THE BOTTOM LINE:
I wrote last week that: "Another way of looking at the chart pattern being traced out in the S&P and in Nasdaq, is that of a possible rectangle bottom. The 'rectangle' formation in stock indexes isn't thought of as having a most-typical outcome as a top OR bottom; unlike say a Head & Shoulder's bottom. Technicians tend to assume that if the preceding trend has been DOWN, a rectangle pattern suggests a bottom, but the key is a breakout above OR below such a well-defined trading range."
We got just such a breakout to the upside this past week suggesting that a significant bottom is in place.We got just such a breakout to the upside this past week suggesting that a significant bottom is in place. I put out a further explanation of the implications of the rectangle pattern in my Wednesday Trader's Corner article. A key aspect of such a bottom is the rule of thumb about a price objective after an upside breakout of the multiweek/multimonth trading range that comprises a 'rectangle' formation; an implied 'minimum' price target on a bullish breakout move is the point distance between the top and bottom of the price range ADDED to the top of the rectangle.
Using the aforementioned rule of thumb for an eventual next move at a minimum is to 1320 in the S&P 500 (SPX) and to the 2900 area in the Nas Composite (COMP). This suggests good potential for a new 12-month HIGH in the Composite, but SPX would have to extend future gains beyond the minimum objective I refer to as prior (12-month) S&P highs were in the 1350-1365 area.
It's important to note here that bullish sentiment remained quite moderate even at the close of the week. Traders and investors are still a little too shell shocked by recent weeks' volatility to immediately jump to bullish conclusions. This bodes WELL as it relates to prospects for further gains.
You'll see the rectangle pattern highlighted in my COMP commentary. This is basically a 'measured move' objective, as a second up (or down) leg tends to at least equal the first leg.
Speaking of the Composite, COMP's weekly chart below clearly shows the upside breakout in a related but different way. It stands to reason that tech stocks would lead the rally, just as they had less of a percentage pullback than the S&P and Dow stocks as is seen in the way the Nas 100 (NDX) came roaring back.
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has resumed on a short to intermediate-term basis the bullish pattern implied by its long-term uptrend. This is suggested by the new Closing high that carried SPX well above prior closing peaks, not quite yet above all prior intraday highs which were in the 1230 area.
I've been saying that the 4% SPX moving average envelope lines were back to being a more reliable trading guide to possible extremes on the upside and downside. This was especially true at recent lows. While there was one dip to below 1100, the index came back smartly once exiting stops were 'run'. In the direction of the dominant trend is where prices most often overshoot the envelopes. Often if not usually, there's a slowing down of the rally once the indexes outpace the envelope lines.
Mostly, rallies or declines to above or below the lower trading bands (envelopes) tend to show that the move is getting 'extended' above the mean so to speak. I always know that I'm in strong trend when moves get so far above/below the 21-day moving average. Good FURTHER gains can and do occur but I also know it's a higher risk environment for some disappointing news that upsets the bullish or bearish applecart.
As I indicated in my initial 'bottom line' comments above, the decisive upside penetration of a rectangle and now, presumed rectangle bottom, suggests a 'minimum' upside target back to around 1320. It seems doubtful that SPX would just return to a LOWER high, but we'll see on that going forward, assuming this rally has legs.
Near SPX resistance is now looking to come in around 1260-1263, with next key resistance at 1300. Key near support is now in the 1200 area, with next support at 1169, extending to 1160.
OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'
As seen above, the 13-day Relative Strength Index (RSI) is nearing a 'typical' overbought extreme that begins around 70 and extends to 75. This could suggest a slow down in the advance if SPX gets to or into its 'overbought' zone or it can suggest a tendency for pullbacks, which can be relatively short-lived and not necessarily suggest a significant top. However, buying when RSI is IN (or above) its overbought zone isn't a good risk to reward play.
Just MODERATE bullish sentiment levels as also seen above with the 'CPRATIO' indicator, after such a strong rally as seen this past week, is encouraging in suggesting that there's more rally potential ahead.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart had a bullish rebound this past week that puts the index above the top end of its prior multiweek trading range. The bullish chart has returned; investors not so much. The 2-week gain in OEX is impressive nevertheless as the index went from an intraday break below 500 (to 489) all the way to 554 10 trading days later.
Where to next? OEX should continue to work higher but it will start getting overbought soon if its strong upside momentum doesn't slow. Near resistance is at 560-563 and then at 580, which should be much tougher resistance; i.e., more stock for sale.
The chart will look most bullish if OEX now consolidates ABOVE 546-548, the top end of its trading range it broke out above on Friday. I've highlighted key technical support at 537, the current intersection of the prior up trendline; next lower support of significance in my book comes in around 520, extending to the low-500 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart turned from mixed, as is characteristic of a trading range market, to bullish as INDU ended the week at 11644, above its prior Closing high. This was not by a lot and yet to come is a possible retest of its prior intraday high at 11716. I've pegged near resistance at 11700-11716, with next pivotal resistance above this in the 11900-12000 zone.
I noted last week that prior to this past strong rally week, the Dow had two back to back closes above its 21-day moving average, which was bullish; I wasn't sure it was quite decisive given resistance at the previously penetrated up trendline, but it WAS.
I've noted near support at the aforementioned trendline, at 11300, pivotal lower downside support at 11000. I didn't see such a strong rally coming so quickly but it did not, as I said, "struggle to hold above 11000". WRONG! Tech led the way and the big dogs and cats followed.
There are now 26, of 30, Dow stocks trading above their 50-day moving averages, some just recently trading above this average. This number suggests there's some overall upside momentum here. The 50-day average is commonly looked at by investors as a sign of near-term momentum. Money managers take stock in the percentage of Dow stocks trading above their 200-day averages. On this basis, 40% are trading above this key longer-term moving average. The Dow has a ways to go to regain major price momentum.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart has turned from predominately mixed to bullish. As with SPX, COMP began it's most recent rebound after bullish sentiment reached a 'typical' oversold extreme that is often associated with upside reversals. When COMP decisively pierced its 21-day moving average on Monday of this past week and kept going, it made for a definitive buy 'signal'. However, initiating bullish strategies when RSI is in its overbought zone isn't a good risk to reward play.
The decisive upside penetration of the upper end of such a well-defined multi-week trading range suggests that COMP has traced out a rectangle bottom and sets up a potential next upside target to the 2900 area. This kind of objective is usually thought of as a 'minimum' price objective; if reached, any such move is unlikely to be in a straight line, as we'd expect pullbacks along the way. However, buying when RSI is IN its overbought zone isn't a good risk to reward play.
To maintain a maximum bullish chart going forward, look for COMP to predominately stay above its prior up trendline; and, to stay predominately above the line of prior resistance (the top end of the highlighted rectangle) in the 2600-2625 area. However, buying when RSI is in its overbought zone isn't a good risk to reward play.
Near support is at 2610, then at 2523 at the 21-day average, support which extends to the 2510-2500 zone. I've pegged resistance at 2700, then at 2750. At 2750, COMP would likely run into some significant selling.
OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'
The 13-day Relative Strength Index (RSI) for COMP seen above is nearing a 'typical' overbought extreme that begins around 70 and extends to 75. This could suggest a slow down in the advance if SPX gets to or into its 'overbought' zone or it can suggest a tendency for pullbacks, which can be relatively short-lived and not necessarily suggest a significant top. However, buying when RSI is IN (or above) its overbought zone isn't a good risk to reward play.
Repeating what I wrote about the S&P and as seen above, the fact that we closed the week with just MODERATE bullish sentiment levels as also seen above with the 'CPRATIO' indicator, after such a strong rally as seen this past week, is encouraging in suggesting that there's more rally potential ahead.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) is bullish in its pattern but of course is now also nearing what could be strong resistance in the area of its July intraday high at 2438; NDX's Closing high was 2429 on two occasions before prices broke down. It's been a barn-burner of a rally; over 300 points from intraday low to closing high in 10 trading days. I'll take that in calls anytime!
I've pegged next resistance in the 2400 area, then at 2430-2440. Near support is suggested at 2300, then at 2250, extending to 2225. Thanks especially to Google and Apple. Sorry I bought the iPhone 4 before 4S came out but it looks like a software upgrade will get me spiffed up. And thank you Steve Jobs for building such an exciting company. He was a heck of guy by all accounts. Tough like other CEO's I've met, but he demanded and rewarded excellence. Man after my own heart. RIP
It looks very much like the Nas 100 is going to challenge its prior high and probably exceed it before it slows down much. What a turnaround. We went from despair to not so much. Still, traders didn't throw caution to the wind and bullish sentiment didn't jump into the danger zone. Nor is the 13-day RSI showing the kind of overbought extreme that says 'high risk'.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has been back in its bullish uptrend channel now since 10/7 or the Friday heading into this past week. It turned out that piercing that lower line was hugely significant.
As somewhat usual with QQQ rallies, it was a low-volume affair. Unlike company stocks, high volume doesn't necessarily go with breakout strong moves. However, On Balance Volume (OBV) usually indicates the direction to trade in and OBV this past week of course climbed steadily along with prices. OBV assigns whatever volume there is (to a running cumulative total) on up days; conversely, the running tally of OBV gets whatever volume there is subtracted from it on down days. The DIRECTION of the OBV line, up, down or sideways is what's important.
Look for higher levels ahead but in the 59.5-59.8 area is where it gets 'interesting'. That may be where prices will consolidate and mark time for a while. If there's a decisive upside penetration of the 60 level, that's hyper-overdrive for the bulls.
Near support is at 56, extending to the 55-54.7 area. 54.7 is the current intersection of the lower up trendline or the low end of the Q's uptrend channel.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart has achieved a bullish technical breakout above its well-defined down trendline.
Kind of an interesting aside, one of highlighted supports on my RUT chart below is at this prior down trendline. Price support and price support trendlines, once pierced, tend to 'become' the opposite of what they represented before. At
667, RUT pierced its down trendline at the beginning of this past week. I tend to continue to keep this SAME down trendline on my primary RUT chart, anticipating that if the index pulls back to it, buying will come in there. You'll notice that my 2nd level of support is notated at 651. 651 is the point where prices would touch this trendline on the Monday opening.
Look for higher levels, perhaps to a quick challenge of the prior 738 high, where resistance might come in. I'd be selling some there. There ultimate potential on this move, without any huge setbacks/pullbacks, to the 800 area. That's where substantial supply (of stock) really becomes a factor. I could easily see 740. On the downside, support is at 680 and the chart looks most bullish with pullbacks contained there. Next lower support is in the 650 area, extending to 640. Major support is in the 620 to 600 zone.
GOOD TRADING SUCCESS!