THE BOTTOM LINE:
The pullback that was hinted at prior to this past week deepened in the week just ended. The risk in an overbought Market is that eventually the bears will get their turn to whack it down. The 'problem' in this market for the bulls is seen in the very long-term monthly chart shown for the S&P 500 (SPX).
There was a major prior double top in SPX that has morphed into a possible major 'triple top'. I don't envision the S&P topping out yet, but getting through the 1570-1600 area may be tough for a while. Moreover, the reality of a possible triple top also can't be dismissed as SPX got quite 'whippy' once the Index rallied back into its 1535-1570 long-term resistance zone.
The other factor in corrections, once we know for certain that we're in a major correction (within an overall bull market), the first decline is rarely the longest. A rally may be followed by a decline that exceeds the first sell off; e.g., the first decline was 50 S&P points, the subsequent rebound was 20-30, but the decline was 75 S&P points peak to trough, before a compelling buying opportunity set up by trading WITH the major trend.
Technically, recent highs were in a high-risk zone for the bulls as resistance implied by the prior monthly highs was accompanied by a longer-term overbought reading as suggested (see chart above) by the 8-month Relative Strength Index (RSI). I think prices can back and fill for awhile but that SPX will over time break out above prior highs.
The foregoing doesn't mean I favor bullish strategies here as in buying index calls. It's generally poor trading strategy to buy index calls with a current risk to reward equation that suggests upside potential is about equal to further downside risk. Upside might eventually be to 1900, with risk for a correction back to the 1300 area in SPX.
If SPX rallies from current levels and doesn't break under 1540, the index will have 'held' the low end of its broad uptrend price channel and could then begin to work sideways to higher. If 1540 is bested, 1500 support could be tested. A repeated daily Close below 1487 would turn the intermediate trend lower.
The Dow 30 (INDU) continues to have the best relative strength as the INDU pullback has to date has held above prior technical/chart support in the 14400 area. In the Dow it would take a repeated daily Close below 13900 to turn INDU's intermediate trend lower.
The Russell 2000 (RUT) continues to be the 'canary in the coal mine' as RUT first saw repeated highs form in the same area as the Index traced out a well-defined line of resistance and a possible top.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is short-term bullish and with a still-bullish pattern intermediate-term if 1540 holds up as support. If instead SPX falls below its up trendline, next key support begins in the 1500 area, extending to the prior Closing low at 1487.
I've highlighted chart support at 1540, down from 1570 last week with next technical support at 1500. Near resistance is seen at 1570, then in the 1595-1608 area.
The 13-day Relative Strength Index (RSI) and my CPRATIO bullish-bearish sentiment indicator are both coming down toward an initial 'oversold' reading. With these lower readings I rate the chart as less likely to see a further substantial down leg develop.
S&P 100 (OEX) INDEX; DAILY CHART
I wrote last week that "A big difference between the bullish S&P 100 (OEX) Index chart and big brother SPX is that OEX hasn't yet cleared prior all-time highs ...". OEX was only getting close to challenging its 2007 high weekly close, unlike SPX which cleared its prior (2007) top. This divergence did supply some warning that the big-cap S&P 100 index might NOT 'confirm' the new high in the S&P 500 and warn of a pullback. I thought OEX would confirm a similar move to new highs sooner rather than later. Buzzer goes off: WRONG!
Near resistance is seen in the 710 area, with 725-727 as pivotal next resistance. Near support is highlighted at 695, with next key support in the 680 area, extending to 672-670.
There's potential for a rebound from recent lows if OEX's up trendline holds up as support. Upside potential is probably 20 points before more backing and filling, with downside risk of a correction also 20 points. Not something to go into with new bullish positions as the assessed risk to reward ratio potential is well under the favorable 1:3 (or more) risk to reward ratio.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
Last week I rated the individual Dow 30 (INDU) charts as quite bullish with 20 of the 30 Dow stocks rated as having "bullish to very bullish uptrend patterns."
This week I'd add AXP to the bullish list but take off GE and IBM which looked to have started corrections. MCD and T look questionable given the potential for double tops. Still and all not a MAJOR change in my bullish outlook for INDU.
I wrote last week: "Short-term trading wise a break of 14700-14680 is bearish; then look to the trendline for next support."
Key near INDU support is now highlighted at INDU's up trendline intersecting at 14470, with support extending to 14400 and the important 50-day moving average. Major support is at 13800.
Near resistance looks like 14750, extending to 14870.
A longer-term target for the Dow remains 15000, with further upside potential to perhaps 16000. Near-term is the question for us shorter-term trader types. I'm watching for whether INDU can move back above its 21-day moving average (potentially bullish) or will deflect from this key average as resistance.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart which had an initial bullish
Breakout move in the week coming into the one just ended, saw instead a subsequent sharp sell off that negated the earlier bullish expectation.
I've redrawn the COMP's up trendline and this lower slope, suggesting a lower rate-of-change is starting to make more 'sense' as a steeper rate of upside change that's slowed to a more moderate pace. This, still within a strong long-term bull move. [For more on a Nasdaq longer-term chart, look further on for my Nas 100 (NDX) Weekly chart.]
The short-term trend in COMP turned lower in the week just ended. The intermediate trend as I define it turns lower with multiple closes below 3170-3150. Near support is highlighted at 3170, with next support at 3100.
Near resistance is 3250-3260, with more significant chart resistance coming around 3300.
Last week I saw COMP headed to the TOP end of its uptrend channel. COMP instead ended the week at the LOW end of that channel! Is this a bullish opportunity? It looks like a short-term rally is underway or near but this in turn may be followed by a second down leg that carries farther than the first decline. At or near a bottom of a subsequent second decline can offer the best bullish trade opportunity.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart turned short-term bearish with the decline of this past week. The more sluggish daily chart picture is not seen so much on the weekly chart so I include this chart this week. The intermediate trend is up as long as the prior lows in the 2700 area are not exceeded.
Near resistance is highlighted in the 2800 area, with next and very pivotal resistance around 2865, the line of prior highs in that area.
Near support is down 50 points to 2750 (from 2800 last week); next and more pivotal support comes in at 2700. Multiple closes ahead below 2700 turns the intermediate chart picture bearish. As to the still-strong bullish long-term trend, the weekly NDX chart follows the daily chart here.
I thought NDX was going to exceed its prior highs but the reaction from that area, once NDX didn't pierce that level, was sharp and quick. It appears that a short-term rebound may be underway or near. If so, a second decline from there has to watched for its bearish potential.
NDX WEEKLY CHART:
Its quite clear from the Weekly close-only line chart seen below that the recent weekly Close reversed in the same area as in September.
What is even more clear or noticeable on this longer-term chart is the strong multiyear uptrend in the big cap tech stocks as represented by the Nasdaq 100 (NDX) Index.
It's hard to know on this chart where the support trendline intersects but it's in the low-2700 area. Not surprisingly of course where we see key support on the daily chart above.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) tracking stock was bullish in its pattern, one that then turned short-term bearish this past week. Assuming my redrawn up trendline is accurate, for now at least, support should be found in the 67.2 area. We're due for a rebound of some degree.
Near QQQ support is now well below last week's (69), at 67.2. Next lower support is in the 66.3 area. Resistance comes in at 69 (sorry, not noted on the chart I see), then with quite pivotal resistance at 70.
Last week I was projecting "another move higher, with a target to 71.5-72 at some point." A LITTLE off on my timing of when we get to 71 or above, even above 70 at this point. We could also go into a 66-70 trading range. Something more to think about but in either case a short-term rebound is due/overdue.
Daily trading volume shot up as QQQ fell through 69 support and dropped in a 3-day decline to touch 67. Volume pattern here suggests potential for at least a temporary rebound as panic selling may have dried up for now at least.
RUSSELL 2000 (RUT); DAILY CHART:
The short-term trend is bearish and the intermediate trend remains bullish only if RUT holds above 900. By redrawing the up trendline in the Russell 2000 (RUT) Index as intersecting in the area of longer-term support in the 900 area, RUT remains within its broad uptrend channel. A bearish chart picture develops if RUT starts trading below 900. I wrote last week that "...if 900 is pierced, RUT's intermediate trend turns lower."
There is also a fundamental reality that over the last three years that sales at companies with revenue of more than $50 million have grown by an average of 15.3 percent annually, compared with 8.5 percent annual growth at businesses with less than $50 million in revenue. There is a trend at work currently that doesn't favor the small to mid-cap stocks that make up the Russell 2000 relative to the S&P and big-cap tech stocks.
RUT technical support as already noted is seen in the 900 area, then at 880. Two consecutive Closes in the Russell below 900 turns the intermediate-term trend down. Resistance is seen at 940, extending to the 953 area.
GOOD TRADING SUCCESS!