THE BOTTOM LINE:
Back in a different era, before the periodic dominance of tech stocks there were periods of market strength mostly centered in the big cap Dow stocks as that Average was the one mostly shooting higher. This pattern was sometimes described as a 'solitary walk of the Dow'. We can now wonder if the Nasdaq 100 (NDX) is doing the same thing. Of course Google's 11% gain on Friday accounted for much of the Friday sky shoot in the Nasdaq 100 (NDX).
The end of the week NDX spurt negated my Thursday concern mentioned in my Trader's Corner column , that there was a pronounced bearish price/RSI divergence in that index especially. With the Nas 100's strong Friday finish, RSI has just about, not quite, 'confirmed' the index in a similar new high. There's certainly no longer a wide divergence.
Many of the technical indicators put this extended rally in a high risk (for a) correction area. That doesn't mean that prices won't go still higher, just that further expectations of a lot more upside is countered by the risk to high risk of a shakeout. There does reach a point where all bullish news is priced into stocks.
A potential shakeout ahead is forewarned in daily sentiment readings that spiked higher into my 'extreme' bullish zone on 2 days this past week. Ultra bullishness on key tech stocks is what is driving this, whereas the S&P and the Dow are struggling to break out above technical resistance. Can the Nasdaq just go its own way and not have the S&P coming along for the party? There's some precedence for serious decoupling of a key index from the rest of the market. Stay tuned on that!
Many of the major indexes are in the 'red' (overbought) RSI zone on a daily chart basis, where length setting is 13 days. However, on a weekly chart basis, even the red-hot NDX is not yet at an 'overbought' extreme as measured by the 13-week Relative Strength Index (RSI) and the MACD indicator, as seen on my first chart. Is the next stop for NDX a re-test of its 11/2/07 weekly high at 2239? It's certainly a next looming target given that NDX has achieved a decisive upside penetration of the two prior highs (2056 & 2059) made since that 3-year ago peak.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) daily chart is still somewhat mixed in that the Index hasn't been able to break out above a key 1173-1182 resistance zone as noted on the chart. This is not to say that the uptrend isn't very much intact. But breaking out above prior pivotal resistance is a milestone for SPX's ability to challenge or retest its prior 1220 high.
Given the recent overbought RSI readings and this past week's 2 daily spikes into high bullish extremes in my trader sentiment indicator, SPX has some risk of a shakeout. Of course the recent consolidation in the 1180 area may just be that; i.e., a 'consolidation' before there's another leg higher. Pointing out the risk of a pullback, temporary or otherwise, is a cautionary note here.
Besides the 1173-1182 zone, I've noted resistance on the chart at the prior 1220 high. Major resistance is in the 1300 area. Near support is projected for the 1150 area, then at 1120.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) has been lagging the S&P 500 somewhat, as OEX has stalled at the low end (at 532) of what I've defined as its 532-537 key resistance zone. I have to believe that strength in the big cap Nasdaq stocks is what is supporting OEX, but isn't enough currently to pull OEX up on the most recent Google inspired shot higher in the Nas 100. If the Nasdaq falters, it's hard to believe that the S&P won't weaken, perhaps more than the tech heavy Nasdaq. Again, as with the larger S&P 500, the uptrend in the big cap S&P 100 is very much intact.
The question in my mind at this juncture is whether there's going to be a pullback before OEX can challenge its prior 12-month highs in the 554 area. As I've said often before, once the retracement of a prior major decline exceeds 2/3rds of that decline, there is an increased likelihood that a recovery rally will at least make it back to the prior top.
Key near resistance is at 532, extending to 537, with more major resistance implied by the prior top in the 554 area.
I've noted near support this week at the 21-day moving average once again, which is currently at 520. A modest pullback would take OEX back into this area, which is also the top end of 2-week consolidation. Major support likely begins in the low-500 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) is bullish in its pattern but may be stalled here at the top end of its uptrend channel. This isn't to suggest that having come this far, INDU won't retest its prior 12-month high in the 11258 area. The rate of increase from here could continue to be slow however. However it gets there, whether after a near-term correction or not, the Dow seems likely to at least retest its prior top.
Assuming there a sizable next up leg in the Dow beyond 11200-11258, a next major target for INDU is to the 11700 area. With some key bellwethers like GE and JPM faltering, I don't envision such a substantial further advance ahead currently.
I've highlighted near support at 10877, at the 21-day moving average, with fairly major support beginning around 10600.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index chart remains quite bullish in its pattern. COMP's up trendline is showing a steep rate of ascent and this trendline has stayed intact. When the index reached the area of its bullish trendline, after the recent mostly sideways move coming into this past week, COMP shot higher again.
Just on price action alone, it looks like there should be another spurt higher that carries COMP to a retest of its prior 12-month high. If I look at the 'overbought' indicators like the 13-day RSI and, recently, the upward spike of bullish sentiment, I wonder how the index can maintain such a renewed strong upswing.
When bullish sentiment readings on my CPRATIO indicator stayed moderate, prior to this past week, I thought it a good omen for a continued advance and that's sure happened. Yes and double check! Assuming bullishness continues to build up, both overall and with some daily upward spikes, I become less confident that the Nasdaq can keep charging higher. I'm also aware that a 'bit in its teeth' (pardon horse metaphor) charging ahead bull, will often be accompanied by a lot of bullish conviction for some time; e.g., for 2-3 or more weeks.
The next potential technical resistance for COMP is in the 2518-2535 area, at its prior highs; 2535 was the highest intraday high and is highlighted on the chart. The 2535 area marked a major double top relative to highs made in late-May/early-June 2008. The big cap NDX has already exceeded its similar double top. However, COMP carries a lot of 'baggage' so to speak in that all Nasdaq market stocks are contained in the index. Not all tech stocks are seeing the earnings growth of an Apple or Google.
I've noted near support again at the fast rising 21-day moving average, currently at 2381. I didn't note these levels on the chart, but 2332 should be a next key support, with pivotal lower support if a pullback carried to as low as the 2250 area.
NASDAQ 100 (NDX) DAILY CHART:
As I wrote last week: "The Nasdaq 100 (NDX) has made a new Closing high and appears to be ready to achieve a decisive upside penetration of the top end of the index's recent narrow 1970-2030 trading range." And, another 'no brainer' was my add-on that: "Unlike the S&P and the Nas Composite, NDX has retraced nearly ALL its entire prior decline. It is unlikely that the index is going to get this close and not retest its prior high..." I think this prediction was a no-brainer in the sense that stocks and indexes repeat these patterns so often; i.e., retracing 66% of a prior move and then going on to achieve a 100% 'round-trip' retracement. Not so easy is to predict the NEXT move for NDX!
I've noted what may turn out to be minor resistance in the 2140 area assuming this rally keeps on track. The major next test for the index looks to be the top made 3 years ago, as of early-November, around 2239. The NDX chart is impressive technically, enough so that a further 50-100 point, or more, advance looks possible.
I will be watching the steep up trendline. When the current rate of change or momentum starts to slip and prices dip below that line, especially on a closing basis without a strong snap back rally the next day, I'll be anticipating a further correction. Such a correction is 'due' but it always looks that way when a strong trend goes on to being a super strong trend. It's hard to predict where these things will end, where a top will develop in this kind of market. A trendline break is often the first clue.
I've pegging near support in the low-2000 area, with next support (not highlighted) around 1963, then at 1900 even.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Bullish, bullish, bullish: the pattern of a decisive upside penetration of a prior key high, with the index or stock then taking off in a strong further spurt higher. You can see the effects of short-covering and renewed buying, probably at least initially on buy-stops (to also take on new or added long positions) placed just over 50.6.
52.6 may offer some resistance if this rally keeps up its furious pace higher, with fairly major resistance coming in around 55.0, which marked the high of nearly 3 years ago. November tends to be a month when fall highs often occur on a seasonal basis.
Near support: 49.4
Next support: 48.2, then 46.7
Near resistance: 52.6
Major resistance: 55.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT), as it turns out, has had a remarkably consistent and strong advance, with several intraday lows that were 'touches' making up a well-defined up trendline. I didn't note it as immediate support, as levels just below the relatively steep up trendline will keep changing day to day, but on Monday for example a drop below 694-695 would be an initial (downside) penetration of RUT's steep up trendline. I've noted 680 on the chart as support, then at 654, at the 200-day moving average.
Resistance is still noted at 720 from last week, then at the prior 12-month intraday high at 746.
As with the Nasdaq, it seems unlikely that RUT would exhibit the kind of buying power underlying the multiweek strong rally (dating from the late-August double bottom low) and get so close to its prior top without challenging or retesting that peak. However, watch the up trendline for signs of a break.
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.