THE BOTTOM LINE:
While I anticipated that the major indexes would achieve bullish breakouts above resistance and go to new highs for the current advance, I didn't anticipate such smooth sailing. This past week's rally ran in a pretty much straight line higher, with the afterburners kicking in on Friday. The Nasdaq Composite (COMP) and the Russell 2000 (RUT) were the standout performers, with RUT even regaining its up trendline dating from its March 2009 low.
COMP and RUT have so far fulfilled my expectation that regaining MORE than 66% of the late-January/early February decline would at a minimum suggest a retest of the prior high. COMP, at its Friday close of 2326, cleared the prior closing high of 2320.
RUT's rally not only exceeded the index's prior 649 top but also broke out above key resistance implied by its previously broken up trendline dating from last March. As I noted some weeks back, the small to mid-cap stocks often get a boost in Q1, as reallocation of money goes into some of the smaller companies.
True to form, traders have gotten quite bullish now that (probably) the best and 'easiest' part of the move is behind us. I have started to scale out of some long calls. Not that I don't think that the major indexes won't go still higher but I like to let other folks fight it out for that last potential 'third' of a move. Bullish sentiment is suggesting some risk ahead for a shake out or sideways consolidation. This is also suggested by an overbought RSI on a daily chart basis. You be the judge based on further, individual chart, analysis below.
One key chart suggested the area where the Jan-Feb sell off would or 'should' have ended. The S&P 500 weekly chart below suggested technical support to be found on the pullback into early-February. Just as resistance can be implied by a return to a previously broken up trendline (see SPX, COMP and NDX daily charts), support is often found on a pullback to a previously penetrated up trendline; i.e., prior resistance, once exceeded, 'becoming' later support on pullbacks. There is still some ways to go for SPX to achieve a substantial new up leg (above 1150).
The weekly Relative Strength indicator (on an 8-week basis) seen above isn't yet back into an overbought zone. The first time a major index gets to such extremes isn't always significant. But, watch out for that second time!
COMP appears to have the greatest potential for a next leg higher, such as back into the 2450 to 2525 zone, assuming the index clears 2327 on a weekly closing basis.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart fulfilled bullish potential suggested by holding above 1100 on balance and then exceeding a 2/3rds retracement of the last decline. The gap up opening and sharp run up of Friday creates a bullish chart; one with good likelihood to challenge and probably exceed the prior 1150 high.
Above 1150 it's a hard to peg a next target area, but certain chart aspects suggest 1170-1180 as a next objective; I didn't label this area as 'resistance' since it's based on fulfilling a measured move. Significant technical resistance is however seen up in the 1200 area as this would mark a return to the prior up trendline or previous 'rate of change'. What was support (this trendline) now 'becomes' a key potential resistance.
Support is at 1115-1110; below this area, around 1090.
What's not as bullish as the chart pattern is the near-term overbought level suggested by the 13-day Relative Strength Index (RSI). However, price action 'trumps' indicators as indicators are only derived from price. Price and volume are the only tools of technical analysis. Still, overbought situations as prices approach a prior key high can suggest at least a flattening out of the trend or possible period of consolidation.
By Friday, trader sentiment was quite bullish as seen above with my "CPRATIO" indicator. Now that Alice in Wonderland is reborn in the movie theaters, it is a reminder that that appearances are not always what they seem. Through the looking glass of contrary option, high levels of bullishness implied by the equities call to put daily volume ratios are NOT necessarily bullish or not for long.
In a raging bull market bullish sentiment can remain very high for a long period. In this kind of more 'fragile' environment for stocks, where there's significant uncertainty about the strength and length of a recovery, high bullishness is less likely to be sustained; e.g., maybe for days, not usually for weeks.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index achieved a bullish breakout above 510 and 515 resistances. Friday's strong rally achieved a decisive upside penetration of not only the previous cluster of intraday highs but also cleared resistance implied by the 66% retracement level.
Is it now clear sailing ahead? I have highlighted some potential near resistance in the 522 area. Pivotal resistance is however up around 530-531. A close above 530 that was maintained in subsequent trading would suggest upside potential to 550 (and an area which may be tougher to overcome than 530).
Near support is at 515, extending to 510. The pivotal chart-changing support is in the 500 area. A close below 500 would be quite bearish at this point.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average is bullish again on a short-term basis with Friday's decisive upside move above prior highs and the 66% retracement level. To turn the chart bullish on an intermediate-term basis would require the Dow to pierce its previous (10730) high.
Near resistance/selling interest may next be found in the 10600 area; pivotal resistance then of course being at the previous high.
Near support is anticipated around 10400, then at 10200.
Of the 30 Dow stocks, 11 are now in strong to fairly strong uptrends. 11 Dow stocks in strong uptrends are enough to carry the Average higher even when many others (around 17) are lagging. If, for example, 10 other Dow stocks were in strong downtrends, that would definitely limit much further upside. But only a couple INDU stocks continue to decline on balance. 4 of the Dow 30 (BA, CSCO, DIS and HD) are in very strong rallies.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has achieved a bullish breakout above its prior highs and looks headed toward a possible test of resistance implied by the previously broken up trendline around 2350. COMP may be too 'overbought' in terms of sentiment and momentum indicators like the RSI to sail through THIS resistance. Longer-term, there is upside potential to the 2450 to 2535 area.
The breakout point was at 2250 as I suggested last week. It was open sky overhead after that. I've highlighted this same area (2250) now as near support. Next support is in the 2200 area.
NASDAQ 100 (NDX) DAILY CHART:
It was clear sailing after the Nasdaq 100 (NDX) pierced prior highs at 1826-1830. Coming on a bullish upside (overnight) price gap higher makes the chart look even more bullish in terms of further upside potential. The 1897-1900 area is the next key resistance, given the sizable cluster of prior intraday highs at 1893-1897 that occurred in early to mid-January. 1950 is also a very pivotal resistance in that it would bring NDX back to resistance implied by its previously broken up trendline, as highlighted on the chart.
I've noted near support around 1846, then at 1824. The 1800 area is now a must hold level for the bulls. We did see one previous close below 1800, but the Nas 100 stocks as a group kept rebounding from this area.
I've noted the nearness of the RSI to overbought levels. With this kind of chart, I don't see a major danger that NDX won't challenge and probably exceed its prior highs. The real question is whether another 50 points (above 1900) can be tacked on without a pullback or sideways move FIRST that pulls the RSI toward a more neutral mid-range reading.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Price action in the Nasdaq 100 tracking stock (QQQQ) of course mirrored the underlying NDX index last week. I have given up expecting that such rallies will ALSO occur with a big jump in QQQQ volume, unlike the expectation for stocks of companies.
The principal volume measure I anticipate 'confirming' bullish price action is a similar strong uptrend in the On Balance Volume (OBV) indicator. Big daily volume surges (per the volume 'bars') only seem to occur on sharp sell offs and at lows in QQQQ. So, a different measure of volume tends to accompany rallies versus downswings.
Near resistance has to be assumed as being at the prior 46.6 high. Next resistance is well above the 46.6 area, at 47.6; the intersection of the prior up trendline.
Key support is at 45 with next lower support around 44.0
RUSSELL 2000 (RUT) DAILY CHART:
It turned out as forecasted last week, with the Russell 2000 (RUT) daily chart having a "bull flag or pennant pattern, reflecting a bullish consolidation prior to another push higher; i.e., through and above 632-633 resistance." I'll say! RUT is 'leading' the major indexes in one chart aspect: RUT is back above its up trendline dating back a year now. This impresses me a lot but then I'm mostly a technical trader.
I've projected potential next resistance as being up around 690. I would include 700 as the upper end of a possible next key resistance zone; call it 690-700.
Pivotal support is at 630-633, then in the 625 to 620 area. I tend to use the 55-day moving average with the RUT daily chart, rather than the more commonly used 50-day average. 55 is a Fibonacci number and this variation in the average, although minor, just seems to 'work' well with this Index (in terms of suggesting support or resistance). For example, the 2/25 intraday dip to 620 exactly touched, and rebounded from, this Average.
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.