THE BOTTOM LINE:
The question regarding this recent sideways trend is whether prices will fall much from current levels and have a 'normal' corrective pullback. The probabilities for a next move tends to favor a downside correction rather than another upside breakout or a continued lateral move.
We can look at the Dow 30 (INDU) chart below where I highlighted two recent prior examples of the outcome of a sideways move in a strong uptrend AND where the RSI and my sentiment indicator were both at or near overbought extremes. You can see this pattern in the S&P charts also, but it happened that I made some chart notations on the Dow chart regarding these prior two similar (to now) sideways patterns.
In the first instance of a lateral move after a previous strong uptrend, there was another rally that developed. In terms of the S&P 500 (SPX) that only led to another 17 or so points higher before another sideways move occurred, this time followed by a pullback of about 80 points from peak to trough.
Can it happen that stocks just keep going up and don't offer those waiting to buy lower a way in? Of course this is a possibility but the historical probabilities for this outcome isn't very great unless perhaps when we're already in a raging bull market bubble. The first leg up was quite strong and this one could be stronger still but this kind of power move would be more common when more money was chasing stocks and when market sentiment (among traders) wasn't already quite bullish.
How will I play this market? I probably won't. If there's another rally ahead, I'd rather wait and see how at the money puts would look to me on another rally extension. The chances of another big rally from an existing 'overbought' condition are too low for me to consider playing calls any longer. I favor ONLY high risk to reward projected outcomes. This is not the case where the potential for the market going up another 50 S&P points is equal to the potential for it falling back 50.
Another question I got was about strategizing for a 100 point range in terms of SPX; e.g., projecting a range not above 1050 or below 950. That might be ok, but I tend to favor trading a DIRECTION rather than a range and would rather wait to buy a good-sized dip. All that's required on my part is waiting and for patience. Jesse Livermore said he made more money by sitting tight than he did by trading.
Hey, it was a long time back as a broker where I 'needed' to recommend trades, which also generated commissions that kept myself afloat. That may seem crass and I never DIDN'T believe or hope that I was right in my client recommendations. It's still a built in conflict of interest as I'm sure most of you know well.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P remains bullish in its dominant pattern but it also looks like a pullback could develop as upside momentum slows. A correction of 25 to 50 percent of the prior advance from lows in the 870 area would be a common outcome. Something less that a 50% correction would be consistent with the limited selling that has occurred on the way up from the March bottom; e.g., a pullback to 962 would represent a fibonacci 38% correction.
There is a price/RSI divergence that often has a bearish outcome, as prices trend sideways whereas RSI peaks have been falling as highlighted by the light blue trendline on each graph. Another way of looking at this situation is that prices have been holding up but on LESS (or falling) relative strength.
The aforementioned price/RSI divergence has more credence when also seen in relation to the recent cluster of high (overbought) peaks highlighted by the red arrows. While SPX and the other major indexes might continue to drift sideways WITH accompanying high levels of bullishness, it's very uncommon for a new up leg to ALSO develop given this degree of trader optimism.
Near support is anticipated around 986, then at 950 as highlighted with the two green arrows on my SPX chart.
Near resistance is noted on the SPX daily chart at 1015, the top end of the recent price range and then up around 1036, along the previously broken up trendline that has seemed to define a key rising line of resistance.
The chart above above is worth 10,000 words on this subject. Bullish sentiment has been quite high in terms of the CBOE daily equities call volume versus daily equities put volume and this has typically bearish implications ahead. With so many traders bullish and committed already, there may not be enough buying power ahead to keep this rally going. We have yet to see in the current multimonth advance such a large number of daily spikes occurring in a similar time frame for my 'CPRATIO' indicator.
NOTE: The way I keep my equity call to put daily volume ratio is to divide daily equities CBOE call volume BY total daily put volume so that a HIGH number (e.g., 2.00 or above) equals a type of 'overbought' situation similar to overbought/oversold indicators like the RSI. If the PUT to Call ratio commonly seen is at .5 or less, this is an equivalent reading; same thing just different ways of dividing the daily volume totals. My "CPRATIO" chart isn't found elsewhere.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index chart remains bullish but, as noted last week, as also met my intermediate-term objective of 471. This target takes the prior trading range of 30 points (441-411) and adds this to the 'breakout' point at 441 to equal 471 which is a type of measured move objective. I expressed my outlook and considerations about a continued move higher in my S&P 500 comments above.
I've noted near resistance at 469, forming the line of recent highs, then at 482, along the rising resistance trendline. Anytime there is a decisive upside move, and sustained closes above, this trendline, a new up leg would be suggested as underway.
Near support is around 460, with fairly strong support suggested in the 440 area.
As with the other indexes, we see diverging price/RSI trends as OEX trends sideways whereas its Relative Strength Index (RSI) has been falling of late. This type of diverging trend typically forecasts a price break ahead. Based on past such divergences there's no telling just WHEN a downside price correction will occur, assuming it does. There are those occasional times when this same diverging pattern isn't predictive of any trend change, even short-term.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) continues to have a bullish chart pattern but the recent sideways drift does show some loss of upside momentum. I base my ideas of a correction developing ahead based on this somewhat scant evidence on a price basis, but more so in terms of the RSI and Sentiment indicator extremes. A break below 9200, especially on a closing basis would suggest the start of a correction.
Near support, below 9200, is noted at 9158 at the 21-day moving average, then down in the 8850 area, where there should be substantial buying interest/support.
Very near INDU resistance is at the top end of the recent narrow trading range around 9420. Next technical resistance is projected for the 9575 area.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has not seen enough buying interest repeatedly in the 2000 area to power it through this key resistance. The longer that the index drifts sideways the greater the risk of a price break. To round out the technical outlook, a sideways trend after a prior run up isn't always seen bearishly as it can also be viewed simply as a consolidation of the prior up trend. This viewpoint probably accounts for the strong interest in stock calls versus puts, which is what puts my sentiment indicator up to 'overbought' extremes.
The 5-day average in my sentiment indicator has stayed as high as I've seen it and for longer than when the current bull move began back in March. A correction is overdue no doubt as I've been saying. The caveat is whether the market is forecasting a FAR stronger economic and earnings recovery than currently forecast.
There's no reason to speculate overly much on how things are going to turn out economically ahead. Rather my focus is most of all on whether there is a decisive upside move above 2000 in COMP and one that is sustained; e.g., a typical strong move would be a couple of consecutive daily closes above 2000, followed by pullbacks that find SUPPORT/buying interest has developed in this area.
Pivotal resistance is 2000 and I've noted a next resistance up around 2115.
Near support continues to be at 1970, with substantial next support in the 1880 area.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bullish in its pattern with the same (overbought market) caveats noted regarding the Nas Composite and the other indexes.
A move above pivotal recent resistance in the 1635 area is needed to suggest that NDX was being propelled into a next upswing. If so, next resistance looks to come in around 1690-1700.
Repeating my view of LAST week, if NDX started falling below 1600, then 1580, I'd take this as an indication for further weakness ahead. Substantial technical support should be found in the low-1500 area. The lowest I would envision NDX pulling back to is to 1450 and I'd be surprised to see that much of a dip. More common for the kind of strength we've been seeing in tech is for a dip in NDX to the 1540, a 38% fibonacci retracement of the last advance, to around 1513, representing a 50% retracement.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) still is finding substantial resistance/selling interest on rallies above $40. A decisive upside penetration on good volume is needed to suggest that the NDX tracking stock was headed to the 41.7-42.0 area.
Key near support/buying interest has been seen on dips to the 39 area.
Daily volume has been on the low side which is what I would expect in a sideways trend without a breakout above the key resistance. The On Balance Volume (OBV) line is going sideways consistent with the direction of prices.
Near QQQQ resistance: 40.2
Next overhead resistance: 41.7
Near QQQQ support: 39.2-39.0
Next support: 37.2
Major support: 35.8-36.0
RUSSELL 2000 (RUT) DAILY CHART:
The way I've projected it this week, the Russell 2000 (RUT) has backed off from the top end of a broad uptrend channel as highlighted on the RUT daily chart below.
Resistance is apparent in the 579-580 area, then probably just a few points above that at 584-585, extending up to 600.
Further weakness is suggested if RUT starts falling under 560, especially on a closing basis. The most significant technical support should come in the 525-535 area. Major support is anticipated around 500, extending to 480.
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.