THE BOTTOM LINE:
July was a powerful month, not quite as much as April when the Nasdaq Composite was up 12% versus an 8% gain for July; the S&P 500 (SPX) was up 9% in April, versus 7% in the month just ended.
If the indices start trending sideways or only slightly lower ahead, as is suggested by the high/overbought readings in the RSI and on my sentiment indicator, call premiums are going to cave also. If you're short calls, a sideways to lower move will of course be in your favor.
The 'perfect' conditions for a continued bull run that I talked about last week, whereby prices were going up and bullish sentiment was moderating or declining, changed this past week. Given that many if not most options traders are TREND FOLLOWERS, it takes a continued price move to get them on board with the dominant trend as far as call or put activity.
I could advise ANTICIPATING the next trend or move, especially crucial when trading index options, forever and a day and this psychological aspect will ALWAYS be the same. This is a good thing, as it can lead you to profitable trading opportunities, especially as long as you trader very selectively!
If you are in any index puts, there is still a risk of a run to new highs, such as to the 1010-1020 area in the S&P 500 (SPX) or to the 1650-1660 area in the Nasdaq 100 (NDX). However, the risk of a correction ahead or after a next upswing, has grown.
Prices may drop enough, even in the summer doldrums ahead, so as to make puts, especially taken out around recent highs, reasonably profitable. The second alternative to very much of pullback is that that of more of a 'time correction' or a mostly sideways drift. Time going sideways will moderate an overheated market also.
Usually there's enough of a correction from the aforementioned overbought extremes to make a profit on the short side; e.g., by purchase or owning the August SPX 880 or 885 puts. Certainly, protect profits garnered on this run up by unwinding some or most of such profitable option positions.
Beside the overbought condition there is slowing upside momentum. When you see this in the leading sectors or the leading market (i.e., the Nasdaq currently), this is a warning.
Fundamentally, the lack of signs of a consumer spending rebound is an economic worry. Not that I 'worry' about this too much as the market anticipates a few months ahead. But, in every 'overbought' situation there is a point where bullish traders, even investor types, REACT to bearish news rather than slough it off, mainly due to their wish to protect unrealized profits.
CHART OF THE WEEK:
You can see in the weekly SPX chart the bullish and not so bullish aspects here. Bullish, as SPX stays above the prior breakout point (at 944), but in the third week of a rally phase, prices are not making the same headway which is suggesting slowing (upside) momentum.
The other thing to note is that, on a longer-term weekly chart basis, SPX and the other indices are now ALSO into overbought territory. You can see per past behavior on the chart below that after overbought 8-week RSI extremes, prices went sideways for a few weeks in one instance and fell 87 points over 4 weeks (from peak to trough) in the last prior instance.
There's the well known saying about past performance being no guarantee of a similar future occurrence, but the aforementioned pattern is fairly consistent as you can see for yourself.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P remains bullish in its pattern and is rising along an extension of its previously 'broken' up trendline which suggests an area of some overhead 'resistance'. While this chart pattern, PLUS the overbought extreme seen on the RSI indicator AND in bullish sentiment, suggests that it's unlikely that there will be a dramatic further rise, it doesn't mean that prices won't continue in the present modestly rising trend.
What we can predict is there is an increasing likelihood of a pullback correction.
The 'minimum' upside objective to the 1020 area I suggested as based on the upside breakout of the 'rectangle' formation should be tempered with the fact that there is a significant hurtle, or significant resistance, in the 1000 area in SPX.
I've pegged near support at 950, with fairly major support down in the 910 area, which extends to 900.
Near resistance is at 1000, extending up to around 1020 in my estimation.
As discussed in my initial 'bottom line' comments, there was a spike up to the 'overbought-extreme bullishness' area on my equities Call to Put ratio (CPRATIO) which I keep such (dividing total daily equities call volume BY total daily equities put volume) that a HIGH reading is 'overbought' just like the RSI or other type PRICE oscillators.
I have found over many years that a SINGLE day reading, or a cluster of such single day readings, most often precedes a trading correction. On the upside, such (overbought) readings can go on for some time however. A 5-day moving average that registers a similar high extreme, as seen on the Nas Composite CPRATIO graph further along, correlates even more to substantial risk of a correction within 1 to 5 trading days.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index chart is bullish and is also of course in new up leg in the big cap S&P group. I've noted next 'resistance' (in quotes)at 470. Resistance suggested by the rising trendline seen on my OEX daily chart, is not on a equal footing with a prior high that I could point to.
Moreover, prices can just keep rising along but under the line of (trendline) resistance. The trendline VISUAL does point out that prices are no longer in the same upward trajectory as before. They slipped to a lower rate of upside price change or upside momentum. This suggests somewhat greater potential for a pullback or decline.
Support points or area are at 450, then around 440 and the last of what I've noted with green up arrows is at 425. The prior double bottom low in the 412 area is likely major support and this extends to 400.
As with all the other indexes, OEX is at an overbought extreme in terms of the 13-day RSI.
DOW 30 (INDU) AVERAGE; DAILY CHART:
I won't keep repeating all details of the chart pattern; it is as noted above with the S&P indexes as far offering a still bullish chart. However, it appears to me that the Dow 30 (INDU) is going to run into increasing selling pressure ahead.
INDU found some resistance around 9100, but could reach 9300 before this current move is through. I'm not betting on another substantial upside spurt, unlike what was to be expected when the Average pierced its prior cluster of highs in the 8850 area.
I've calculated near resistance next at 9300; above this is pretty much the type of guesswork I won't take on. The 9650-9750 to 10000 area looks like the major resistance zone ahead based on a study of long-term charts. I'd rate it highly unlikely that there's a sizable new upside acceleration that is going to take the Dow back to those heights anytime soon or least until after a pullback first.
Near support is at 8990-9000, then down in the 8850-8900 area, plus I assume support in the area of the 21-day moving average at 8688 currently.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP), while bullish in its pattern has substantial resistance around 2000. COMP was slipping from these heights by the end of this past week. The index might manage another run up toward 2050, but I'd rate the odds better that we'll see 1950 first. There's technical support at the 1880 'breakout' point. Fairly major support begins in the 1800 area.
Bullish sentiment and the RSI got to overbought highs in this past week. As soon as that Thursday reading occurred, sure enough the next day saw a bout of profit taking selling. Is this the start of something more substantial than a pause before another move higher?
Projecting future price swings is no exact science needless to say but rather a projection of the probabilities (based on historical cyclical tendencies) or likelihood of a continuation of the present trend versus time for a pause in that trend. I'm looking for a pause and correction ahead but won't be shocked, I say shocked, at the market taking the more unlikely course. Flip a coin long enough and you'll get a big run of heads; or tails.
I noted earlier the bearish rise in my CPRATIO line which is now also seen on a 5-day moving average basis. This suggests greater potential for a correction than we've seen since just prior the May price dip.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bullish but I'd also note that NDX has reached my 1600 upside objective. The index could retest its high to date and extend gains to 1650-1660, but NDX is also starting to see an initial 'failure' of relative strength as the 13-day RSI is not 'confirming' recent new highs.
Near support now is at 1580, then in the 1515-1500 area, with fairly major support back down in the 1450 area, extending to 1400.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) hit my long-standing major objective of 40. As I noted last time, "I'd be surprised to see the stock moving much higher than that without a pause or pullback first". My point of view is unchanged.
Moreover, recent volume trends are not 'confirming' the recent continued move higher as noted on the chart below with the On Balance Volume (OBV) indicator and the most recent trend in terms of the daily volume trend per the daily volume bars.
Near QQQQ resistance: 40.0
Next overhead resistance: 40.5
Near QQQQ support: 38.75
Next support: 37.2
First area of major support: 36.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart has had a pretty good run and was showing decent buying the stocks even at the end of the week. Near resistance is in the 550-560 area, then at 580, extending to 600. If the Nasdaq continues to falter, RUT is not going to go it alone on a further bull move.
Near RUT support is at 540, then at prior highs around 530-532 and next in the area of the moving average currently intersecting at 511 as noted on the chart.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.