back into its uptrend channel that existed prior to the March sell off. Instead, once prices got NEAR to resistance implied by the previously broken up trendline, prices reversed. The indexes tend to either get TO, or above, such trendlines OR rally failures often occur when an index is only within a close proximity of this line.
I noted last time that a 'measured move' objective, where the most recent up leg would equal the last advance, would have been to 617; instead, the intraday high last week was 611.
Support in the OEX developed more or less in the area of its prior highs, which is a bullish plus if it continues. I've noted support at around 590, extending to 580. A close below 580 would be bearish. Conversely, resistance is apparent in the 610-611 area, extending to 620.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) average reached the top end of its uptrend price channel and reversed from there. I would say that the further near-term upside potential for the Dow 30 is not big, although we could see a move yet to 13000. A decisive upside penetration of 13000 would be a more move than I'm anticipating currently.
When INDU got to its upper trend channel line, it was accompanied by an overbought RSI reading. To nail down profits on long DJX calls was a good move at that juncture. If INDU rallies again up toward resistance implied by the upper channel line, take call profits and run. Buying some puts around Dow 13000 would look to have a favorable risk to reward; risk 100 points, with a downside objective to the 12500 area.
Technical support is noted in the 12460 area, with next support seen at 12200. I've noted resistance at 12800, extending to the prior recent intraday 12876 high; resistance then extends to the 13000 area.
Dow charts with bullish patterns, and not having turned more questionable relative to this past week's action, is seen with
AXP, BA, IBM, INTC, JNJ, KFT, MMM, T, TRV and UTX.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart is bullish in its pattern of higher highs and lows. COMP did reverse this past week in an area of at resistance implied by its previously penetrated up trendline, the second time rallies have reversed at this line. This pattern of highs has formed what looks to be the TOP end of a new uptrend price channel.
Resistance implied by the upper channel line suggests possible strong resistance comes in around 2925 currently, as noted by the higher down arrow. Nearer resistance is implied in the area of the prior recent high around 2887.
Key support remains 2800, extending to 2765, at a possible 'emerging' up trendline, but with only two lows currently; better is 3 or more lows to define an up trendline. Nevertheless, a break below this line would imply more weakness to follow. Fairly major support than could be expected in the 2700 area.
Overbought extremes in terms of the RSI and my bullish sentiment indicator were seen at the recent minor top. The pattern seen since prices rebounded a bit from the 21-day moving average, doesn't yet suggest a robust rally and looks to be a possible bear flag with a possible 2750 downside objective.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) is bullish as with all the other major indexes that in that the pattern is one of higher highs and higher reaction lows. We could see some further weakness ahead, such as for a test of support beginning around 2350 and extending to 2300 support implied by the up trendline.
Resistance in NDX is implied by recent highs in the 2415-2417 area. Next resistance is noted at the intersection of the upper channel line intersecting at 2463 currently. I have two channels highlighted currently, one dating from the stronger trend that existed before the early-March weakness, but NDX doesn't look like it is going to regain this higher channel and I'll likely stop featuring all but the middle line bisecting the two channels, old and new.
Key support is highlighted again this week in the 2350 area, then at 2300, at the current intersection of the up trendline. As long as this trendline is not pierced I remain bullish on the dominant trend.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bullish in its pattern but like the underlying NDX index, the Q's are hitting resistance and upside looks limited from here, but with downside potential equal to a bit more than upside possibilities currently.
If QQQ was to clear immediate resistance in the 59.3 area, then at 60, at the current intersection of the upper channel line, with next resistance estimated at 61.
Support levels are 58, then at 57.0, extending to 56.5, at the current intersection of the up trendline.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) got back to resistance implied by the 'kiss of death' trendline, the more colorful name applied to the previously broken up trendline dating from the early-March sell off when the uptrend got pierced.
I see RUT upside potential as limited currently. Resistance has to be assumed to lie at the 868 recent high, extending to the early week intersection of the same trendline which comes in around 880. is at the recent chart is bullish given its move to new highs. Major resistance is seen in the 900 area.
Near support is comes in around the 50-day moving average and recent lows, at 825-827 currently. Fairly major support begins in the 800 area, extending to the prior downswing low at 776.
I see more likelihood for further weakness such as to 800-780 than I do for another immediate challenge ahead to the 880 area.
GOOD TRADING SUCCESS!