THE BOTTOM LINE:
The market is getting quite overbought in conventional terms and bullish sentiment has finally caught up to that fact that we're in a major bull move. A correction can come any time but I don't anticipate a steep reversal.
I noted that the market is overbought and I should clarify that bull markets almost ALWAYS get overbought in technical terms but this situation tends to continue in this pattern for prolonged periods. Moreover, it depends on what time frame is being examined. On a daily chart basis, the 13-day Relative Strength Indicator (RSI) is about as high as it ever gets without at least a pause or minor correction.
A pause or even a minor correction will moderate or 'throw off' an overbought condition. Another rally ensues and then the indicator rises to an overbought 'extreme' again. It's common in a major bull move for a number of overbought extremes to be reached before the market comes down in a significant way. On a weekly chart basis, again using 13 as the 'length' input (1/4 of a year), the S&P and Dow are also seeing the high readings of overbought extremes; not quite so much yet with the Nasdaq, but they're getting there also.
Now the next question is can you 'time' a top based on the major indexes being at overbought extremes. Not really. It is more of a danger of a bearish shakeout when bullish 'sentiment' also gets very high. And we're getting there according to my 'CPRATIO' sentiment indicator displayed with the S&P 500 (SPX) chart and the Nasdaq Composite (COMP) daily charts.
There is the factor of chart resistance as even more telling on a chart/technical basis, assuming you can FIND either a prior high that might mean at least an interim top OR, in this market, resistance implied by the top end of broad WEEKLY uptrend price channels that I highlighted last week (5/11/13), as seen on this LINK. This week, I will show these broader price channels on my daily charts. The upper channel lines suggest the major market indexes might hit significant technical resistances or objectives around:
1750 in SPX; in the 775 area in the S&P 100 (OEX)
At 16100-16200 in the Dow
3800 in the Nasdaq Composite (COMP) and 3300 in the Nas 100.
With the NDX tracking stock QQQ, 80 could be a major objective
1100 is a possible longer range target in the Russell 2000 (RUT}.
I have no advice to exit bullish strategies taken on from significantly lower levels. I have no advice to step IN and would resist taking on bullish positions after such lofty gains.
Conversely, I don't want to take on bearish positions unless there is a clear cut price reversal, NOT just based on the fact that this market is quite overbought on both a price and 'sentiment' basis.
It is interesting and oh-so common from past market cycles that traders finally got super-bullish after the S&P rallied 250 points or 18% since the beginning of the year. It never fails. Try as hard as we can to teach getting in on trends EARLY and when the market is 'oversold' for example, human nature is always to get drawn into the market after prolonged gains. It's a well-known psychological phenomena that I suggest you NOT be part of!
The strongest SPX sector gains were seen in the 7 (of 9) S&P 500 sectors represented by the Exchange Traded Fund (ETF) stocks of XLV, 'consumer services'; XLF, 'financials'; XLK, select 'technology' stocks; XLB, 'basic industries'; XLI, select 'industrials'; XLP, 'consumer staples'; XLE or the SPDR for the S&P 'energy' sector did finally achieve a new closing weekly high relative to its 2011 peak.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) continues in an accelerating bullish trend and SPX achieved a bullish upside penetration above the top end of the daily chart uptrend channel the Index had been for many months.
Evaluating the broadest uptrend channel for SPX as calculated based on the weekly chart (not shown), the upper resistance end of SPX uptrend channel intersects up in the 1750 area currently, which becomes both a potential upside objective AND a potential resistance. 1700 could offer some near resistance.
Near support is at the prior resistance trendline (resistance, once penetrated, 'becoming' support) at 1650. Technical support then extends to the 1600 area.
As noted in my initial 'bottom line' comments, all the indices are at overbought extremes on a daily chart basis as seen with the RSI indicator above; a bit less so on a longer term chart basis. Such readings suggest potential for volatility once some bearish news comes in and traders start taking profits in mass.
A more defining kind of 'overbought' extreme is suggested by the high level of bullish sentiment in my CPRATIO indicator seen just under the SPX Relative Strength Index above. Such bullish 'sentiment' extremes are typically a more worrisome thing for the bulls, as most tops of any significance occur after traders push the call to put ratios to high extremes. Stay tuned!
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) is in the same very strong bullish pattern as the broader 500 Index. OEX also broke out above minor resistance implied by the top end of the daily chart uptrend price channel; I've now pegged immediate support at the 740 'breakout' point.
The broader uptrend channel, as suggested by long-term charts (weekly chart not shown) intersects currently up in the 773 area. This is now the only potential 'resistance' I can point to on a chart/technical basis.
Support below 740, is highlighted at 720, then around 710 at the current intersection of the uptrend channel.
As with SPX, the S&P 100, OEX, is at an overbought extreme according to the RSI indicator and suggests higher risk of a pullback and volatility upon bearish news.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) continues in a strong bullish trend. INDU is approaching potential resistance in the 15500 area. I currently estimate major resistance above 16000.
16050 is the current intersection and potential resistance, implied by the upper end of INDU broadest projected uptrend channel, as calculated from longer-term charts; not shown here, although the relevant upper channel line IS.
Near support is highlighted at 15050, with support then extending to 14870.
I suggest being alert to a downside correction if the Dow reaches the 15500 area. If INDU sails through this area, on a chart basis, I couldn't on a technical basis forecast potential 'resistance' coming in before the Dow went up another 500/500+ points.
Of course a correction can come now, in the 15500 area or at any point ahead implied by overbought extremes seen in the RSI momentum indicator and based on climbing bullish sentiment. This, as traders have finally become 'believers' in the bull market it seems just 2,300 points higher from the lows of late-December!
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) is in a strong bullish uptrend that has accelerated since COMP broke out above 3400 resistance implied by the high end of its uptrend channel marking the back and forth price swings of the more gradual uptrend dating from late last year into early-May.
I've projected next resistance as possible in the 3600 area, then more major resistance up at 3750, which is the broadest projected uptrend price channel as derived from longer-term weekly charts (not shown).
A downside correction can come at any time based on the overbought extreme suggested by the Relative Strength Index AND by the overbought extreme in bullish sentiment as reflected in my CPRATIO (CBOE equities daily call to put volume ratio) indicator.
Near support, 3400, extending to 3350; major support suggested by COMP up trendline is at 3230 currently.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart shows the same accelerating uptrend as the broader Composite. NDX also saw a bullish penetration of what had looked like what might be strong resistance around 3000. So far so good for the bulls! Next resistance is projected for the 3085-3100 area. Major resistance, at the upper end of NDX's broadest uptrend price channel, comes in around 3300.
Near support is likely on a pullback to what was resistance at 3000, but key support so to speak is in the low-2900 area, extending to NDX's up trendline intersecting around 2825 currently.
The tech-heavy Nasdaq is not leading this Market of course. I tend to follow Apple Computer (AAPL) as a possible Nasdaq bellwether and it had a big of a set back after hitting technical resistance in the $450 area; AAPL closed the week at $433.
NDX is at the same overbought RSI extreme as the other major indices and which suggests caution in taking on more risk in bullish strategies a this juncture. Eventually, if this bull market rolls on into the summer, we could see 3300 eventually but a big further up leg would be surprising without a correction, even if more a sideways type move, coming first.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) tracking stock is moving higher with NDX opf course and broke out above 73 resistance this past week and got to 74.3 at the Close. Possible next resistance in QQQ comes in around 76. Major resistance is seen in the 80 area.
A move to as high at 80 would be some move, if seen from a low Close of 62 in mid-November to 80; even to 74.3 on Friday is one heck of a move of nearly 20% in around 6 months.
Near support, 73 even but more pivotal chart support is 71.5, extending to lower trendline support seen in my close-only (line) daily chart.
Daily trading volume hasn't been stellar, which is often the case as more volume tends to come out on the stock retreating. The more key volume ancillary indicator with this ETF stock is the On Balance Indicator (OBV) which is trending strongly higher.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) Index is rapidly approaching key resistance at the 1000 mark. I've pegged potential near resistance at 1011, at the upper end of the bullish uptrend channel that RUT has been in for a few months; and, which RUT might break out above as has occurred with Nasdaq and the S&P. On the other hand, 1000-1015 could see selling coming in and an interim top. Just saying!
Major resistance implied by the upper 'resistance' end of RUT's broadest uptrend channel, transposed or calculated based on its weekly chart (not shown), extends much higher, to the 1100 area currently.
Near support is seen back at prior resistance in the 950-953 area, with trendline support at 923 currently.
Because of the way that RUT zigged and zagged higher from it last low, the Russell 2000 is not showing the same overbought extreme as Nasdaq. Still if the Market corrects, RUT will fall back with it.
GOOD TRADING SUCCESS!