THE BOTTOM LINE:
A resolution of the multiweek sideways trend occurred with the decisive upside breakout above resistance, as especially seen in the Nasdaq market. The S&P 500 (SPX) has followed suit and for a change SPX is following, not leading. Some analysts consider a sideways move as a non-trending market but I figure a lateral move as a third 'trend' option. It reveals something technically.
As I have been saying for some time, a sideways move after a prior advance is most often a bullish consolidation before the uptrend resumes. However, and I can be a good gauge of market psychology in this, the longer the recent narrow sideways trading range went on, the more I began to wonder if the market might not (instead) be building a top.
A rectangle pattern can turn out to be either a pause before the dominant trend continues OR it could be an interim or even final top. I WAS paying attention to the recent strength in tech and there is no way that the Nasdaq Composite (COMP) and Nas 100 (NDX) could break out above prior tough resistance and start a run without the rest of the market bucking up.
By the end of the week I focused in on the bellwether Semi-conductor Index (SOX) and its bullish breakout above prior highs, which occurred well ahead of similar action in COMP and NDX. The pullback to the 'breakout' point, where it found support on 12/11 was a harbinger well in advance of the renewed uptrend in the tech-heavy Nasdaq. SOX has been in a very strong uptrend and it has often led the overall Nasdaq market higher in the past and it did so again.
CHARTS OF THE WEEK:
SOX is also in 'overbought' territory according the RSI as seen above but when an index or stock is on a run, that has to be (somewhat) ignored. Price action is 'king' so to speak. Bullish sentiment is also at an extreme as will be seen in my CPRATIO indicator with the COMP chart. But again, an apparent overbought condition can go on for some time. It DOES mean that the market is at higher risk of downside volatility when bearish news comes out.
I also noted in last week's Index Wrap column that I didn't think there would be a 'game changer' of a week ahead. WRONG! In a low volume week, not much might happen but the bulls (or bears) can also push prices farther than they might otherwise. Historically, traders used to observe the tendency for a 'Santa Claus rally' and we got ours.
Anybody who has followed my work over the years or even months know that I put a lot of stock in breakouts above or below key trendlines, more so with major trendlines as seen on weekly charts. My next 'chart of the week', one that I don't normally feature, is of the weekly S&P 500 (SPX), which shows that the latest weekly bar has definitely cleared the major down trendline dating from the late-2007 top. If SPX now starts moving above the 50 percent retracement level (relative to the 2007-2009 bear market decline), it will suggest a next potential target as being to the 62% Fibonacci retracement level at 1228.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
I wrote last Saturday that if the S&P 500 (SPX) index breaks out above its upper trendline (the upper level line) it would suggest a potential objective to the 1149-1152 area, or higher. I'm staying with that target although I've highlighted near technical resistance as likely initially around 1140-1142. Major resistance is likely at the upper end of the broad uptrend channel, currently intersecting at 1183.
Near support should be found at the prior line of resistance around 1116. Next support is estimated at 1092, then 1083, with major support at the low end of the broad uptrend price channel, at 1064 currently. As time goes on this support line rises of course.
I also noted last week, "...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." And, this is EXACTLY what happened, somewhat to even my surprise as I don't always expect indicator type patterns to have such consistency!
It was consistent with its recent RSI trend (see above) for SPX and OEX as well, for a rebound once its 13-day RSI fell back to a 'neutral' mid-range reading in the 50 area. It didn't take a decline all the way down to an oversold reading and offers another harbinger of being in a strong uptrend. As I've often said, sideways moves are another way that a stock or index will 'throw off' an overbought condition versus having a steeper pullback.
Bullish sentiment is also hit some extremes recent as can be seen in my CPRATIO indicator on the SPX chart above. But and I'll say it again, an apparent overbought condition can go on for some time. However, I should note that the market IS also at higher risk of downside volatility when bearish news comes out.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) hasn't or hasn't yet (we'll see) achieved a decisive upside penetration of the upper end of its trading range of recent weeks. OEX did manage to CLOSE above the line I've drawn below representing the predominant resistance area. However, the strong rebound from the low end of the rectangular trading range (and its 50-day moving average) by the index after an overnight upside price gap suggests further rally potential.
I've projected a next technical resistance around 528, with more major resistance in the 543 area or the top end of OEX's uptrend channel.
Near support is in the 510 area, extending to 504-505. Major support is suggested by the currently intersection of the lower trend channel line, coming in around 493 currently.
I noted last week that "The RSI has again retreated to a 'neutral' mid-range reading and this in the past has prefaced trading rallies that followed.". I was somewhat skeptical that predicting a next rally would be this 'EASY' as figuring the twists and turns of the market isn't always so. But, then again sometimes it is!
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average has poked its head above the upper end of the highlighted rectangle pattern of recent weeks and seems likely to keep going. Stay tuned for whether INDU immediately extends its strong rally of this past week. The Average has had so many back and forth prices swings disbelief is common as to whether 'resolution' of INDU's trend is at hand.
I've noted resistance levels for the 10600 area, then up around 10720, extending to 10850.
Key INDU support lies in the 10400 area, then around 10300-10260, extending to 10230.
Last week I highlighted the diverging RSI trend seen above, relative to the sideways price trend of INDU in prior weeks; the Relative Strength Index (RSI) had been falling. Now there's another wrinkle here in that the RSI has broken out above a down trendline drawn through its prior tops. Trendline breakouts in the RSI can also forecast a change in trend direction, although this pattern's importance is not to the same degree as (price) chart breakouts.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Not only did the Nasdaq Composite (COMP) break out above its key line of prior resistance but it did it in 'style' as the index gapped higher above that resistance as highlighted on the chart below. A strong run this past week for the tech stocks and as I noted initially, led by strength in the semiconductor stocks especially.
I noted last week that "a next potential target is to 2300" and COMP is almost there. I've highlighted 2350 as a next resistance above 2300, with a move toward 2400 as major resistance, at the current upper end of COMP's broad uptrend channel.
2213, or what had been resistance, is indicated now as near support, followed by a next lower support coming in around 2163, at the current intersection of COMP's up trendline.
Bullish sentiment is again hitting 'overbought' bullish extremes on certain days. This indicator isn't always great solely by itself for timing tops when the market is in a strong upside run. No doubt traders and investors continued to harbor lust in their hearts for tech stocks. After the pause in the Nasdaq in recent weeks, the rally came back to life, proving the old adage that if they can't knock em down, it must be OK to go back in and resume buying.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) broke out above 1814, the top end of its multiweek trading range. The upside move accelerated after this event, showing I think the importance traders also invest in such technical resistances. I take Thursday upside price gap as a bullish sign of a further strong move. I've pegged resistance just over the 1900 level, at 1918 currently, with major resistance around 1966 currently suggested by the top end of NDX's broad uptrend channel.
I noted last week that rebounds in some key tech stocks like AAPL, INTC, and CSCO were suggesting further upside potential for the Nas 100 especially. I went on to say that "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'?"
I hope 'Santa' was a good for you as he was for me AND the Market!
Near support is suggested at the prior line of resistance at 1814; resistance once pierced tends to 'become' subsequent support on pullbacks. Next support is suggested at 1782, with a key support then coming in at the line of prior lows around 1758.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) also of course looks very bullish with the upside breakout and strong move that has followed. I've noted a next key resistance up in the 47 area, with major resistance just over 48.
Key near support now is 44.8, at the recent breakout point, with next support at the major up trendline currently intersecting around 43.7. Pivotal support then lies at 43.3.
Unlike 'regular' equities (of individual companies), QQQQ doesn't always see a good sized expansion of daily trading volume when this stock takes off. It was a holiday week of course and there were less players willing to pony up and jump into this rally. I find that there's generally some distrust of rallies (or sell offs) that happen around major holidays where volume slackens due to many traders taking a break. The On Balance Volume (OBV) line went sideways on Thursday's strong advance, injecting a slightly cautious note relative to the next couple of trading days; a correction wouldn't surprise.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) was starting to show buoyancy prior to this past week even and it went on in the holiday shortened week to achieve an important upside chart/technical breakout. The apparent double top RUT made at 625, would have (only) been 'confirmed' if the subsequent downswing after the second peak at 625 had led to a move that pierced the low made prior to the double top; that intraday low was 552. RUT ended up falling to 553 and made an approximate double bottom. That sort of set the stage for the upside possibilities that developed.
The subsequent rally led to the prior two highs at 625 being pierced in the trading week that ended on Thursday. The ability of RUT to hold above its long-standing UP trendline in December was also a bullish omen. All to the good, as this sector's doing well is positive for the overall economy's attempt to get rolling again.
I've noted support on the RUT daily chart around 629, then down at 600 which is a pivotal support currently. Overhead resistance is figured (by me) in the 660 area, with major resistance around 700.
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.