THE BOTTOM LINE:
This past week's price action saw little change in prices but price action was more volatile. When the VIX is 5% or more above it's 10-day moving average (as it was on Friday's close) surprises tend to come on the upside. However, a troubled Europe is a wild card, as well as the Korean situation.
Of the last nine instances (since 4/16/10) of VIX trading 5% or more above its 10-day moving average, 6 have preceded rallies. The 3 instances of VIX readings that did not lead to even much of a short-term bounce came within an overall topping process. Three of the 9 upside extremes led to just short-term minor rallies and three occasions preceded substantial advances, but often with some lag time. This pattern suggests a better than even chance of a further rally but not necessarily one having a lot of immediate upside potential.
CHART OF THE WEEK:
Continuing to feature a chart not usually seen in the mix of my major index daily charts, a VIX daily chart is seen below. Consisting of the daily VIX levels, a 10-day VIX moving average and 5 percent bands or trading 'envelopes' above and below the 10-day VIX average.
I can't say that the VIX pattern described above is a lot to go on. In terms of price action, the S&P 500 (SPX) has been resisting declines much below 1180; the Nas Composite had just one dip to 2460 support. While this past holiday-shortened week saw low volume, the sellers were not able to take this market down much.
This coming week should better tell the directional story. I've been looking for lower lows after any short-term rally attempts run their course; e.g., a further decline that would take COMP below 2160 (e.g., to 2100 or lower) and SPX to below 1180, possibly to the 1130 area.
On a weekly chart (not shown), longer-term, basis COMP and SPX are coming off overbought extremes from early-November and are showing either downside or flat momentum in terms of the weekly RSI and MACD. Another way of looking at declining momentum is to see that the S&P and Dow are trading below their 21-day moving averages; not so with the Nasdaq as COMP and NDX closed just above this key trading average on Wednesday and Friday.
There may be further rally attempts but I don't envision moves above current key resistance levels, such as to above 2200 in the Nasdaq 100 (NDX) and 550-553 in the S&P 100 (OEX).
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The short-term trend in the S&P 500 (SPX) index remains down or at best sideways, making the overall chart picture mixed; the intermediate and long-term trends remain up. My expectation remains for a new down leg that carries to below the recent downswing low at 1173. If SPX follows the common corrective a-b-c (down-up-down) pattern, the next down leg would exceed in points the first (peak to low) sell off of 54 points. Later on there are some seasonal influences that tend bullish, especially in December's second half; e.g., a 'Santa Claus rally'.
If an SPX rebound can't make it back above 1200 resistance, it would seem to point to another sell off, one that could end up in the 1130 area. If however there's a rally above 1200 and this become a new support, then the 1227 high could be re-tested; if 1227 is exceeded, the upside might then be back up to the previously broken up trendline, which could then slow down or stop a rally.
Near support is at 1180, then 1160, with fairly solid support in the 1130 area. Near resistance is at 1200, with the most pivotal resistance at the prior 1127 intraday high; above the prior top, resistance is seen around 1240 in the coming week.
In terms of my technical indicators seen above, RSI again finished the week at a 'neutral' reading. My sentiment indicator popped up with Wednesday's rally, which seemed to reflect an overly bullish expectation. However, Tuesday's down day saw CPRATIO dip lower. Recent trader sentiment is currently reflecting the ups and downs in price we've been seeing. I don't think there's all that much conviction out there; if the market rallies, there are willing buyers and on sell offs traders beat a hasty retreat. Sentiment is also neutral here.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is mixed in the same way as with the larger SPX (500) index. Prices are of course no longer advancing above the prior up trendline that was pierced at 540. Subsequently, prices ended the week under my revised up trendline highlighted on the OEX daily chart. OEX at 533.6 on Friday was under the line of resistance seen at 540, which also equals its current 21-day average.
As with SPX, I don't believe that we've seen the end of the recent downside correction. Corrections can be sideways for a time, but when it's a 'pause' to prior selling pressure, the next move after is often lower and my expectation is for another down leg ahead. Conversely, a move back above 540, with rallies setting up from this area, would suggest potential to retest the prior high.
Near support remains the 530 area, then at 520. Near resistance is at 540, then in the 550-553 area. A close above the prior 553 intraday and closing high, especially if not just a single day's event, would regain previous upside momentum.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average has been finding resistance repeatedly around 11200. I take this as a consolidation before another downswing. This pattern is not cut and dried bearish, as the same consolidation could be viewed as a prelude to a rally. I've found with INDU that a sideways move after a first decline (and this after a long run up) is more often an interlude before a second down leg. Stay tuned on the outcome ahead.
Key chart resistance is at 11200 and then comes in around 11285, with the most pivotal resistance in the 11410-11450 area. Pivotal support remains 11000, then at 10917-10880.
I noted last week that "Stocks in the Average looking capable of strong further upside are few in number; i.e., CAT, IBM, KO, MCD, and maybe XOM." No changes to this 'list'. There are a number of Dow stocks that are trading below their 50-day averages, some relatively recently, like CSCO (a bellwether that's a definite drag on INDU), CVX, GE (another S&P/Dow bellwether), HD, JPM, MMM, MSFT, PG, T, VZ and WMT. All in all, from this bottoms up approach, INDU is not looking like it's poised to resume its prior rally.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index chart remains mixed, although COMP was up on the week and has closed the week above the 21-day average. The mostly sideways trend, coming on the heels of COMP's first significant correction in some months, is more suggestive of a pattern that would complete itself with a second sell off ahead; as opposed to a consolidation that's only a pause before a strong uptrend resumes. The kind of price action we're seeing with the Composite is not uncommon when a market gets significantly 'overbought' on a longer-term weekly chart basis; e.g., volatility increases but the bulls can't push prices back up as easily anymore.
The Composite is hanging in above 2500 for longer than I thought it would which has also meant the Index is back above its 21-day moving average. If COMP re-tested its prior high that could be short-lived and set up a possible interim double top. I should balance any short-term bearish view here with the longer-term bullish outlook justified by not only technical considerations, but with the fundamental reality of record corporate profits.
On the bullish side, a move that pierced the prior 2593 high with further consolidation above 2593-2600 would demonstrate renewed bullish momentum. Major resistance would then look like 2700.
Key support is in the 2460 area, with a break of this level suggesting another down leg was underway which still seems more likely than an immediate resumption of the strong upside momentum seen before November, a seasonally mixed month. Next lower support looks to come in at 2400.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart remains somewhat mixed. I can't call this chart bearish by any stretch but the recent break suggests at least slowing of upside momentum. I've redraw an up trendline and we'll see if prices break under this also as occurred with the previous up trendline; a very steep up trendline.
Again this week, I'm hesitant to suggest that the current short-term rebound has run its course. It's wait and see on price action. If NDX starts falling below trendline support at 2140 and of course certainly below the prior (down) swing low at 2085, a move to 2050, even 2000 wouldn't be an unusual correction given the extent of the major advance from lows in the 1700-1750 area.
Technical resistance begins around 2180, extending to 2200. A close above 2200 that wasn't reversed in the following day's trade would put the strong bullish trend back on track.
I'll repeat my note of last week that I'm "bearish to the extent that the typical corrective pattern is a sell off, a rally that retraces half to (even) all of the prior decline, followed by a bigger point decline than the first sell off." We'll see how 'typical' NDX is in this regard as tech stocks have been on such a roll!
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Buyers of the NDX tracking stock weren't quite as enthusiastic as the big fund managers who were buying key individual Nas 100 stocks on their last dip. On Balance Volume (OBV) didn't surge higher but it was a choppy low volume holiday week. This coming week should tell the story. If my redrawn current up trendline is pierced, the Q's could fall below 52, then the prior low as well (50.8). Tech stocks depend on global sales and Europe worries seem bound to cause at least some adjustment in earnings prospects and projections. Cisco Systems (CSCO) is a prime example on their lowered guidance with the stock really getting whacked.
My view is toward QQQQ setting up for another decline from the 53 area or even 54 (and a possible interim double top), with a second down leg that might be a steeper decline than the first sell off from 54 to 50.8.
I indicated last week I'd be a seller on further rallies. A rally to the 54 area would be a candidate. If the trade was doable, a liquidating buy stop could be entered at 54.5. Risk, relative to a second decline that retested 51 support or carried to 50, would be a favorable risk to reward speculation.
Near support: 52.3, then 51.8
Next support: 50.8, extending to 50.0
Near resistance: 53.2
Major resistance: 54.0
RUSSELL 2000 (RUT) DAILY CHART:
We should be able to test a 'double top' theory the way that the Russell 2000 (RUT) index is tearing its way back toward its prior 739 top. Is RUT a harbinger of the Nasdaq continuing to snap back in the coming week? Stay tuned on that.
RUT's previously broken up trendline seems to be offering a rising line of resistance. Prices could just continue to rise along this steep line and go pretty far that way. The key to whether the prior trendline has bullish or bearish significance is seen by which side prices are on. If the index trades above the line again, it suggests that the prior strong uptrend is back on track. Conversely, if highs keep hitting this line AND the index can't exceed its prior top, I'd want to be in puts. Such a quick renewal of strong upside momentum would make it foolish to consider such a play. I trade against the dominate trend sometimes but I consider when to do that quite carefully.
Key resistance is at 739-740, then is projected in the 757-760 zone for the week ahead. Near support is at 715, then in the 701-700 area and extending to 690.
GOOD TRADING SUCCESS!