THE BOTTOM LINE:
All major indexes achieved 'technical' upside breakouts above prior highs; exception, the stogy Dow. The market continues to advance, although at a slower pace than the prior week's barn burner.
The Dow Jones Industrial Average (INDU) ('Dow 30' as I tend to call it) continues to lag in line with my comments last week about the limited number of those 30 stocks with unmistakably bullish charts.
On a personal note, I'm back in the Big Apple this week for a reunion with friends, including a visit to the site of the new trade tower. The Wall Street area is still the cold and windy place in winter it was for the years I worked there. New York City is changing for the better. A city that never stands still!
CHARTS OF THE WEEK:
A couple for your consideration; one showing the overbought extremes this Market is getting too and another chart picking up on a VIX 'trading model' I've been working with. As with some other indicators it works differently depending on whether we're in a bull OR bear market.
Since the Nasdaq 100 (NDX) continues to lead this market, the overall market is unlikely to sell off in any big way. Focus on the NDX suggests a way to plot potential resistance: 1.) is the prior intraday high at 2239 hit by NDX back in November 2007. This is the most 'substantial' way of plotting possible resistance as suggested by a prior major high. 2.) a more qualified 'resistance' is suggested in the 2330 area by this level representing a Fibonacci 38% retracement of the huge market decline between March 2000 and October 2002. There is with NDX at least a target zone (2240-2330) we can work with as an area where the market could peak and take a breather.
The kind of extreme levels seen above in the WEEKLY Relative Strength Index (RSI) and (now) the weekly MACD indicator also suggest this is a high risk market in continuing to initiate bullish strategies. Overbought markets can and do keep advancing, but also share the characteristic that perceived bearish news tends to cause a MAGNIFIED reaction. Just so you're forewarned.
Certain trading type 'models' that can be set up with the CBOE Volatility Index (VIX) of the S&P 500 (SPX) index give an interesting take on things. I've been writing some lately about the tendency for rallies when the daily VIX is more than 5% above its 10-day moving average. This 'works' fairly well to suggest strong rally potential; not so much in reverse with a dip below the LOWER 5% envelope in suggesting vulnerability for a decline.
In my chart above I've circled some instances where the aforementioned high and low extremes occurred. On the bearish side, a very LOW daily VIX relative to the 5 percent moving average envelopes highlighted below, has sometimes suggested an impending top IF the overbought/oversold indicators like RSI and MACD (Moving Average Convergence/Divergence or 'mackdee') were also at the kind of extremes seen at prior tops as is the case now.
I would also note that the Nasdaq Composite (COMP) is not yet at the same kind of weekly overbought MACD extreme as the big cap Nas 100. A correction is always a concern when a rally goes on 'too long' and stocks get 'rich' relative to earnings. We know a correction is coming but don't know when and can only guess at price objectives for a next peak.
The major indexes are now (also) overbought on a short-term basis so a near-term and more minor correction wouldn't be a surprise. A high RSI or MACD offer one barometer of risk in bullish options strategies. On an intermediate-term chart basis, the picture is bullish. Clearing the prior line of tops says we're in a new up leg and don't bet against it. Not for awhile. Bullish spirits tend to be good ahead of the holidays; not for nothing came the concept of the 'santa claus' rally.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index did get 'fully' back on a bullish track by the move above its prior 1227 high. The Index is back squarely in the middle of the uptrend channel currently highlighted on my SPX daily chart. As long as support continues to develop around 1230-1227, look for higher levels on rallies ahead. 1250 may offer some resistance, but 1280 would offer more.
Bullish sentiment is quite high but this can go on for a while. It's not a precise market timing tool. Extreme levels of bullishness along WITH other chart related patterns (e.g., a double top) are quite predictive of an impending sell off. Not 'buying into' very high levels of trader bullishness has kept me out of trouble before. I have revised my 'overbought'/'oversold' sentiment zones (my lowermost indicator below) to ones more appropriate for the bull market phase we're in.
Very near support should be found around 1227. It tends to be integral to a bullish pattern to see support develop at prior resistance. Normally a breakout above a prior important high is a signal for a further up leg; a 'leg' implying a substantial move higher, such as 70-100 points in SPX. Support is next seen in the 1205-1200 area, extending to 1190. The prior low at 1173 is a key technical support for the bulls to hold.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index did a nice bullish pop above its prior high with a strong close on Friday. 553 now becomes a key near-term support; a couple of days closing below this level would suggest waning upside momentum. The other technical supports I find important at on the chart.
As with big brother S&P 500 this index looks headed higher. I've noted potential near resistance at 560. I can see OEX making a run at higher levels within its uptrend channel. This is why I note resistance at 574, more of an 'ultimate' upside target AT the trendline. Prices sometimes just get close to the upper part of a price channel before coming down.
Very near support should now be found on pullbacks to the area of the prior 553 high. We might see a day under on not much more than a fluke, but not usually two days back to back, which breaks bearish. The next technical support comes in around 540, then at the up trendline at 534, extending to the prior 527 (down) swing low.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average is the most watched index by the 'public' is also the major index holding back from making a new high; i.e., to above INDU's early-Nov intraday INDU peak at 11451. I consider intraday highs and lows as more than the 'shadow' importance given to these points in Japanese candle charts.
Not surprising to me based on last week's 'bottoms up' analysis of the 30 stocks comprising INDU. Flipping through saved charts of the 30 big cap stocks is feasible; drilling down more than this, such as looking individually at even 60 of the S&P 100 stocks takes more time than I have for it. I keep 5 chart groupings of 6 INDU stocks each in alphabetical order by ticker symbol. From a quick survey of these 5 'workspaces' I got last week that: "About a third of the Dow 30 looks fully in gear to take INDU higher. I'd be surer (of strong upside potential) if it was 15. 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." NOT!
I have to shuffle around some of my bullish list from last week by taking out DD, DIS, and MCD (for now) and adding GE (a key bellwether), AXP and VZ. Still, my strong-bullish list is stuck at around 10. As already said, I'd have more confidence in the Dow busting out to new highs if HALF (15) of the Dow 30 stocks were in strong bullish patterns. INDU is either a harbinger of a rally failure here or just lagging, as the capitalization weighted indices eventually pull INDU above its prior highs also.
Key near support remains 11200, with trendline support seen at 11075 currently. Major support begins at 11000. Near pivotal resistance as mentioned is in the area of the prior 11451 high. After that, projecting by INDU's possible trend channel, I've noted resistance at around 11850.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index renewed its bullish pattern so to speak with its decisive upside penetration of its prior high at 2593. There was a stronger move in the Composite this past week than in the previously red-hot Nasdaq 100. This is typical of a rally that 'broadens' out, as investors try to find more underplayed 'second tier' stocks and pivot away somewhat from the highest price multiples of the big cap favorites.
I look for higher prices and a possible move up toward the upper end of the highlighted uptrend channel seen below. Potential resistance is noted around 2680, then around 2742-2745.
Key near support is now at 2590-2600, with next lower support suggested by the lower trendline at 2540. Further support is at 2500, extending to the prior (down) swing low at 2460.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bullish and continues a bullish pattern with its move above the prior 2200 high. This level becomes a pivotal support in that a 'typical' bullish pattern sees prices hold above prior highs once they're pierced. Also consistent with a bullish chart is that support develops on pullbacks to the index's up trendline; a line currently intersecting around 2156-2160. Support at the prior (down) swing low is at 2085. A break of this level would point to an intermediate (downside) reversal.
Potential technical resistance is suggested at 2240, then up around 2336, at the current intersection of the upper channel line. 2239 is a pivotal resistance as a prior major top; the long term weekly chart is seen in my initial 'bottom line' comments above.
Near technical support is at 2153, at the 21-day moving average, with pivotal support around 2100.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
QQQQ (Nasdaq 100 tracking stock) is bullish in its pattern; a good bullish omen for a next up leg was suggested with the move above prior highs at 54. The recent move above resistance is not what I would call a 'decisive' upside penetration as there wasn't major follow through. Nevertheless the Q's advanced above the prior high, then traded down to that area on the final days of this past week; making for the bullish pattern where prior resistance, once exceeded, 'becomes' subsequent support. A slip back below 54 for more than a day becomes a possible sign of at least a short-term (downside) reversal.
Daily trading volume hasn't leaped but On Balance Volume (OBV) has moved steadily upward. On the contrary, we most often see noticeable daily (trading) volume surges in QQQQ before and during a significant sell off.
Near support: 54.0
Next support: 53.0
Near resistance: 55.0
Next estimated resistance: 57-57.1
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) index has an accelerating advance, consistent with its seasonal tendency to move higher toward the end of the year. This is especially true when the big cap stocks have racked up strong yearly gains, and investors and fund managers look to the smaller cap stocks for some further diversification in terms of company size.
My next target in RUT has been the 780 area and the index is almost there. A further technical resistance could come in at the upper (uptrend) channel line, currently intersecting around 790. 800 looks like an achievable target. RUT is also at an oversold extreme where shakeouts can be bumpy.
Near support is up to the 740 area, with next support at 720, extending to the low-700's.
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.