THE BOTTOM LINE:
As I noted last week, when the VIX is 5% or more above its 10-day moving average, surprises then tend to follow on the upside. Such a strong rally was a surprise. Based on other technical and fundamental considerations, I was anticipating a further dip.
However, the S&P 500 (SPX) was resisting getting pulled below its 1180 support and the Nasdaq Composite (COMP) was mostly holding the pivotal 2500 level. It's also true that a narrow sideways trend after a strong prior advance, tends more often than not to be a consolidation of the dominant trend. Still, I was thinking that we were going to see a more 'normal' pullback; e.g., one that retraced a bigger portion of the last upswing.
About the VIX, it's turning out to be a pretty useful indicator when there are certain extremes that occur relative to the daily number relative to key moving average envelope lines. As I noted last week: "Of the last nine (now 10!) instances (since 4/16/10) of VIX trading 5% or more above its 10-day moving average, 6 (now 7) have preceded rallies."
CHART OF THE WEEK:
The updated VIX daily chart is seen below. This chart consists 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've analyzed the chart in a little more detail than last week. The pattern I'm noticing is that 'extremes' of the daily VIX below the 5 percent envelope band, which are theoretically bearish (low volatility), do not reliably forecast a top. There were a couple of instances where downside VIX extremes did lead to sell offs.
As with many indicators, some 'confirmation' should come from other related technical indicators or chart patterns (e.g., upside penetration of a down trendline). In the case of the early November minor top, the 13-day RSI was showing an overbought extreme. Top or bottom 'signals' are the reverse of the RSI, as a HIGH reading tends to suggest a possible next rally, a LOW reading, a possible top.
As highlighted above, there have been three instances (circled) where daily VIX readings that were 5 percent or more above its 10-day moving average and which preceded bottoming action and subsequent rallies. All in all, a pretty useful indicator when used per the 'model' shown here; i.e., use of the daily VIX in conjunction with a 10-day moving average, with moves above/below 5 percent (moving average) envelope lines.
So much for the past, what about the future? I anticipate that the major indexes will pierce their prior highs. It seems unlikely to me that this recent strong snap back rally will only lead to double tops. That said, the market is nearing a longer-term overbought condition, so I'm not banking on a major further up leg. SPX could advance into the 1270 to 1300 zone in December, but that's about the best upside I see before a correction sets in, most likely in January.
The Russell 2000 (RUT) is leading the way as it broke out to a decisive new high. RUT has a seasonal tendency to rally in the later part of year.
I've re-drawn uptrend channels on all my major index charts. (Trendlines often need to be redrawn as price action unfolds.) Recent lows made third points on which to draw internal up trendlines; i.e., ones connecting the most number of lows. The upper channel lines are then simply parallel lines that connect to the highest high(s) for the period shown.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index closed within a hair's breath of the prior 1226 (closing) high. Assuming there's not a second top in this area, the chart will be fully back on its bullish track. My redrawn uptrend channel is highlighted below.
Based on the line of support that developed at 1173-1175 based on 4 different intraday lows and given the dominant uptrend of the past few months, it wasn't too surprising technically to see a rally set up. Fundamentally, for all the unemployment, the reality seems to be those record corporate earnings.
I thought there was a better than even chance for SPX going below its prior 1173 low, but the basing action in this area on Monday-Tuesday of this past week suggested otherwise. Key resistance was at 1200 and SPX knifed through this area, suggesting at least a re-test of the prior high. Based on a possible move to the top end of SPX's uptrend channel, resistance doesn't come into play before the 1270 area. Interestingly, 1272 represents a 2/3rds, 66% retracement of the 2007-2009 decline.
Near support is at 1200-1202, extending to 1180-1173. Near resistance is 1227, then well above, at 1270-1272.
In terms of my technical indicators seen above, RSI remained mostly around a 'neutral' 50. In a bull market trend, if RSI resists falling below its mid-point between an oversold 30 and overbought 70, there's rally potential. Daily bullish/bearish sentiment readings stayed mostly in a similar neutral range, between its 1.2 and 1.9 'extremes'. In a bull market, fully oversold readings are few and far between.
S&P 100 (OEX) INDEX; DAILY CHART
The big cap S&P 100 (OEX) is lagging a bit relative to the S&P 500, since OEX hasn't quite closed in on its prior high. The index needs to clear its prior highs in the 553 area to suggest a further up leg. A rally back to this area, followed by a stall would suggest the formation of bearish double top. However, if the Nasdaq 100 continues its strong advance, OEX should also be pulled higher; maybe it lags, but still advances.
I've revised an uptrend line that 'works' as an internal/best fit trendline and suggests support around 530 currently. The 21-day moving average is also an expected support at 540.
Pivotal resistance is suggested by the prior 553 high. Next resistance is well above this, coming in around 570-571 currently as suggested by the upper end of the highlighted uptrend channel seen below. 574 is potential resistance implied by a Fibonacci 62% retracement of the October 2007 to March 2009 decline.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average also broke out above a line of resistance at 11200. Like OEX, INDU hasn't quite challenged its prior highs, which in the Dow is seen in the 11450 area. It should continue higher if the other major indexes continue their march higher. December has some investment crosscurrents that tend to favor the smaller companies (witness the very strong Russell 2000), but the Dow should continue to follow the leaders. This assumes that the prior highs will be exceeded. We have to watch for a possible double top of course.
About a third of the Dow 30 looks fully in gear to take INDU higher. I'd be more sure if it was 15 but strength or potential further strength in AA, CAT, DD, DIS (possibly), HD, INTC, KO, MCD (possibly), UTX and XOM look like they could pull INDU at least through its prior highs.
Key near support is at 11200, then in the 11000 area. Pivotal near resistance is in the 11450 area, then well above, at 11800. I should also mention the highs made in the 11760-11850 area in August 2008 as a potential resistance zone.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
I was speculating last week that the Nasdaq Composite (COMP) Index might still sink below its last low at 2460. NOT! Instead the Composite hung in around 2500 and then popped back above its 21-day moving average, which is usually a bullish plus. COMP went on to make a new Closing high this past week and has at least equaled its prior intraday high on its latest rally. I'd look for COMP to clear 2600 to stay on a bullish track.
In terms of a prior COMP top to look to as a means of projecting a possible next resistance, the intraday high going back nearly a decade to the 2001 top, is well above current levels at 2862; the prior high Close was at 2810 in the week ending 11/2/07. Resistance implied by the top end of COMP's daily chart uptrend channel currently intersects just over 2700.
Key near support is at 2500-2485, extending to 2460. Major support begins at 2400.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bullish and NDX made a new Closing high. It hasn't yet cleared its prior 2200 intraday high but it looks like the index will pierce that high also. The index only had a limited sell off to support in the 2100 area, with just one close below 2100 that lacked downside follow through the following day. A good reason to always look for 'confirmation' of a technical breakout/breakdown on that key SECOND day! Also, RSI stayed pretty much in the 'neutral' 50 area.
The dip to below the up trendline I was working with last week was short-lived. NDX would have had to fall below the prior downswing low at 2085 to suggest much further downside objectives. Big tech stocks remain kingmakers in this market.
Near technical resistance is suggested by the prior 2200 high. 2239 is a pivotal resistance as being the top reached for NDX in nearly a decade, since 2001. I've also highlighted possible resistance around 2250. Resistance beginning in the 2325 area is suggested by the upper end of NDX's uptrend channel.
Near technical support is at 2153, at the 21-day moving average, with pivotal support around 2100.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
As usual and so contrary to company stocks, QQQQ prices went up, up, up, while volume went down, down, down. Makes it look like a lot of short-covering was going on. I suggested last week that I'd short rallies to the 54 area (with an exiting stop at 54.5) and the Q's almost got there. Shorting recommendation withdrawn for now!
With a re-drawn up trendline and uptrend channel, the chart has a bullish pattern again. It is true that if the stock couldn't get above 54 again, it would set up a potential double top, but I'm no longer assuming that this is a likely outcome. The prior high in the 54 area remains a significant test for the stock certainly; and, which should help explain why volume was falling off as QQQQ approached its prior high.
Near support: 52.9
Next support: 52.2, extending to 50.8
Near resistance: 54.0
Next estimated resistance: 55.0
As I said in my initial 'bottom line' comments, the Russell 2000 (RUT) index has been leading the market. I should have redrawn my up trendline sooner, as the mid-November low in the 700 area made a forth point for an up trendline. The subsequent late-November lows made a 5th point, making it clear that RUT remained in a well-defined uptrend, albeit one that had a lower slope. Meanwhile I was still too focused at the previously broken, steeper, up trendline that kept me focused on possible resistance. WRONG! You snooze, you lose, with trendlines.
For example, I wrote last week 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." TRUE, but the pullbacks to 700, then to the 720 area, were good spots to buy calls, as opposed to buying a 'breakout' above 747 when the call premiums had shot up! When I started trading index options, after trading index futures, I learned NOT to buy technical 'breakouts'. My fills on 'market' orders were horrible. It was sure way to NOT make money on calls bought this way. But I digress.
RUT looks headed still higher, possibly next to 780, at the high end of its uptrend channel. 800 should offer fairly tough resistance, with major resistance in the 850 area, where the June 2007 top formed.
Near support is at 728, extending to 720. Fairly major support begins in the 700 area.
GOOD TRADING SUCCESS!