THE BOTTOM LINE:
High bullishness now matches high overbought readings but this rally won't necessarily stop just because there's increasing risk of a shakeout. By my count, a correction is coming but there should be a rally to higher highs after that.
As I've said many times about major bull moves, forecasting a particular price level where the indexes might top out (even if just an interim correction), is hard to predict. However, as usual with technical analysis there are some levels to watch as potential resistance. This is a time to go to a couple of weekly price charts to assess the bigger picture, starting with the S&P 500 (SPX) weekly chart.
I was a bit off in a prior column calculation that 1220 would represent a fibonacci 62% retracement of the Oct. 2007 to Mch. 2009 bear market decline; the actual retracement level is 1228. A 2/3rds-66% retracement at 1272 is also an area of potential resistance. If SPX gets to the 1270 area, the index might reach 1300, at least as an intraday high and where I'd be tempted to speculate on some puts (with an exit point at 1325).
As far as the longer-term Relative Strength Index (RSI) seen above, a measure both of trend momentum and potential overbought/oversold extremes, this indicator is about as high as it gets before a price correction sets in. However, RSI extremes are mostly warning of high risk situations (in terms of putting on new bullish trades), but aren't good at suggesting a specific resistance point that might deflect the current powerful advance.
I recently wrote an initial Trader's Corner article about (Elliott) Wave analysis of trends and am including these musings about what I see as an 'obvious' wave pattern based on weekly NDX index chart. This analysis would suggest that this index (and the market) is in a strong 3-wave type move, within a wave 5 advance.
A correction ahead, which is certainly due or overdue, would likely constitute the second corrective downswing ('small' wave 4) within a 5th wave 'final' rally, before a more major corrective pullback, most likely in the Q1 to Q2 period.
This is some thoughts on the bigger picture and not a specific guideline to trading decisions obviously.
Indicators that provide some shorter-term trading guidance are seen above by the approach of the weekly MACD and RSI to overbought extremes. I'm keenly interested in what happens if/when there's a weekly MACD reading at or above 83, as this level has been a predictor of tops for the period shown.
I respect a strong trend and haven't traded against this strong bull market, but I'm waiting and watching. While I still am long (unleveraged) some QQQQ stock, I'm out of my index call positions based on my trading philosophy to shy away from situations when daily chart indicators show overbought extremes, especially for a second and third time. However, I tend to get INTO positions when few believe the trend will turn; e.g., when there's low levels of bullish sentiment and low RSI readings as in the July and late-August (upside) reversals. This kind of entry strategy, when successful, makes for a no-pain gain if exiting before most traders believes in the new trend. Of course there were bullish chart patterns to go along with the mentioned upside reversals; e.g., the exact double bottom in RUT made in late-August.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
While I was also cautious last week about the S&P 500 (SPX) index and its prospects for a breakout move, I did note that "a breakout above recent highs that continues on above 1220 could be a final leg up before there was a correction." How far any such 'final' upleg will carry is a big question. I've noted near resistance around 1240, or the high end of the bullish uptrend channel seen on the daily chart. (The weekly SPX chart is shown above in my initial 'bottom line' comments.)
Bullish sentiment also shot up this past week as you can see with my CPRATIO indicator and puts my sentiment model into a higher risk area in terms of prospects for a correction. This is a 'leading' indicator in that some time can elapse before a top actually develops. Such high bullish sentiment is something I pay close attention to. It's as if many traders decided definitely that the Fed putting more money into circulation (by buying T-Bonds and printing the money for those purchases) is a done deal in terms of boosting our very slow economic recovery. However, this type action is unproven as to its effectiveness.
You'll note that the RSI is also at a major 'overbought' extreme. This can go on a while longer but such extreme readings (e.g., at 80 & above) are associated with market tops as you can see.
Initial support is again projected at the 21-day moving average (at 1180 currently), with pivotal technical support at 1160, extending to 1140. Near resistance is projected at 1240. Major resistance is suggested at 1300-1310 (not shown) based on a prior cluster of highs in Aug-early Sept 2008.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has a renewed bullish pattern as the index pierced significant resistance in the 535 area, although OEX hasn't yet cleared its prior 555 high. Resistance around 560 is suggested by the top end of the uptrend channel I've highlighted on the chart. I pointed out the extreme high reading seen with the 13-day RSI. While this (RSI) extreme doesn't point to top like a rally failure around 555 might, it does suggest high risk of a shakeout. Any bearish news coming along in an overbought market has a much greater impact than if the same market was oversold to neutral in terms of the RSI.
Near support continues to be assumed in the area of OEX's 21-day moving average, now up to 534. Next support should comes in around 520.
Near resistance is projected at 555, with this extending to 560, the top end of its current uptrend channel. Major resistance (not shown) is at 600, after a line of highs developed in this area in August-September 2008.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) renewed its bullish chart by breaking out above its prior highs. I've redrawn a bullish rising channel consistent with how I've highlighted the S&P indices. Next resistance implied by the upper end of this bull channel is suggested for the 11600 area. Major resistance, based on weekly chart (not shown) considerations is suggested at 11770-11850.
I wasn't seeing much on the 30 individual Dow stock charts last week that would have 'supported' such a strong move, but (besides IBM) AA, CAT, DIS, GE (a bellwether for the Dow), INTC, JNJ, JPM (maybe I should have taken that program head job at Chase in 1998!), PG, TRV, WMT and XOM looked especially good.
Near support begins at 11200, extending to 11138, at the 21-day moving average. Next support is at 10917-10900.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
I feel like a weekly broken record as the Nasdaq Composite (COMP) Index chart continues on its strong bullish course. This is visually confirmed by COMP's steep up trendline, with the latest move an overnight gap up from that line.
And speaking of repeats, I'd say again that "The RSI extreme suggests caution in adopting further or new bullish options strategies in key Nasdaq stocks but being overbought alone doesn't provide a compelling reason in adopting bearish strategies." Now the index is at a much greater 'overbought' extreme of course but it still doesnâ€™t mean that translates into an immediate top. (Forget of course about shorting a potential double top in the 2535 area.)
Resistance is suggested if COMP stalled at the top end of its uptrend channel intersecting at 2662 currently. Major resistance isn't suggested on the weekly chart (not shown) until the 2725-2735 area. Near support is noted at 2475, then at 2400.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is quite bullish and with the same steep uptrend as the Nas Composite, only a little more so. Potential resistance comes in next around 2239, at the November high of 3 years ago which may prove to be an interesting 'anniversary'. Possible resistance comes in around 2250, the upper end of NDX's uptrend channel. Of interest is potential resistance around 2330, which represents (only now) a 'minimal' 38% retracement of the huge bear decline from Mch 2000 to Oct 2002; NDX went from a closing high of 4691 to closing low of 815!
On such a current power march higher, overbought extremes are seen in momentum indicators like the Relative Strength Index (RSI), Stochastics and MACD; although with the NDX weekly MACD (at 74 Friday) doesn't hit an extremely 'overbought' condition until at 83 and above on any weekly close; see above weekly chart with my top-of-the-page "bottom line" comments that has NDX as THE current bellwether index.
The 13-day RSI at 88.8 is as high as it typically gets in the period shown below; this is also mostly true for a period going back to 2008. Theoretically the RSI could reach 100, but to do so the market would have to have the kind of rallies seen Thursday, every day for 13 days.
Support is suggested at 2100, then at 2050. Resistance noted in my opening paragraph.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
There's little to add for the QQQQ tracking stock in terms of bullish comments made for the underlying Nasdaq 100. The big story that we see with THIS chart is that there was finally a big volume pickup on this latest rally in QQQQ. Finally, there's the kind of volume confirmation that we would expect to see on a company stock that is in a maximum bullish posture.
Near support: 52.0-51.6
Next support: 51.0, then 50.0
Near resistance: 54
Major resistance: 55.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is no longer of course in a sideways drift after buyers powered the index well above resistance marked by the lengthily prior period (10/13-11/2) of resistance/selling pressure coming in that kept highs in the 711-714 area. This chart goes from bullish/mixed to bullish period.
As I wrote last week, the A breakout above 720 suggests that prior highs in the 740-746 area could be retested and RUT is almost there. I don't have a higher upside projection except to only marginally higher levels if prices start hitting the upper end of RUT's bullish uptrend channel; e.g., by 11/11, Thursday of this coming week, an intersection at 754.
Near support is at 700, extending to 690.
GOOD TRADING SUCCESS!