MAILBAG QUESTION:

"you said the weekend that the there's a bullish outlook but I dont see that with the tech stocks flopping and the small cap stocks getting hit. what do see here exactly?"

MY RESPONSE:

Rotational type corrections have occurred in recent weeks as high flying Tech stocks have come down to more realistic levels and other more mainstream sectors have trended more sideways. Sideways trends (rectangle patterns) within major uptrends are assumed to be bullish consolidations. While I could wait and comment about this in my weekend Index Wrap, there are some underlying 'technical' principles here that lend themselves to delving into tendencies of Market behavior in this (Trader's Corner) forum.

I tend to get into bullish plays when stocks correct back to prior support and get to more 'reasonable' price levels. The majority of investors get bullish when stocks are soaring. Bad idea if you want to be an options trader. When uptrends are going gangbusters, that's when options premiums inflate and that's not when I want to be buying calls. As I am primarily a market 'timer' that's the way I find I can profit the most. Buy low, sell high! Sounds dumb and way too simple, but I want to buy when others don't. I want to exit or sell when traders are throwing money at stocks.

I headlined my most recent Index Wrap "outlook bullish", not buy everything willy nilly. No, the S&P and Dow were in what I take to be bullish rectangle patterns. I want in that situation to position myself, on dips, in bullish strategies. More on this and chart examples shortly.

In the big cap Nasdaq 100 (NDX), I also want to position myself bullishly but on good-sized dips only and ESPECIALLY as the index 'builds' a bottom and/or re-tests prior lows.

There's a lot of perhaps useless worry over the Russell 2000 (RUT) 'leading' the overall Market lower. RUT and Nas 100 will tend to keep a LID on bullish upside breakouts in the S&P 500 (SPX), 100 (OEX) and Dow 30 (INDU) but when RUT and NDX finally get done with there bigger corrections, the lid comes off in SPX, OEX and INDU. And, NDX especially then could be bought cheap and RUT could be left alone. Better to play Nasdaq for the upside then the little guys in the Russell. I try to NOT let the more thinly traded RUT influence my overall Market decisions.

This is why I talk about a ROTATIONAL type correction where different sectors are doing different things. And why I love the stock market as there are so many different ways to play it. And options allow many MORE different and creative strategies. And different temperaments can find their own way to play, from more conservative to greater risk-taking.

When the Nasdaq stocks took off and soared to bubble-like multiples in some cases, this also led the S&P and Dow 'mainstream' (economic) stocks higher but they didn't soar. Now the Nasdaq has corrected considerably, as witnessed in the Nasdaq 100 (NDX) making a complete 'round-turn' correction all the way back to its prior downswing low. Bearishness then abounds. Hey, I'd MUCH rather play counter to bearish sentiment WITHIN a primary bull market, then be on bullish when everyone and there brother and sister are chatting about how exciting stocks are over cocktails.

RECTANGLE PATTERNS:

You may remember this chart of the weekly Dow 30 (INDU) that I used some time ago. The broad INDU sideways trading range seen in my first chart, is taken in technical analysis generally as bullish WHEN there is a decisive upside penetration of the upper end of the highlighted (in yellow) price range.

Now the assumption was that the sideways trading range (in yellow) was a bullish consolidation after the prior strong advance; i.e., prices were 'consolidating' prior gains. However, the confirming 'signal' of a NEW up leg that at a 'minimum' would carry INDU as far above the prior line of highs as was equal to the prior price range (difference between 14750 on the downside and 15660 on the upside) or to at least 16610; 'X' marks the spot. That objective was reached.

Now the Dow has been in a NEW trading range but INDU keeps coming back to that prior 16600 'line' of resistance and I assume the Dow is AGAIN going to break out to the upside in a new up leg. The 'signal' for his hasn't occurred but I anticipate a bullish outlook for a substantial further advance.

By the way, it was important that the Dow tested, then rebounded from, what had been prior resistance; note the weekly Close back above the 'rectangle' pattern after sell stops had been 'run' and after the electronic trading models sold into the panic decline that week. Resistance once penetrated, tends to 'become' subsequent support.

SPX's current sideways price range and possible bullish rectangle is seen next. I am making an assumption that there WILL BE an upside breakout in the S&P 500. I'm making what is a reasonable, but yet not 'proven' assumption of that based on the SPX chart, NOT on what RUT, or NDX, is doing. Judge each sector and each major index somewhat on its own!



NASDAQ: WHERE TO?

The big cap Nasdaq 100 (NDX) is the most 'problematic' of the major indexes to get a bullish chart interpretation for the overall market. I lean bullish on the prospect that the Index WILL break out above overhead resistance, while admitting certainly that another down leg could develop. What's to like in the chart that says otherwise is the pattern of higher stair-step lows up from the second low that forms the potential NDX double bottom. We have to stay tuned on this one!

If I were buy NDX calls and this thing goes sideways to lower for an extended period, that's of course going to work against a too-early bullish strategy. I have a longer-range bullish outlook for a recovery move and for that case I need go next to NDX's weekly chart.

The weekly NDX chart is bullish in that the Index has held its current longer range up trendline AND got oversold on an 8-week/2-month basis in terms of the Relative Strength Index or RSI.

An astute reader of charts would notice the possible Head & Shoulder's Top pattern with the middle cluster of highs being the 'Head' just over 3700, sandwiched on either side (Left and Right 'Shoulders') by two clusters of highs in the 3600 area. Time will tell, but it's relatively rare for a significant top to build when a stock or index is 'oversold' on a longer range basis.

I remain mildly, not wildly, bullish on the prospects for the Nasdaq 100 to have some further recovery by moving above pivotal resistance in the 3600 area. NDX wouldn't have to go up a lot to help the S&P and Dow to gain further traction on the upside. I don't judge the major indexes strictly in isolation but stop short of being overly bearish just based on the smaller cap universe represented by the Russell indices getting abandoned by the bulls. However, I may as well close with a RUT chart and put my two cents in on its chart pattern.

RUSSELL: the Big Bad Bearish Wolf?

I'm not especially concerned about the Russell 2000 (RUT) pulling down the overall Market in a major way. It's relatively thinly traded and the computer driven algorithms keep selling but when RUT gets to a 'value' level, this should pull in value buyers.

RUT could of course wind up the week below 1100 support but I don't believe that is a 'signal' that the Russell Index then will start to fall back to the low-1000 area which could bring in related Nasdaq selling, which could then impact an S&P and Dow upside move.

It would get my attention if RUT ends up below 1080 for longer than 1-2 days in terms of price considerations. Except for the strong prolonged 2013 advance, the Russell stocks tend to have a seasonal tendency to get bid up in Jan-April and then sell down after that, such as into June or sometimes into a fall low. Stay tuned on whether the tail will wag the dog! I tend to doubt it but RUT is an index that the computer algos can take down easier than the big volume Nasdaq and S&P indices.


GOOD TRADING SUCCESS!