THE BOTTOM LINE:

As anticipated, the market pulled back. One technical aspect I looked at last week that suggested the market was 'overextended' were moving average 'envelopes', very useful in a trading range market, a phase we're in now.

I suggested last week that "those having bearish positions should sit tight as odds favor at least a modest pullback either from recent highs or after a retest of the early-May price peaks". This is how it went but where to next? To date, the major market indexes are 'holding' at or above their 21-day moving averages and if this continues there will likely be a rally attempt this week, even if a rebound doesn't carry very far. If, instead, the indexes pierce this key trading average, look for another minor down leg.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

I wrote last week that the S&P 500 (SPX) chart was bullish but that SPX's rally was 'extended' on the upside as the prior week's highs hit levels that were above the 3% upper (moving average) envelope line, relative to a 'centered' 21-day moving average. The beauty of use of the moving average envelope indicator is that it can be used to identify areas where the index is not only 'overbought' in general but specific prices levels where this is the case; i.e., levels ABOVE the 3% upper envelope line. Once the S&P gets above or below 3 percent relative to the 21-day average, it does increase the odds that a counter-trend move will occur.

The way that I use the moving envelope study with the indexes will be covered fully in a Trader's Corner article I'll also produce this weekend. The major way I use this study (in the indexes only) is to watch for when prices sink below, or rise above, the 3% envelope line. In a rising market, prices will then tend to either move up ALONG the line OR pull back to the 21-day moving average. If the index pierces this average, I look for a 'maximum' downside objective to the LOWER envelope line.

I've highlighted support in the low-1300 area, at the 21-day average, then for the 1276 area, the current level of the 200-day moving average; next and what should be fairly major support in the 1260 area, where the lower (3%) line intersects currently.

SPX resistance is at 1330-1333, then at 1345, extending to 1353.

RSI AND TRADER 'SENTIMENT':

The Relative Strength Index (RSI) indicator (seen above) recently got down to a 'neutral' level around 50. I tend to doubt that SPX will get to another 'fully' oversold reading like it did in early-June, especially given the low level of bullishness.

My bullish/bearish sentiment, also seen above, is being pulled once again to a mildly bullish (in a contrarian sense) reading; i.e., its recent lows suggest less bullishness, more bearishness, among traders. This alone suggests to me that this market isn't as likely to sink much lower.

S&P 100 (OEX) INDEX; DAILY CHART

I went into the usefulness to market timing for the moving average envelope indicator you see on my OEX chart, in my S&P 500 commentary above.

The S&P 100 (OEX) chart is bearish in the short-term, mixed to bullish on an intermediate-term basis. The OEX chart is bullish on an intermediate-term basis as long as its prior key lows are not penetrated. The chart will assume a more bearish cast if prices next sink below the pivotal 21-day moving average, currently at 582.

Key technical support, including on weekly charts (not shown), is at 572-570. Support in this area is not only implied by a long-term up trendline, but is also suggested by the 200-day moving average.

Resistance is at 592-593, extending to 600-602.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 (INDU) in its recent downside correction has so far held support in the 12400 area, where I've highlighted near or initial support. A next key support is at INDU's 21-day moving average, currently at 12321. 12200 should be fairly major support, although we can't rule out eventual basing action in the 12000-11862 area.

In terms of the 30 individual stocks, the stocks that most look like they are in a position to rebound include: AXP, BA, CAT, CSCO, CVX, DD, GE, HD, IBM, JNJ, KFT, KO, INTC, JPM (eventually), MCD, MSFT, PG, VZ, UTX, and XOM. 2/3rds of the Dow 30's stocks are in a position to rally on bullish news. This lineup precludes me from suggesting any major downside potential for INDU.

Support I already talked about above as highlighted on my INDU daily chart. Resistance is at 12600, then in the 12750 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Regarding the Nasdaq Composite (COMP), while it looked like COMP could go higher still, I wrote last week that "on a risk to reward basis, it's prudent to take profits on call positions." The pullback hasn't been deep so far, only to a level above support implied by INDU's 21-day moving average. We're still looking at a significant double bottom low in COMP in terms of a still bullish-looking intermediate-term chart. On a near-term basis, a different story; the short-term trend is down-bearish.

With the Composite, as is often the case with this tech-heavy sector, I'm using a 4 percent moving average envelope line (relative to the 21-day moving average). As the last low was 4 percent UNDER the centered moving average, I assume the next high could be at least 4% ABOVE the 21-day moving average; which it was and then some, at 2879.

Resistance is at 2818-2825, then at 2840-2865. Support is at 2750-2745, then at 2700. Major support begins in the 2600 area.

RSI AND TRADER 'SENTIMENT':

Repeating from the S&P 500 commentary, which also shows my Trader Sentiment model:

The Relative Strength Index (RSI) indicator (seen above) recently got down to a 'neutral' level around 50. I tend to doubt that SPX will get to another 'fully' oversold reading like it did in early-June, especially given the low level of bullishness.

My bullish/bearish sentiment, also seen above, is being pulled once again to a mildly bullish (in a contrarian sense) reading; i.e., its recent lows suggest less bullishness, more bearishness, among traders. This alone suggests to me that this market isn't as likely to sink much lower.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index has both a possible double bottom, assuming those prior lows 'hold' and, most recently, a possible 2409-2417 double top. It's early in this possible top, so there's less to go on there. The short-term trend is down, the intermediate (and long-term) trend up. What makes for a more bearish picture than would otherwise be the case has been the relatively steep decline since a final push higher took NDX to the prior top but only on one day. The other interpretation about this chart is that a 2200-2400 trading range may have been established; a common summer pattern for the market is to stay range bound and not break out to new yearly highs or break down to new lows until October-November. I'm mildly bullish in that NDX has held above support implied by the 21-day moving average; like the Dow, this index is only giving ground grudgingly. Friday was a decent rally considering the gain relative to the spike low of the prior day. I look for support at and near the 21-day moving average, currently at 2300. Major support is expected in the 2200 area.

Resistance is at 2375, extending to 2405-2409.

NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQ) is now mixed in that the short-term trend has turned lower with the sell off of this past week. As with the underlying index, the Q's hit their prior high and then sharply retreated leaving a possible double top formation. Volume spiked on Thursday, when QQQ made its low of the week. The diminished volume on Friday may suggest that the panic liquidation phase is over. It's too soon to tell if summer highs in the 59-59.3 area have been established.

Resistance is at 58.0, extending to 58.7, with next key resistance at 59-59.1.

I look for support to be established on further pullbacks, especially one that carries to the area of the 21-day moving average, currently intersecting at 56.5; I also highlighted support in the 57 area so more accurate to say that key near support is at 57.0-56.5. Next support is at 56 even and QQQ would reach an hourly up trendline in this area. Major support begins in the 54-53.7 area.

Initial resistance is at 59.3, extending to the 60 area. Support is at 57, then around 56.

RUSSELL 2000 (RUT) DAILY CHART:

I applied my moving average envelope overly with the Russell 2000 (RUT) this week as this model for showing the potential price range appears to be also relevant as it is with the S&P and Nasdaq. A 4% LOWER envelope line ('floats' 4% under the 21-day moving average) has been where RUT had two prior important bottoms. The 4% UPPER envelope line is an area where RUT made several prior short to intermediate-term tops.

I don't see RUT falling under 820 to 810 support in the coming week. Major support should be found in the 790 to 780 area.

In terms of near-term upside potential, the Russell may not rebound much; perhaps to resistance in the 845 area. I've noted next higher resistance coming in around 857 currently or at the upper (4%) envelope line.



GOOD TRADING SUCCESS!