THE BOTTOM LINE:
In 4 out of the last 5 weeks, both the S&P and the Nasdaq indexes gained ground, but the S&P could now be stalled at its prior top and Nasdaq may be at some resistance also. One question is whether rising tech stocks can keep pulling all boats higher. The market is also 'overbought' in terms of extremes in bullish sentiment and as measured by the RSI indicator.
I wrote my most recent (Thursday, 3/11) Trader's Corner about how a return to a previously broken trendline can act as strong resistance (or support); this article can be accessed by clicking HERE. The Nasdaq Composite has reached resistance implied by its previously broken 1-year UP trendline and it's a question as to whether it can regain or move above this trendline; especially in an overbought market. On the other hand the Russell 2000 (RUT) has traded back above such implied trendline resistance.
The 21-hour RSI for ALL the major indexes (hourly chart not shown) has been trending lower of late as prices have continued to get pulled higher. This bearish divergence is suggesting possible selling pressures coming up. While I remain bullish on a longer-term basis, the major indexes now look to have some risk, even high risk, of a correction. I'll lay out specifics for each individual index.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart may be stalling at its prior 1150 high, a possibility that's more acute given the recent high levels of bullish sentiment and the Relative Strength Index (RSI) extreme. I'm not taking out puts here, but have exited call positions mostly as we wait to see how this situation of a possible double top plays out. I am not placing bets that the prior high will get pierced AND be followed by a sizable further up leg. Could happen, probably won't.
SPX fulfilled my bullish expectations of a retest of its prior high, once the index exceeded a 2/3rds retracement of its prior downswing. The Nasdaq has of course pierced its January highs and is still on a run. Whether SPX holds tech back or follows Nasdaq to new highs is a key question. I rate the possibility of a corrective pullback or at least a sideways move as greater than the outlook for sizable further gains near-term.
If SPX climbs above 1150, a next potential objective is to the 1180 area. Major resistance implied by extending the previously broken up trendline currently comes into play around 1215.
I've pegged support at 1124, then at 1112, with major support anticipated in the 1080 area.
I've noted already the overbought extreme seen in the 13-day Relative Strength Index (RSI). As I wrote last week: "...overbought situations as prices approach a prior key high can suggest at least a flattening out of the trend or possible period of consolidation."
High, high and high (see above) in terms of bullish expectations implied by my daily CBOE call to put ratios for total equities options volume. High bullish sentiment, coupled with a return to a prior tough resistance area and an overbought extreme suggested by the elevated RSI, isn't a situation suggesting sticking around to see if there are any further gains to be had in SPX calls.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) Index is approaching the prior cluster of January highs made in the 530-531 area. OEX has had to date a substantial rebound off its lows and is overbought. How much more upside could there be? A rhetorical question. If OEX pierces its prior highs, a next target is to 540. Between 540 and close to 560, it is hard to measure or project any particular technical resistance.
The limitations on OEX's further upside (above it's prior top) is the same as big brother S&P 500; i.e., an overbought market in terms of momentum oscillators like the Relative Strength Index/RSI and, in a sense, also overbought given such high bullishness.
Very near support is at 520, but the key support remains 515, extending down to the area of the 50-day moving average at 511. The 500 area is the beginning of fairly major support.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average did finally manage to break out above 10600 resistance. There is not major upside momentum here, as INDU and the S&P lag the Nasdaq. Moreover, the 21-hour RSI (not shown) is trending down, as prices have continued to work higher recently. This bearish price/RSI divergence suggests that INDU is vulnerable to a near-term downside correction.
Concern about a correction here is not suggesting that I am ready to bet against the current trend. I would consider taking out some DJX puts if INDU butts up against tough resistance implied by INDU's prior up trendline, currently intersecting around 10850. This kind of juncture, where momentum slows in an overbought market as there's an approach to a prior top, is where it gets dicey in eking out further gains in bullish strategies.
Next resistance has to be assumed for the previous 10730 high, then at the previously broken up trendline, currently intersecting around 10850.
Immediate support is at 10600 and a dip under this level could be the start of further weakness. Pivotal technical support comes in around 10400, with major support beginning at 10200.
Stocks to watch: bellwether INDU stock General Electric (GE) had a strong move on Friday (to 17) and a further advance above 17.5 could bode well for a similar bullish breakout above 10730 in the Average.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has maintained a bullish chart by continuing to advance after its breakout above the cluster of prior highs seen in January. I have noted possible resistance now coming in at recent highs, as COMP butts up against its previously broken up trendline. I have not noted any further resistance on my chart above this trendline, currently intersecting at 2374. Prior weekly upswing highs made in August '08 would be challenged at 2457 to 2473.
Support levels are 2300, then 2250. Major support likely begins in the 2200 area. As discussed relative to the S&P, high bullish sentiment and the RSI extreme suggest that it may be difficult for COMP to continue achieving the kind of strong gains seen in the prior two weeks.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) remains bullish in its pattern. The line of prior highs around 1900 now should offer support on pullbacks. Ability to find support on pullbacks to the 1900 area would suggest that the index was consolidating for a further push to try to regain (get back above) its 1-year up trendline, currently intersecting at 1960. If the Nas Composite breaks out above ITS previous up trendline and which COMP is touching now, it would lend credence to NDX continuing to move up to resistance implied by the comparable NDX trendline.
Near technical support is now up to 1900, with next support coming in around 1862, which is where the previous upside gap would get 'filled in'. Upside chart gaps tend to be areas of chart support on subsequent pullbacks.
It's tough to stand up for a prediction that a strong run like what NDX is in won't continue, but I assess further upside progress will be limited. At least downside risk of a correction appears greater than further upside potential.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The same chart pattern exists for QQQQ as with the Nasdaq 100 (NDX) chart, with my same concern about how much longer the current advance can go on. If the QQQQ rally is to continue, I would expect that the Q's will find support on any pullbacks to the prior 46.6 high. Next lower support is highlighted on the chart at 45.8. Major support begins in the 44 area.
Key resistance is projected as being 48-48.1, as such a further advance would return QQQQ to potential resistance implied by its previously broken up trendline and provides a pivotal technical test.
The contraction of daily trade volume on the continued strength seen Thursday-Friday is not adding to a bullish case for a further advance. However, On Balance Volume (OBV) continues to track upward.
RUSSELL 2000 (RUT) DAILY CHART:
I didn't think last week that the Russell 2000 (RUT) would be showing such technical strength. At least as implied by the fact that RUT is back in the same upside momentum (rate of price change) groove as it was before its up trendline got pierced on the last correction.
Where to from here? I noted next potential 'resistance' as suggested by my red down arrow just over 700. Above and beyond that, it is anyone's guess. If the chart remains bullish, we will at least know where technical support should be found: on pullbacks to its (regained) up trendline as was seen over Wed-Fri.
I've bumped up where I'm showing initial support this week to the 653 area; next support is noted at 633 on the chart.
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.