THE BOTTOM LINE:
It could be anticipated that the Dow would get to 10,000 and make a new high for it's move and this was the outcome, but the Nasdaq and the related Russell 2000 have formed potential double tops. Unexpectedly, this makes last week's prediction for Dow 10000 AND a warning of a possible double top both true!
The S&P and the Nasdaq rarely diverge for long so the inability at least so far for Nasdaq to accompany the Dow 30 (INDU) and the S&P to new relative highs suggests that there's risk to ALL the major indexes of a correction. It looks to be time to take profits on long calls. That isn't to say that I will turn around and short or buy puts in this powerful bull trend. The best money to date has been made on buying pullbacks, especially when accompanied by the 13-day RSI falling back to into at least it's 'neutral' range as highlighted on the S&P 100 (OEX) chart.
There's a warning sign of another type that suggests an extreme akin to being 'overbought' given that my sentiment indicator reached another and higher extreme of bullishness, as seen graphically on both the S&P 500 (SPX) and Nas Composite (COMP) charts further on below.
While SPX, OEX and INDU could go on to further nominal new highs, the upper boundaries of their current uptrend channels suggest these indexes could begin to run into technical resistance at around 1108, 510 and 10188 respectively. If in calls and I hope you are or are otherwise profiting from this strong trend, you may well be 'playing' for the last 5-10 percent of overall profit potential. Relative to the risk of a shakeout, especially now that the pundits have all trumpeted the mighty 10000 in INDU, further upside potential looks limited relative to, as I say, to possible downside risk.
On a long-term chart basis, the S&P and finally joined COMP as having pierced long-term down trendlines. At 1119 SPX reaches a 50% retracement of its bear market decline dating from its October 2007 top. COMP at 2246 would achieve a fibonacci 61.8% retracement. These are the kind of retracements where I begin to look for at least a slow down of the first-half advance.
Moreover, we're in a seasonal period (October) where shakeouts notoriously occur. All in all a still strong bullish trend, even with Nasdaq faltering here, but I'm not of course talking about holding longer-term stock investments but whether this is an area of significant risk of a short to intermediate-term shakeout of importance to holding derivities.
CHART OF THE WEEK:
The S&P (500) has achieved a clear cut move through and above its long-term down trendline as seen on its weekly chart below. The index is also up in an overbought area in terms of the 8-week Relative Strength Index (RSI). It may hit overbought levels a second time, as it did back at the 2007 top. The primary point in this is that we're not in the low oversold or even mid-range 'neutral' area of this indicator any longer. It gets to be tougher to tack on those very big further gains when we start hitting these higher readings in terms of the RSI. Moreover, the recent new closing weekly high was 'unconfirmed' by a similar new high in RSI which also presents a future shakeout potential.
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart difference this week is the index's upside penetration of its prior high at 1075. A bullish best would be if SPX can STAY above this level. Resistance may be seen (again) if the index reaches the high end of the uptrend channel I've highlighted below.
So, very near support is suggested at 1075, then at 1065-1067 and next at the 50-day moving average (again), currently intersecting at 1038. Key chart support is at the last downswing low at 1020. A close below this level lasting more than a single day would suggest further downside potential, even back to the 1000 area.
Pivotal resistance is at the 1096 high, then up in the 1100-1110 area.
I've discussed the 'overbought' situation suggested by high/extreme bullish sentiment and the high 13-day RSI, as seen below. Given what I suggest may be limited further upside potential, take profits and run. If you don't have any (profits) but have trades on that WOULD be profitable on another up leg and hope that there will be a next and further upside run, I don't like the odds here.
I don't rule out further upside progress of course, but I try to only calculate or consider trades having probabilities of gain that are substantially greater than potential loss. Hope is a good thing in most spheres but in trading, not so much.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index chart by my analysis doesn't have a lot of upside potential left given its tendency in recent weeks/months for it to correct once it hits the rising trendline seen at the upper end of its bullish uptrend channel. The chart pattern is bullish otherwise as it keeps going to new highs for this move and its pullback lows also stay above its prior lows.
I've projected technical resistance around 510. Key nearby support is in the 500 area. Next support may come in around the 50-day moving average at 480 and especially then at the prior recent (down) swing low at 473. Pivotal next support is in the 462-455 area.
On this chart, I've noted a more or less mid-range RSI zone, I've called the 'neutral' area. There have been multiple prior rallies when the index pulls back such that the RSI falls in this area. In strong bull moves like this one, it's much more likely that the RSI will merely 'throw off' an overbought situation rather than getting 'fully' oversold. For this reason, I've noted this mid-range area, rather than the high and low extremes as one to watch for with the 13-day RSI.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow chart pattern remains bullish, but I have also noted the Average's nearness to potential technical resistance at the upper trend channel line.
I don't consider it so important for INDU to stay ABOVE 10000 as much as in its ability to hold above its prior 9918 prior top; resistance once overcome, tends to 'become' subsequent support on pullbacks in strong bull moves.
Next support in INDU is in the 9840 area, then around 9590, extending to 9430. I've projected potential technical resistance in the 10188 area currently.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has a potential double top going but this wouldn't actually be technically 'confirmed' unless it also then closed (for more than a day) below its last swing low in the 2040 area. I noted the potential for a double top in the major indexes last week. Stay tuned on that!
If COMP can close above its prior intraday high at 2168 a next technical resistance is suggested currently around 2240, at the upper channel line.
Near support is in the 2120 area, then might next be found around 2063, at the 50-day average and most definitely 'should' be seen next at the prior 2041 intraday low. Support implied the LOW end of COMP's uptrend channel is at 2010 currently.
Bullish sentiment was discussed already but I would note the TWO consecutive daily spikes above a CPRATIO reading of 2. Two back to back days like this are rare. It suggests that traders read MORE into a rally above Dow 10000 than is warranted.
The foregoing is especially true if you know, as I do from having worked for Dow Jones, how imperfect or imprecise the methods employed are for dropping one stock(s) and adding others to the Average; affecting its ultimate rise or fall of course. It's not like the objective method of the S&P whereby the biggest cap stocks are the sole criteria for being in the two main S&P indices.
Meanwhile, COMP which has an objective means of what stocks are in this Index (ALL Nasdaq listed stocks!), is not following this move to new highs and that should be worrisome to the bulls.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has the same potential double top pattern that has formed in the Composite, suggesting pivotal near resistance lies at the prior 1755 intraday top. If there is a decisive upside penetration of this prior top, I've pegged next resistance as coming in around 1813, at the current intersection of the upper end of its broad uptrend channel.
Near support is in the 1700-1690 area. I'll note again that a 'major' double top would only be 'confirmed' on a technical basis IF the Index subsequently fell below its prior 1657 low, which is a pivotal or key support currently for NDX. Another pivotal support comes in at 1625 currently, at the lower boundary of the uptrend channel highlighted on the daily Nas 100 chart.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Daily trading volume is a related technical aspect that can be studied for the Nasdaq 100 tracking stock (QQQQ). The key On Balance Volume (OBV) indicator has turned down as volume as picked up some on the recent decline. Volume here is adding some support to the idea of a possible double top of significance. It's still a bit soon to say that the Nas 100 index is headed substantially lower but right now I rate the chart as showing a possible interim top.
An aside to what we're seeing on the daily chart is that my QQQQ trading 'system' that has shown great profitability to date remains long the stock. This trade strategy or system requires a 21-hour RSI extreme (above 72) before an exit long position could occur and this indicator rose to a peak 67.4 at the highest hourly close of last week.
Near QQQQ resistance: 43.17
Next overhead resistance: 44.0-44.3
Near QQQQ support: 42.5
Next support: 40.7
Major support: 40.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is showing the same chart pattern as the Nasdaq in that a potential double top has formed in the 625 area. A decisive upside penetration of 625 would renew the bullish possibilities, especially on a closing basis and for more than a day. Next technical resistance is suggested, also at the top end of its bull channel, at 644 currently.
Near support is in the 606 area, then at 588, extending to the prior intraday low at 576. 554 is support implied by the low end of RUT's uptrend channel.
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.