THE BOTTOM LINE:
The longer this sideways move goes on the more it seems like the S&P and Dow at least, could be building a top, although we also need to wait for a decisive break below the low end of the 5 week old trading range to 'confirm' that. Meanwhile, the Nasdaq made a new weekly high and looks poised to breakout to the upside, so go figure. It's the market and at times it confounds all of us!
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The longer this sideways move has gone on and it's been a pretty narrow trading range too, I've also wondered if a top is forming. However, the Nasdaq has become more buoyant of late and if the Composite breaks out above its line of resistance of the past 5 weeks, it should also lend support to the S&P and Dow.
There's two ways to consider the major indexes technically as far as the rectangular trading range. Sideways moves after a strong prior run up tend to be consolidations of the prevailing trend. On the other hand, the same lateral trend AFTER such a huge prior advance could suggest a rectangle top. After all, some tops take on just this appearance.
While I remain bullish in the longer-term, I also recognize that a second correction (and there's only been one pullback deep enough to qualify as that since the rally began in March) is sort of 'due'. After taking a second look on what's to be seen technically, I wrote a Thursday Trader's Corner article on some OTHER technical considerations that might be relevant here. Ones that are mostly bearish chart and indicator aspects, as opposed to the view that yet another up leg will be a resolution to the current pause. Things to consider other than the sideways trading range itself, which is a 'neutral' pattern. Until, at least, there's a breakout above or below the two level lines connecting reoccurring multiple highs and reoccurring lows.
To not cover that same ground again here and if you haven't already perused it, you can go to my recent related (12/17) analysis piece by clicking
HERE. By the way, my weekday Traders Corner articles are often an adjunct to and sometimes a continuation of, earlier technical thinking expressed in my weekend Index Wrap.
On balance, the same 'indecision' pattern continues. A decisive upside OR downside breakout above the lines of support and resistance is needed to suggest a directional move. The Nasdaq looks like it stands a better chance of breaking out ABOVE its resistance. The S&P 500 (SPX) and Dow 30 (INDU) continue to show support at prior recent lows.
The S&P 100 (OEX) showed technical support by also bouncing off its 50-day moving average. Next week, being not only short but with many traders heading for the ski slopes, fireplace chats, or warm shores, doesn't seem like it will provide a game changer.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
If the S&P 500 (SPX) index breaks out above the upper highlighted trendline (the upper level line) seen below, a potential objective is to the 1149-1152 area. If SPX pierces 1083, at the line of support, a potential downside objective becomes for a pullback to the 1050-1047 area, although the low end of its current uptrend channel would suggest support coming in around 1060.
The biggest upside move I can current envision is to the 1200 area, the biggest downside objective is to the 1029-1000 price zone.
While prices have repeatedly hit closing highs in the same area and gone sideways in this respect, the Relative Strength Index or RSI has been declining on balance, which can suggest waning relative strength and a bearish price/RSI divergence.
On the other hand, in a more bullish interpretation, the sideways move has also 'thrown off' the overbought RSI readings seen at the start of this multiweek sideways move. If the market has the same internal strength it had previously, a next rally would start after the RSI dropped back to more neutral or mid-range reading.
Bullish sentiment has continued to retreat on balance and in a way this also is starting to throw off a different type (than that of the RSI) of 'overbought' extreme. I would rate my sentiment indicator as also somewhat 'neutral' at this juncture. The sideways trend of course tends to scare off some would be call buyers and shorting is not always a common strategy in indexes. There has been however some increased put buying as a hedge, speculative or versus stock, against a correction after the major strength of prior months.
S&P 100 (OEX) INDEX; DAILY CHART
518-520 is still the pivotal resistance, with the key line of support unchanged at 504-505 in the S&P 100 (OEX). I wrote last week that I was anticipating greater upside potential than downside. Now that the OEX has again retreated to the low end of its narrow 5-week old trading range, I don't find myself leaning either way as far as upside OR downside expectations. Can't go up, won't go down much. However, something comes along usually that propels a breakout move so I'm on the sidelines waiting for that.
I'd also repeat from last week that a close below the 50-day moving average (505 currently) would put me on a bearish alert. Below 504-505, next support looks like 490, then in the area of the prior 479 (down) swing low.
Upside potential on a move above the 518-520 resistance is to 536-536, perhaps up to the 540 area.
The RSI has again retreated to a 'neutral' mid-range reading and this in the past has prefaced trading rallies that followed. If so, this will be somewhat amazing, as such consistent past performance relative to indicator patterns are rare for such a lengthy period.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average's most prominent chart pattern is seen with the highlighted 'rectangle' below. Key resistance remains 10500-10520 and pivotal support coming in around 10230 and is also unchanged from my last week's comments. The difference THIS week is that INDU is near the LOW end of its multiweek trading range rather than nearing the high end (as it was last week). Back and forth, to and fro, suggestive of a relative balance between buyers and sellers.
In the event of a downside breakout below 10230-10200 support, a possible next target is to the 9900 area. Major support is suggested by the prior intraday Dow low in the 9679 area.
Upside potential on a corresponding upside breakout (above 10500-10520) is to 10800-10820.
I highlighted the diverging RSI: relative to the sideways price trend of INDU, RSI has been declining. In a 'normal' market, one that hasn't been so strong in one direction (up), this type price/RSI divergence is a bearish omen. It may be here also, but stay tuned on that.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite of course has been in trading range too but a more 'ragged' one. The highs have formed a repeated line of resistance and formed an upper resistance trendline similar to the S&P and Dow. The lows however have ranged from 2115 to around 2150 in COMP. 2150 is a key technical support. 2213 to 2120 is the pivotal near resistance.
If there is an upside breakout above resistance and it seemed that COMP was trying on Friday for this, a next potential target is to 2300. Major resistance is near 2375 if judged by the upper end of COMP's broad uptrend channel.
If there was instead a break below 2150-2115, a next key technical support is well below, at 2030-2024.
Once again COMP could be poised to diverge from the S&P and could even lead a rally. At a minimum, given that the S&P and Dow have pulled back again into a support area, strength in tech should at least provide a related support floor to SPX, OEX and INDU.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) trading range of recent weeks pegs key resistance around 1814 and support in the 1758-1750 area. A breakout above resistance suggests upside potential to around 1870, perhaps to 1900. Conversely, a downside penetration of 1758-1750 suggests potential for NDX pulling back to around 1690, perhaps to a re-test of the prior 1652 swing low.
It looks like some key tech stocks (e.g., AAPL, INTC, CSCO) are in or are rebounding from fairly solid support. Based on the chart, I would rate NDX as having decent potential to pierce its upper line of resistance. It wouldn't be too surprising to see tech lead the market again for a time; a 'Santa Claus rally'?
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
There's not much more to say with QQQQ than already noted about NDX. Key resistance in the Q's is at 44.8, with potential for rally to 46.5 if the stock can break out above this line of resistance.
Key near support is at 43.5, extending down to the 43 area. A decisive downside penetration of 43.0 would suggest a downside objective to as low as 41.2, or even a test of the prior intraday low at 40.6.
Volume picked up substantially on Thursday, when QQQQ dipped below 44 and this daily trading volume surge continued on Friday on the tech-based rally, all of which is an associated bullish sign of potential for NDX to gain some further upside. A move above the upper line of resistance may bring in another volume surge on short-covering.
RUSSELL 2000 (RUT) DAILY CHART:
Signs of life occurred in the Russell 2000 (RUT), as it rallied to near resistance. RUT looks now like it can hold above 600 technical support and perhaps challenge key resistance at 625. Next resistance than comes in around 640.
I don't see a lot of upside potential just yet but the chart would turn decidedly more bullish if RUT could gain some further upside traction above Friday's 610 high. The prior double top at 625 then looms even larger as an important resistance.
The worst downside case I see current is to the 570-568 area and perhaps to a re-test of the 553 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.