THE BOTTOM LINE:
I didn't anticipate quite such a strong week as we just had but it was consistent with my expectation that the market had likely made a correction low on 2/5. That day had the kind of reversal pattern often seen at oversold bottoms, with a sharply lower new intraday low, followed by a strong rebound and a close near intraday highs.
Also relevant technically as to technical support was the S&P 500 (SPX) rebound from its weekly trendline I highlighted previously (and will update today), the rally in the Nasdaq 100 (NDX) after completion of a 66% retracement of the prior advance, and the fact that the S&P 100 retreated back to the beginning of the bearish rising Wedge pattern that starting forming in October; a common downside objective after the sharp sell off that typically ends the bearish rising Wedge formation.
CHART OF THE WEEK:
Upside penetration of an important resistance trendline often sees a subsequent pullback to an extension of that trendline. Prior resistance often 'becomes' subsequent support and that's true of trendlines as well. If there had been a weekly close below the S&P 500 weekly down trendline seen below, I would have been significantly more doubtful that a low was in progress and with a greater expectation that there was going to be one more downswing (making for an 'irregular' corrective pattern) in the major indexes. Instead there was the far more common down-up-down or a-b-c pattern; all nested within a V-bottom formation.
OK, for where we've BEEN, where do we go from here? Assuming that the retracement of the prior decline carries beyond a 2/3rds retracement of the prior decline, it's a good bet that the prior highs will be re-tested; and probably exceeded.
The major index that can be most easily analyzed by studying ALL the individual stocks is the Dow (INDU) and I keep chart groupings for all 30 stocks. In this 'bottoms up' approach and especially given that INDU stocks are NOT capitalization weighted (making it more complex to assess one stock versus the others), I made an analysis of the upside potential of the Dow in my recent (2/18) Trader's Corner article which can be seen HERE.
Based on the 15 INDU stocks in strong uptrends, 8 that are 'following' along to the upside (and still rated 'neutral') and with just 7 on their own bearish path, it's easy to see that the Dow is poised to go higher, although with market leadership still with the Nasdaq which should continue to outperform the S&P.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart has completed formation of a V-shaped bottom, which is the most common index chart pattern suggesting an end to a downside move. Per my suggestion of last week, the recovery to above 1100 suggests that SPX is back on a bullish track. I've highlighted on the daily chart below the Fibonacci 61.8% (62) and 66% retracement lines. As always, a recovery move beyond 2/3rds of the prior price swing provides a strong case that the previous top will at least be re-tested, if not exceeded.
In terms of the 13-day Relative Strength Index (RSI), the Index is no longer oversold and if looking at the 21-hour RSI (not shown), SPX is now overbought on a short-term (2-3 days) basis. Because of this I would not be surprised to see a pullback near term, considering possible initial resistance in the 62-66 per cent retracement zone and as suggested at the 50-day moving average. Stay tuned on that.
Near support is 1080, then around 1060. Near resistance, besides at 1115 at the 66% mark, is estimated at 1130. Pivotal resistance then comes in at the prior 1150 intraday high.
Bullish sentiment as seen above in my indicator has shown a fairly moderate recovery, suggesting that traders are being cautious in going into calls on individual equities. If the CPRATIO line had shot back up this past week, I would not consider the further bullish prospects as good as they otherwise look to be.
S&P 100 (OEX) INDEX; DAILY CHART
We got the rebound in the S&P 100 (OEX) above 505 that I thought last week would "suggest renewed upside momentum on an intermediate-term basis and consistent with the still long-term uptrend in the Market." I found it telling that OEX at its recent low, alone of the major indexes, reached a 'minimal' 25% retracement of its March-January advance before rebounding. 25 per cent represents a very 'light' retracement. This market doesn't appear to want to go down much!
I've noted (at the first red down arrow) possible resistance at the 50-day moving average. I did not do the same marking in the 514.4 area, at the 2/3rds retracement, but this is a benchmark level to watch also. From around 514-515, potential resistance extends to 520. 531 of course is the key prior top.
Very near support is in the 505 area and next at 495-496. A daily close below 490 would be bearish price action, especially if this lasted into the following trading session.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average cleared resistance in the 10200 area and kept going to not only take out its prior 10315 upswing high but to close above its 50-day moving average, all part of its bullish action of this past week.
There is possible resistance at the Friday high, which hits the 66% retracement point. A minor pullback would not be surprising early in the coming week given how far INDU has come off its recent bottom, as well as reflecting a near-term overbought situation. Next resistance comes in at 10600, with the most pivotal resistance at the prior (10730) intraday high.
Near support looks to come in around 10280; then at 10160 and next in the 10000 area. I had been downplaying the importance of the 10000 earlier this month, but good support/buying interest was seen on dips to this area on Tuesday into Friday of the week before last which formed a good support base for the most recent advance.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) only has to pierce 2250 in my estimation, at the 66% retracement, to suggest fairly clear sailing toward a retest of the prior top. I've noted possible next resistance at 2275. The chart is bullish in its pattern again given the strong V-bottom formation. That said, there will likely still be some downs along with the ups, especially given a near-term overbought condition.
Near support in COMP begins in the 2200 area, extending to 2185, with expected major support at the prior 2100 intraday low.
As I noted in regards to the S&P, sentiment readings have not shot back up to a bullish extreme, suggesting there's good further upside potential. The 13-day RSI is not only showing upside momentum of course, but has not gotten back up into 'overbought' territory.
NASDAQ 100 (NDX) DAILY CHART:
Consistent with the bullish bottoming action I discussed last week, the Nasdaq 100 (NDX) saw good further gains. More than I anticipated but I love profitable surprises! If you were following the hourly or other intraday charts, you may have noted the hourly Head & Shoulder's bottom that formed over 1/29 to 2/11. Once that second shoulder forms, even before there is an upside 'breakout', it is usually relatively low risk to go into calls or other bullish strategies; 'low risk', assuming adherence to a close protective stop/exit point.
Near support is at 1800, then at 1780. A close below 1780, not reversed (back to the upside) the following day would be bearish.
Key resistance is at 1826 to 1835, at the prior (up) swing high and the 66% retracement level, respectively. Next resistance then comes at the 1860 area. The most pivotal resistance then comes in at the cluster of prior intraday highs around 1895-1897.
Last week I suggested bullishness in an NDX close above its 50-day average, which was forecasted by similar breakout action in Intel (INTC) and Cisco Systems (CSCO) that preceded the Index. The value of bellwether stocks like these are that they can be leading 'indicators' so to speak.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
You may recall that I wrote last week that the "Nasdaq 100 tracking stock (QQQQ) looks to have formed a V-bottom, with a next key test of this bullish pattern coming in at 44.0 resistance." The strong move above 44 has given further 'definition' to the V-shaped bottom. A key bullish test now becomes the ability to continue on above the prior 44.8 swing high. I've noted immediate overhead resistance at 45, with next resistance anticipated around 46.
As with NDX, QQQQ is now overbought on a short-term basis, as best seen on an hourly chart using the RSI indicator with length (i.e., number of periods calculated in the formula) setting at a Fibonacci '21'. Some price dip(s) in the early part of the coming week should not be surprising, but I anticipate further upside ahead. Not only further upside, but assuming this rally doesn't stop at 45-45.1 (a key retracement), a move back to re-test the prior high.
Near support has now risen to the 44 area; next lower support comes in around 42.7.
The rally of this past week was a low volume one. QQQQ volume often does NOT expand in the direction of the trend. This often seems puzzling when compared to a regular stock (of a company). For this reason, I tend to rely most on the On Balance Volume (OBV) indicator; e.g., the slant of the OBV line should point in the direction of the trend at least on any Close that's in the direction of the most recent trend.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) Index continues in its strong recovery rally and could next reach what may be strong resistance at its previously broken up trendline. Near resistance is just overhead, at 633, then at the prior high in the 649 area.
Near support is at 610, then at 585, extending to the prior 580 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.