THE BOTTOM LINE:
The recent pause looks like the early stage of some further downside pressures, especially as the Q1 'window dressing' period is about over. At recent highs the S&P started pulling back from minor technical resistance, the Dow stopped at some intermediate resistance and the Nasdaq Composite (COMP) is either struggling to stay above its long-term resistance trendline or started pulling back after simply touching the equivalent trendline in the Nasdaq 100 index as will be seen with my charts.
While the long-term weekly chart picture, as suggested by the rising uptrend price channels in the major indexes, suggests substantial more upside potential over time (e.g., COMP could reach 2600 and higher, the S&P 500 (SPX) could get to 1300 and above), as a trader I'm most focused on the outlook for the coming 2-3 weeks.
I pointed out some current technical/chart considerations in my Thursday (3/25) Trader's Corner (TC) column, including the key downside reversal seen with the S&P daily chart this past Thursday and the aforementioned SPX and COMP broad weekly chart uptrend channels. For a look at these chart aspects, you can go this article online by clicking HERE.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
As noted in my initial comments, the S&P 500 (SPX) had a key downside reversal on Thursday, a formation that I tend to emphasize when I see it occur in an overbought market.
A downside reversal is typically defined as a new high, especially a decisive new high, followed by a Close below the prior 1-2 days' closing levels. I find the reversal pattern is 'strengthened' when the Close is under the prior day's LOW; e.g., as occurred in SPX but not in the Nas Composite, which had the same decisive new intraday high but closed below its prior day's Close only.
Whereas many market commentators don't define what "overbought" means, I specify that a short to intermediate-term overbought situation (2-3 days out to 2-3 weeks or more) is seen when the 13-day Relative Strength Index (RSI) is above 70/75 and when the CBOE call to put daily equities volume ratio is above 1.9-2.0. In my estimation there should be a yardstick that YOU can follow on your own; especially as I mainly write on a weekly basis. [I should note that the way I keep call/put ratios requires doing a simple division daily of call volume divided BY put volume.]
SPX has been trending higher with past weeks' intraday highs hugging the upper end of a narrow but steep uptrend channel. Near resistance is at 1187, at the upper end of this channel; call key near resistance as 1187-1190. It's difficult to define any major technical resistance before 1235-1240.
Near support is suggested at 1147, the low end of the channel highlighted below. A decisive upside OR downside penetration of this channel would suggest potential for a further move in that direction. Next support below the low end of the channel is in the 1124 to 1115 area.
RSI and MARKET SENTIMENT:
The RSI was recently trending lower as price continued higher, making for a bearish price/indicator divergence after RSI starting hitting overbought extremes above 70/75.
When a rally is extended AND the RSI overbought, extremes in bullish sentiment is something I pay close attention to. In a strong and prolonged run up it tends to be the SECOND or THIRD 'CPRATIO' daily reading above 1.9/2.0 (seen above) that precedes a correction worth strategizing about; e.g., as in deciding to exit some or all calls or taking on some puts for nimble traders.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) has continued to trend higher so I would have to rate the chart as bullish, but with the caveat that upside momentum is faltering. Given an overbought situation, I suggest being alert to signs of further weakness and to protecting profits gained on the strong and prolonged advance.
Above near technical resistance at 545, I don't see clear cut chart resistance until or unless OEX hits potentially tough resistance implied by the previously broken up trendline, currently intersecting up in the 565 area.
Near support comes in around 527, then in the 520 area, extending to 510.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average has managed to trade above resistance implied by its previously pierced intermediate up trendline, but by the end of this past week INDU was back under this line suggesting possible faltering upside momentum. INDU may have to 'throw off' some of the overbought condition by pulling back some, before it is in a position to manage a next up leg and achieve again the upside rate of (price) change or upside momentum it had before its late-January sell off; i.e., as would be seen in a move back above the steep upper trendline.
Next resistance above recent highs is at 11000. Major resistance is not seen before 11400-11500. It would be a major achievement for the Dow to advance another several hundred points from recent highs, WITHOUT an intervening correction, given how far INDU has advanced since the early-February lows. I don't see a further major up leg given the relatively few (around 9) Dow stocks that are in rip roaring advances; e.g., BA, DD, DIS, HD, HPQ, INTC, KFT, MCD, and UTX.
I peg near Dow support at the prior highs in the 10730 area; call it 10730-10700. Next support is at 10500.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
I kept some notations on the Nasdaq Composite (COMP) daily chart from recent Trader's Corner column. The chart demonstrates COMP's struggle to maintain its prior rate of upside momentum. My anticipation right now is that the upper trendline is also the upper resistance zone and the lower trendline the low end of a possible price channel going forward. While this doesn't imply that prices will fall to the LOW end of this uptrend channel, but it is common to see a pullback to or a bit below the middle of this channel.
Important near resistance comes in around 2411 back up at the trendline as noted by the first red down arrow, with resistance extending to the recent high at 2432; next resistance is 2450.
Near support is in the 2350 area, with next lower and a key support, at 2300.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) just about got to resistance I estimated last week for 1980 but then slipped back this past week. While NDX has been in a very strong uptrend, at its recent 1976 high it has finally hit tough resistance implied by the previously broken up trendline as highlighted on the chart. If NDX starts slipping under 1950, especially on a closing basis, there is potential for a pullback back to substantial support in the 1900 area; next support is seen around 1860.
Conversely, a move above 2000 resistance would demonstrate continued major buying interest. As well as putting the index back above the NDX up trendline traced out in the year prior to the late-January break. Such a move (above 2000) would represent a continued major bullish chart, contrary to some indicator warning signs I've been discussing.
Price action is the number one determinant of a bullish pattern, indicators are secondary. However, a corrective pullback near-term has an increased probability given the move back to the prior up trendline and also diminishes the odds of a less severe correction later. Straight up moves get precarious as far as potential for an eventual sharp reversal and pullback.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 (NDX) chart is bullish but faces increasing odds of a bigger pullback than seen in awhile, which would no doubt be accompanied by a sharp spike in daily trading volume.
This past week's high saw a touch to resistance implied by the extension of the previously pierced up trendline. I have sometimes called such trendlines, the 'kiss of death' trendline. Reversals happen often when a stock or index returns to its prior rate of upside price change/momentum. Price breaks, such as occurred earlier this year suggest that the prior rate of upside momentum cannot be maintained and this fact is visually confirmed on an attempt to regain the previous up trendline.
Key near resistance is at 48.6, extending to 49.0. A move above 49 in the coming week would demonstrate continued strong buying in the big cap tech stocks and where prices would go from there is a guess. No major resistance is in evidence before the 50-50.6 area.
Conversely, a move under 48, would suggest downside potential to the 47 area and a bit lower, especially back to 46.6, support anticipated at the area of the cluster of QQQQ prior highs. Next lower support is at 45.8, at the low end of the outlined uptrend channel.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) pulled back from its move well up into its previous uptrend channel. Immediate overhead resistance is at 685, then at the prior recent high at 693; above this prior high, potentially tough resistance then comes in around 714-715.
The slip in momentum seen recently suggests potential for some further weakness such as back to the 670 area or a bit lower. I do not mean to imply that RUT won't go still higher over time, only that a pullback may have begun now that buying related to the Q1 'window dressing' period is about over.
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.