"I own some calls in the s&p and russell which have come up nicely since I got in but I wonder how much more upside before selling kicks in again. you say to watch when the herd gets very bullish. what ar your thoughts here?
In the Indexes, even at new highs such as seen in the S&P 500 (SPX) and the Russell 2000 (RUT), there are nevertheless areas in an advancing trend to look for a pause or pullback suggested by key upper moving average envelope lines, 'overbought' RSI readings and peak levels of bullish sentiment. I assume you are talking about SPX, not the S&P 100, but I'll look at OEX too.
At new highs I pay attention as to when the S&P (or Dow) reach levels that put these indices at 3 percent or a bit higher above their 21-day moving averages; i.e., at 3 to 3.5% above the 21-day average in the S&P 500, 100 and Dow 30. In this zone there's a higher risk for a pause or pullback. PRICE considerations, as always, are therefore a number 1 focus.
In the Nasdaq, I consider an upper moving average envelope at 4 percent over its 21-day average to more plausibly suggest that the Index might have hit a peak, at least temporarily.
Secondly, (a #2 consideration) in looking for a possible slowing or pause in the trend, or a dip, is when the 13-day Relative Strength Index (RSI) reaches a 'typical' overbought zone.
Thirdly, (a #3 consideration) for at least an interim top comes in when my bullish sentiment indicator (CPRATIO) hits a level suggesting extreme bullishness, even for a day. I highlight an area(s) I consider 'extreme' on the charts that I'll look at.
Do even a cluster of ALL the above influences suggest a definitive top? No, only that the probability of a corrective pause or pullback is greater than at prior points in an advance.
THE S&P 500 (SPX) DAILY CHART:
1.) In terms of the considerations of PRICE and how far 'extended' an Index is in terms of its 'centered' 21-day moving average, SPX wouldn't reach such an extreme (at 3% above the 21-day) until the 2136-2140 area.
The steep slope of a current up trendline was breached today, suggesting possible slowing upside momentum. However, it's also common for pullbacks that 'test' support at what had been prior resistance; e.g., in the SPX 2090 area. We might see SPX pull back only to this area then rebound, resuming its rise. But, in terms of a pullback, there could be at least a minor one ahead.
2.) In terms of an overbought 13-day RSI reading, SPX got close but didn't 'fully' reach such an extreme yet.
3.) Looking at bullish SENTIMENT, we have seen a recent CPRATIO 1-day extreme that reached what I consider to be a type of 'overbought' situation in terms of extreme bullishness.
THE S&P 100 (OEX) DAILY CHART:
1.) OEX also is slipping a bit below it prior rate of upside PRICE gain and may easily test 924 support only a point below today's low. Next support is at 920-916. Support, from a trading perspective is always next assumed at the 21-day moving average.
Near-term overhead resistance is just overhead in the 931-932 area, then at 940 to 943 and the upper moving average envelope extreme.
2.) With OEX, an overbought reading in the Relative Strength Index (RSI) was reached at the most recent Closing high.
This technical indicator aspect supports the idea of a possible pause or pullback in this Index.
3.) We've seen with the SPX chart above that bullish sentiment (CPRATIO) hit a peak zone suggesting at least the beginnings of extreme bullishness. Suggesting that this or that level in equities daily call to put volume ratios is an 'extreme' is based on what I've seen over many market cycles. And, is a somewhat subjective evaluation as is how high (or low) levels of bullishness are suggested by call versus put volumes.
THE NASDAQ COMPOSITE (COMP) DAILY CHART:
I wasn't asked about the Nasdaq but it's a worthwhile comparison to the S&P as the tech-heavy Nasdaq continues chugging higher.
1.) PRICE wise COMP is maintaining its current relatively steep up trendline. With the Composite, there's a 'milestone' price level just overhead, at 5000. Between 5000 and 5030, I see more potential for a pause of pullback in COMP than not.
2.) The Nas Composite has hit overbought RSI extremes already and this indicator suggests potential to 'signal' a pause or pullback. I would rule out a next sustained up leg developing from the 5000 level, something extremely rare once such a high Relative Strength Index reading is reached.
3.) I've already mentioned the below highlight on a recent peak 'extreme' level of trader bullishness, as putting us on notice that COMP might stop climbing for a bit such as beyond 2-3 days.
COMP could pull back to the 4820 top end of its prior trading range, rebound and thereby still maintain a bullish chart.
THE RUSSELL 2000 (RUT) DAILY CHART:
1.) RUT, which is the other Index I was asked about here and as I've been saying recently, has better than average upside PRICE potential; e.g., to the 1250 area next. RUT might resist much of a downturn, even if Nasdaq takes a bit of a tumble.
2.) Countering the bullish chart picture is that RUT is at an overbought RSI extreme and this has often led to at least minor, if not more significant, intermediate pullbacks.
3.) Bullishness is growing again relative to the smaller cap stocks in the Russell 2000 but is probably not extreme yet. It may well be later on, especially if RUT gets up 1350 or higher, which is one longer-term projection I have. First, perhaps a pullback to 1220, maybe to the 1210 area.
GOOD TRADING SUCCESS!