THE BOTTOM LINE:
The Dow 30 (INDU), a good 'barometer' of the market in recent weeks, looks to be stalled for now near prior key weekly closing highs. The week before last saw INDU Close at 12720, above its highest July closing peak of 12681. Still to come is a possible test of the late-April Closing high of 12810. Moreover, INDU along with the other major indices are likely too overbought on a daily chart basis (and being close to overbought extremes on weekly charts) to continue higher without a correction. Prices could trend sideways for a while, but I mostly am looking for more of a (price) retracement.
The S&P 500 (SPX) and the other major indexes appear to be forming 'Head & Shoulder (H&S) Tops' on their hourly charts as highlighted next with SPX; an H&S top is 'confirmed' if/when the neckline is pierced. The 'Right Shoulder'(RS) is somewhat 'underdeveloped' but is at the right height, it being approximately equal to the top of the 'Left Shoulder'(LS). The neckline would be pierced by further weakness and the odds of that are higher than usual given a bearish price/RSI divergence that's also highlighted on my first chart.
If the neckline is pierced, this doesn't point necessarily to any major sell off; e.g., a 'minimum' downside objective suggested by the hourly chart pattern is back to around 1300-1295. Technical support also looks good for the 1280 area. So, while a top is indicated in more ways than one, it doesn't look to be a MAJOR top at this point. A sell off here IS a key consideration for those holding long calls and who need to protect profits.
While the Nasdaq 100 (NDX) has soared on good-sized moves in the semiconductor stocks and by Apple, our newest biggest corporation, the broader Nas Composite (COMP) is nearing key prior tops and is also inching closer to an 'overbought' extreme on a weekly chart basis. (The daily 13-day RSI has already been deflected from such an extreme.) The odds of a big break out move above the cluster of prior COMP highs isn't great; NOT impossible of course but not highly probable.
In terms of Dow theory and the Dow Industrials/INDU, quite near its prior Closing highs, it's unlikely that we'd see the Dow Transportation Average (TRAN) 'confirming' a move to new weekly closing highs anytime soon. TRAN closed Friday at 5344, whereas it's prior closing peak stands at a fairly far-off 5548. I envision higher highs to come and this bull market to continue, but the current rally may have come as far as it can for now.
SOX, the Semiconductor Index, had a major upside breakout move over the past two weeks, but it has reached likely tough resistance in the 420 area; Friday Close: 413. SOX is a bellwether for COMP and NDX.
The XAU Gold and Silver stock index rallied off support in the past few weeks with last week reflecting most of the gains (although still within a downtrend channel), on worries about Europe again. U.S. corporate earnings are the bullish influence and Europe the possible sink hole, although with China still strong, it's not the dominant outside influence it was.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The question with the S&P 500 (SPX) in my mind is whether, now that SPX exceeded prior key resistance, can push on up to next projected resistance around 1350, extending to 1370. The inability for SPX to regain its up daily chart up trendline suggests no, not yet anyway.
Moreover, the hourly chart Head & Shoulder's top pattern highlighted above (in my initial 'bottom line' commentary), suggests at least a minor pullback back to near support at 1300, extending to the 1292-1296 area. Next key support is at the dominant longer-term up trendline, currently intersecting at 1275.
In terms of the overbought extremes seen previously with the 13-day RSI and my CPRATIO 'sentiment' indicator, both have slipped off their highs as seen above. The CPRATIO line often sees peak levels a few days to a week before a top, temporary or otherwise.
The tendency for bullish/bearish extremes to supply early warnings of a trend reversal especially bears watching when price action slows or sets up a reversal type pattern AND when RSI hits a similar high or low extreme.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is bullish but prices have been recently drifting sideways. A continued such lateral drift will pierce the steep up trendline, currently intersecting around 592. The OEX has traced out what looks like an hourly Head and Shoulder's top and almost identical to the hourly S&P 500/SPX chart seen above in my initial ('bottom line') comments. The odds of a pullback have grown.
Right now the 'correction' is mostly sideways, but profit taking and buyers standing aside could pull the Index down to the 580 area. We can fairly reliably predict that the STEEP uptrend is unlikely to continue given the overbought extreme seen on the 13-day RSI, although RSI can drift lower while prices hold up for some days. Eventually, prices tend to break some the longer RSI diverges. The divergence is showing up initially on the hourly charts, not yet on the dailies. Assuming no rebound from the up trendline, the 21-day average at 586 should be next support, with pivotal chart-changing support at 580.
Resistance is seen at 600-603, then at 607-611, extending to around 615.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) was off a bit this past week, as prices were churning around and a minor top formed on an hourly chart basis. INDU is within a hair's breath of falling further under its well-defined up trendline; INDU closed below this trendline on Friday. The Average looks like it may have reached a temporary top in the 12800 area. It could reach 13000 resistance still on this leg up, but I see more potential for bearish influences in the near-term than bullish ones. 13000-13200 could be seen on a next rally.
We've had a pretty good run here and as with the S&P and the Composite, INDU is quite overbought on a 2-week basis, but isn't quite so extreme yet on a 2-month basis; e.g., the 8-week RSI (not shown here) closed the week at 63.9 and the 75 t0 80 zone is where the Dow tends to get EXTREMELY overbought. A minor pullback ahead would help 'throw off' the overbought extreme of the daily chart and possible set up a next rally that tests resistance at 1300 or a bit higher, such as around 13200.
Seasonally the first quarter tends to see strong gains.
This isn't to say that corrections won't happen along the way. A strong Dow bellwether stock is General Electric (GE) and GE is stalled in the low-$19 area; as it trends sideways, its Relative Strength Index has been declining for two weeks, setting up a bearish price/RSI divergence.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart remains bullish as the Index tacked on a further gain this past week although that gain was less than an index point. As with the S&P indices and the Dow, the hourly chart (not shown) suggests a possible minor Head and Shoulder's Top formation, suggesting a retracement, probably minor, possibly a little deeper such as back to the 2700 area.
COMP has kept chugging higher for weeks. A correction is overdue but tops are tricky to time as far as when/where to exit calls, buy puts for a counter-trend downswing, etc. As can be seen from the last significant top in late-October, there was a dip, prices came quickly part way back, then a significant second down leg got underway but the best gains came on the last portion of that down leg. Patience is needed if shorting after a strong uptrend as the market looks like it's never coming down.
The index could advance to initial projected resistance at 2850, or to even more pivotal resistance around 2900. Hard to say, but with key technical support easier to figure at COMP's up trendline, currently intersecting at 2750; further support is seen at 2700, extending to 2685. Major support begins in the low 2600 area.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index continued to tack on gains this past week but has also traced out a minor Head and Shoulder's Top pattern on its hourly chart as with the other major indexes. If there's going to be a dip, I'd expect it sooner rather than later but any correction may get postponed a few more days.
It's quite hard to predict when 'overbought' stocks or indexes will start falling as funds and investors keep buying dips; rarely does anyone finish buying in just a quick spree. Buy some, buy some more on a strong rise and so on. Selling is more of an unload it all quickly, especially in panic selling situations.
NDX has achieved new multiyear highs; the index hasn't been at current levels since late-February 2001. Whew! I was still in my 105th floor office in the North Tower of the World Trade Center, toiling away at Cantor Fitzgerald.
I've highlighted near resistance at 2465, then at 2500. 2500 is at the top end of an uptrend channel that isn't highlighted on this chart but can be imagined as an exact parallel line to the up trendline that touches at least 3 highs.
Support is noted at the current intersection of the steep up trendline, at 2430. Next support comes in around 2380, which also corresponds to the current 21-day moving average.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
I wrote last week that if I wanted to test the short side of the market, I'd short the Nasdaq 100 tracking stock on an (QQQ)'unleveraged' basis; i.e., a short position in the stock, no put plays, etc and not on margin. The stock has tacked on another .7 in the past week. I'd exit any short positions at 61.6
Those holding calls, long the stock, etc., no one can say this run is over until something gives, such as a trendline. Support implied by the Q's up trendline, is currently at 59.3, with next lower support looking like 58.4 currently.
I've noted overhead resistance at 60.4, which is in an area where the rally couldn't get further sustained traction. Next resistance is the recent intraday high at 60.8, then up in the 62 area.
I don't typically display the Relative Strength Index or RSI on the QQQ chart but of course readings will be nearly to completely identical to the 'overbought' 13-day RSI. So, the NDX tracking stock is at an overbought extreme like the underlying NDX and its RSI hasn't been this high, this extreme, since early last year after an even more prolonged rally. So, of course, markets get 'overbought' and then overbought some MORE at times.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has been maintaining a bullish pattern of higher highs and higher reaction lows within a bullishly steep uptrend price channel. RUT hasn't traced out the near-term bearish Head & Shoulder's top pattern seen in the hourly charts of the major indexes. This is not to say that RUT won't follow the Nasdaq lower if a correction gets underway in earnest; so far however, no signs of a top.
The Index has traced out a very steep up trendline, which isn't usually sustainable beyond 4-6 weeks typically. Trendline support is noted at 780, with next lower support looking like 767. A close below 760 suggests RUT could see the low 740 area again.
Near resistance is at 800, which I've long thought would be a major target and potential major resistance. Stay tuned on that outcome! Next resistance is suggested at 815, extending to the 820 area.
RUT has hit an overbought extreme in terms of the daily charts and the market may only be a bearish news story away from a correction. At the risk of saying so once again, I'd consider exiting with call profits and unwinding other bullish plays.
Risk to reward on new bullish strategies is not great given the heightened risk of a correction. Still, it's a pretty bullish chart pattern as far as price action since the lows of mid-December. RUT is another of the indexes (such as the DJIA) that has had a terrific 'santa claus', post-santa claus, rally.
GOOD TRADING SUCCESS!