THE BOTTOM LINE:
I've been bullish on stocks for some time but I'm also a trader and in many market cycles you have to assume potential for a correction under the circumstances seen coming into the week ending 8/14 when I last wrote. Elements I was seeing included:
1. a sideways move after a rally suggesting a pullback ahead
2. an overbought condition per past technical patterns
3. peak levels and a cluster of bullish sentiment extremes
So what happened of course was ONE (only) sharp downswing at the beginning of this past week, after which they then took stocks up again. Some of the 'they' included buyers of calls unwinding at least one side of S&P options/stock pairings; e.g., short calls versus long stock.
The result of resurging stock prices served to remind myself and the 'correction' crowd that the market is never completely predictable or doesn't follow the same patterns all the time. That's what makes it interesting, frustrating at times and humbling.
I did get an interesting and profitable take on some other charts and time frames over the week as suggested by some other traders who subscribe to OIN and follow my work even when I zig instead of zag!
CHARTS OF THE WEEK:
A subscriber e-mailed me on the question, given the snap back rally after Monday, of whether the market had 'thrown off' its overbought condition given the prior sideways trend and on an HOURLY basis that was quite true. The following chart will demo while I look a the hourly index charts and the 21-hour RSI as a guide to shorter-term trading:
There not much more to say about my first chart-of-the week as I explain what was especially relevant to me by notating the chart:
This next chart below takes a little more explanation and I wrote about this also in my second Trader's Corner column of the week (Thursday). (See the home page, click on the 'Trader's Corner' tab at top and go to my 8/20 article if you didn't already peruse it.)
A trader who read my (Essential Technical Analysis) book and seemed to pick up on the fact that I didn't believe in following overly complex trading 'rules' indicated that he had been following a simple method: Buy index calls when there is any closing bar on the 30-minute chart that puts the 12 period Exponential Moving Average (EMA) ABOVE the slower moving 26-period EMA.
Conversely, buy puts when the shorter 12-period EMA crosses UNDER the 26-period EMG. This method can be used as a moving average crossover system. As a 'mechanical' system it has some pluses and minuses. A plus is that it gets you fairly early into a move and doesn't reverse too quickly due to the nature of the exponentially smoothed moving average.
All in all, a useful method for shorter-term moves or even getting into and keeping in some long-term moves. I'm going to back test this as a 'system' in TradeStation to play around with it some more. Meanwhile, I find it an interesting add to the charts and indicators that I follow in the major indexes. Here these particular moving averages have been used on the 30-minute Nasdaq 100 (NDX) chart. An upside crossover assumes entry into calls and a downside crossover assumes entry into puts.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P has broken out above its prior trading range after a fairly minimal break of the low end of that range. The resulting move reconfirms the strong bullish trend.
There remains this potentially bearish price/RSI divergence as prices have gone to a new high 'unconfirmed' by the relative strength. Moreover sentiment readings have gone off the chart so to speak, although I also figure that some portion of the high Friday call/put equities ratio was boosted by unwinding activity. Nevertheless the bulls are getting carried away when they start to figure they can't lose in calls.
I don't trust such extremes for sure but I also have to respect the power of the trend here!
The key near support now becomes the top end of the prior trading range suggesting pivotal (very) near-term support in the 1015 area. Next key support is at the prior recent low at 978 in SPX. Further technical support is at 950.
Near resistance is now noted at the red down arrow which intersects in the 1057 area currently.
If long SPX calls enjoy the ride but keep an eagle eye on signs of a correction now that the buoying effect of August expiration is over. SPX has met my 'minimum' next upside objective to 1020 finally.
My sentiment chart above above indicates visually just how bullish options traders have become and they are good harbingers of overall market sentiment. In a 'normal' market cycle, such high readings are clear cut warnings of at least a short-term correction ahead.
This current period could be the occasional power move that we see in a 3rd 'impulse' wave. While there was a prolonged first leg up, the second up leg can be even stronger and longer. Unusual, but this market went a very low extreme and may be going to an opposite extreme into the fall. The market goes from extreme to extreme often enough historically.
At some point the market DOES get to an 'overbought' bullish extreme and DOES correct and this keeps me cautious ahead in terms of NEW call positions especially.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index chart is bullish, bullish, bullish with the decisive upside penetration of its line of prior resistance. Look for support on any pullbacks to that line of prior highs as prior resistance, once overcome, 'becomes' subsequent support. Next stop up in the 490-500 area? This should be the case as long as there are no closes below the two support areas I've noted.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) broke out again along with the S&P, not so much in terms of the Nasdaq. Next stop 9700? Can 10,000 be far away, say by October. Wow, a close over 10,000 at some point ahead ought to put the media talking heads into a real state of hyperbole.
Near support is at 9438, then in the low-9100 area, with next support at 9000.
Just a reminder that they haven't repealed the laws of gravity here and prices can come down also although the bull is starting to gallop seemingly. Today's bullish housing sales figures can become tomorrow's bearish second wave of foreclosures or some other such financial report.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP)hasn't LED this latest rally and that is the bearish fly in the ointment potentially. It keeps me cautious at least. That and the very high bullish sentiment, now seen even on a 5-day moving average basis. It's about as high as this indicator gets without at least a slowing of upside momentum.
A next upside target is up in the mid-2100 area if tech now leapfrogs the S&P and resumes its leadership. It will be important to see if COMP can maintain daily and weekly closes above 2000. It's been a struggle to do this so far. Stay tuned for the next battle (or not) of 2000!
Near support is in the 2000 to 1970 area, then at 1930.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart has a slight closing breakout above its recent line of resistance and a SECOND day above 1630 would put the chart more firmly on a bullish footing. A move up to the 1700-1720 area (at the red down arrow) could be next. The overbought RSI has been 'relieved' by the recent correction.
A worrisome technical aspect for the bulls, although they have a 'what me worry' attitude right now, should be the failure of 'relative strength' in that the RSI has not 'confirmed' by some amount the new PRICE peak. This is not to say that there some magic market principle being violated. It's simply that these bearish divergences often are seen to precede pullbacks. There are always exceptions, just not too many.
Near support is in the 1630-1625 area, then should be found at the recent downswing low around 1563.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) has managed a bullish close at a new high and above the recent line of its resistance.
Near support/buying interest is in the 40 area, then at 39.0, extending down to 38.5.
Daily volume finally ran up along with prices but didn't make a strong showing. Probably more important as its been is that the On Balance Volume (OBV) line has started line has started trending higher again.
Near QQQQ resistance: 40.7
Next overhead resistance: 41.7-42.4
Near QQQQ support: 40.0-39.8
Next support: 39.2-39.0
Key next support: 38.5
RUSSELL 2000 (RUT) DAILY CHART:
The way I'm projecting its major uptrend channel the Russell 2000 (RUT) doesn't have far to go before it hits some resistance around 590-600 implied by the top end of its broad bullish channel. This after a bullish breakout above the top end of its recent trading range which is not to be overlooked either.
Near support should be found at 570, extending to around 560, with next key support implied by its recent 547 low.
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.