This market, which looked like it was bottoming as I wrote last week, came roaring back in the week just ended. Technical tip offs ahead of the rally included: a rounding bottom
on hourly charts, the S&P and Russell rebounding from their 200-day moving averages and double bottoms
that formed in the S&P and Nasdaq.
The foregoing technical factors DON'T really explain how strong the rally was. What DOES explain this is the 'perfect' set up for a bottom that I covered in a Trader's Corner piece I wrote in the week before last (6/21/11) which can be accessed HERE. I point out here that my related Trader's Corner articles are, where possible, adjuncts to my weekly Saturday Index Wrap as I'm always eager to write about technical analysis principles and knowledge relevant to the CURRENT trend.
I could see a BIG rally coming, although I couldn't pinpoint the exact timing for lift off, based on 1) the apparent double bottom (a powerful bullish pattern), 2) the oversold extreme seen in the 13-day RSI and last but not least #3), the extremes in bearish sentiment.
I think of these foregoing 3 factors, when they line up, as my 'big 3'; i.e., a bullish chart pattern and bearish 'oversold' extremes in both RSI and my sentiment model. I've been suggesting all along that the May to mid-June correction was one within a long-term BULL trend. Given this view, the bullish chart pattern plus my two key indicators at 'oversold' extremes, suggested a compelling buy with substantial upside that could warrant going in with a heavier position than a run of the mill trade; assuming a larger position didn't take all trading money and there was an exit plan if the trade went sour or we were just simply early in our timing. The last stages of a lengthily downside correction can get everyone pretty bearish and it's a challenge to go against a prevailing/strong view and take a bullish stance.
All chart time frames, hourly, daily and weekly, were a help in seeing how a rally was coming. I'll leave daily charts to my regular index commentaries. Of interest are the following:
WEEKLY DOW CHART
You've seen this weekly INDU chart before. Sometimes the Dow has the most reliable technical patterns. Here, the last pullback to the long-term up trendline held support perfectly at the low end of its uptrend channel and a strong rally followed. Perfect. And now there is a 4th low that establishes the Industrials longer-term up trendline. When this trendline is eventually broken (pierced on the downside), look out below. I think before that happens, INDU could get up to the 14000 area. The 30 stocks are in good long-term shape; 23 are trading above their 200-day moving averages. More on that in the Dow commentary further on.
TWO HOURLY S&P 500 (SPX) CHARTS:
There is a 'measuring' type rule of thumb that sometimes works with a rounding pattern. A rounding bottom also can be imagined as a 'saucer' (and is sometimes called a saucer bottom).
A potential upside price target is gotten by subtracting the bottom of the rounding bottom from the top end, then adding that number to the 'lip' of the saucer so to speak. You see the calculation below. Since one study suggested that this measurement for a next move 'works' only about a third of the time in stocks and since SPX is so close to the implied objective, I consider that the upside target has been achieved for now anyway, so am ready to take (some to all) call profits and run. Actually, I already did; who knows what Tuesday will bring! It's a long weekend. My next chart after one below speaks to another price target/objective implied by a bull flag pattern.
NOTE: This second hourly SPX chart below is a snapshot of prices through the THURSDAY (6/30) close only. This hourly chart illustration was used in my 6/30 Trader's Corner article .
In case you thought that buying would dry up as soon as end-of-quarter window dressing was over (i.e., on Friday 7/1), that isn't what the chart was 'saying' on Thursday as the bull flag pattern that formed during the afternoon, followed by the start of a breakout (above the upper end of the 'flag') suggested further strong follow through in subsequent trading.
Spot on, as SPX went on to close Friday at 1239. The rule of thumb 'measurement' for a next move after a flag pattern is traced out is to ADD the point gain made by the prior strong spurt higher (the so-called 'flagpole') TO the 'breakout' point; i.e., the price level on the upper end of the box-like flag where prices pierced that line.
Nice look-back Stevens, but where do we go from here? Higher still is my estimate, but not before there's some pause and/or pullback. The major indexes are now quite overbought on a short-term basis and, as you'll see on my daily charts, prices are probably 'too far' over their 21-day moving averages NOT to pull back some or at least move sideways.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has resumed its bullish chart pattern, after forming a key double bottom low. It wasn't a one-time dip to the 1260 area; rather pullbacks tested buying interest in this area a few times. The decisive upside penetration above resistance implied by the 21-day moving average, wasn't surprising given that the RSI had finally reached a 'fully' oversold extreme AND there was a marked drop in bullish sentiment.
Given the extent of the rally, the rebound in bullish sentiment, my lower most technical indicator, was moderate and bodes well for further gains. Further upside potential for sure, but near-term I'd be surprised if there wasn't a pullback or at least a sideways to slightly lower drift.
Near resistance is at 1345, then at the prior intraday high at 1370; the closing high was at 1363. A pullback during the summer season that ended up carrying SPX back to near 1300 wouldn't be surprising. I've noted support at 1300, extending to the 1287 area.
A dynamic rally after so much bearishness. I don't mind a decline, especially if I'm in index puts, but my interests also extend to hoping for a continued economic recovery. The job market is pretty grim out there by all reports and personal observation.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has reversed back to the upside and the key was the fact that the Index held at or slightly above its prior lows. A move above 597, the peak of OEX's last upswing high, is needed as a first sign that the intermediate uptrend has resumed, thereby joining the bullish short-term and long-term uptrends. Eventually, a move to a new closing high above 608 is needed to 'confirm' that the OEX trend is indeed continuing on its upward path.
Support is anticipated initially at 585, with key support below this, in the 570 area.
As with the other indexes, the scramble to add to portfolios this past week and to do short-covering buying as well among the speculative set, has left OEX overbought on a short to intermediate-term basis. A pullback here or after a further rally attempt to re-test 597, wouldn't be surprising. I never anticipate a new up leg to occur once OEX trades over the 3% envelope line (relative to the 'centered' 21-day moving average. Not without a corrective pullback first, which could be mostly sideways but could be more of dip as well.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) has resumed its strong long-term advance; see the weekly Dow chart in my initial 'bottom line' commentary above. INDU declined along its lower -3% envelope line but held well above support implied by its 200-day moving average. The first rally from the lower envelope line failed in the area of the 21-day moving average. The tip off for another rally attempt came when the Dow held its 11862 low and started to climb higher after that. Upside acceleration began when INDU again penetrated its 21-day moving average, this time with some buying power behind the move.
The strong rebound wasn't surprising given the number of Dow stocks (as I pointed out last week) that were in position for recovery rallies. The longer-term chart picture is bullish in that 12 of the 30 stocks either bounced from, or recovered to rally back above, their 200-day moving averages; i.e., AA, BA, CAT, DD, GE, HD, INTC, MRK, PG, TRV, VZ, XOM. 11 of the 30 Dow stocks never got as low as their 200-day averages; i.e., AXP, CVX, IBM, JNJ, KFT, KO, MCD, MMM, PFE, T and UTX. By this bottoms up way of looking at the Dow 30, there's good potential for 23 of the Dow stocks to power the Average to at least a retest of prior INDU highs in the 12830 to 12876 area.
I've highlighted what may be near-term resistance in the 12625-12700 price zone. INDU ended the week at a level that's over 3% above the 21-day 'centered' moving average. I don't see how this rally with sustain itself without a pause and a consolidation of recent gains as right now it's somewhat 'extended'. One form of consolidation is for a sideways to lower move, such as back to the 12400-12300 area. Besides 12400-12300, support is noted back at the moving average and then at 12000 which I always thought would be fairly major support.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) daily chart has regained its bullish footing with the powerful rally of this past week, coming after the well-established double bottom in the area that I've long pegged as major support around 2600.
The Composite, like the Nas 100, sunk below the widely followed 200-day moving average for a few days; actually, just 3 days in terms of closes below the 200-day average. The strong rebound wasn't surprising given the strong footing of the double bottom low. That double bottom has a wide 'stance' so to speak. The further apart the two lows of a double bottom, the bigger the 'base' to support a strong new up leg.
I'd rate the chances of a minor pullback setting up next as fairly high. I would be surprised (not shocked!) if COMP managed a close, or more importantly, two consecutive closes above its next resistance at 2835. Fairly major resistance begins in the 2863 to 2887 area, extending to 2900.
Near support is in the 2750 at highlighted (green up arrow) on the COMP daily chart; next support is at the 21-day moving average at 2685.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) index also made an important double bottom low along with the Composite and the chart has resumed its bullish pattern. The risk of buying NDX calls at recent lows was relatively LOW in my estimation, especially given how oversold the indexes had gotten. The 3rd day of intraday lows in the same area, at a prior important low, is about as much of ringing a bell at the bottom that you will ever get.
The strong rebound was a little surprising, especially with the prior drumbeat of bearish news. Bottoms are usually made this way. The 'breakout' then came with the decisive upside penetration of the 21-day moving average at 2250. 2300 was sliced through but I don't think the 2370-2372 resistance area will fall so quickly. NDX is now extended in terms of having come so far so fast. Time is typically needed to 'consolidate' such gains, usually taking the form of at least a minor pullback(s). Sometime a correction will be what I call a 'time' correction with a mostly sideways move that 'throws off' the near-term overbought condition.
I don't currently anticipate a move to below key initial support at 2300. The 'gap' there might be filled in but I anticipate that the bulls will hold there ground and support tech. There's more room on the upside for further gains in key tech stocks.
Key resistance as noted is in the 2370-2372 area, then of course at the prior highs around 2415-2417.
It's possible that NDX may be in a broad 2200-2400 trading range, especially given the tendency for the lack of big new moves in the good old summer time. Happy 4th of July by the way!
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has regained its bullish chops. I'm not looking for a move to decisive new highs however. I'd be very happy if QQQ settled into a predictable 59 to 54 trading range. I want it, so I probably won't get it!
I doubt that the Q's take out resistance around 58.4 without first pulling back a bit. Major resistance begins around 59 of course. NDX is too overbought on a short-term basis I think to do more than retest the 58.4 resistance area.
Technical support comes in around 56.5, then at the 21-day moving average, currently at 55.3. I anticipate good support at this key moving average.
As is perversely 'typical' of the NDX tracking stock, there was no big volume surge on the straight up move of this past week. Speaking of 'perverse', such sudden straight up moves almost works against getting 'too many' people into new long positions as so many wait for a pullback that doesn't some and doesn't come again. Also, traders and investors tend to take awhile to switch from being bearish/fearful to bullish/hopeful. Bullish or bearish sentiment doesn't turn on a dime!
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) resumed its bullish longer-term chart after the index again established the 772-774 area as the low end of its trading range AND after the last lowest low established bounced from support implied by its 200-day moving average. It remains to be seen if RUT can break out above the upper end of its current range in the 860-868 area.
I look for support on pullbacks initially to around 810, with next support at 795, extending to 785.
Resistance is implied by, first, the prior high at in the 848 area, then at the previous 868 top.
RUT traced out a fairly large top pattern, which formed a Head & Shoulder's (H&S) for one thing. The subsequent downside move realized a good part of the objective implied by this top.
RUT's April-June rally peaks can also be visualized as a rounding top which will often act as a powerful lid on further advances. However, the recent strong rebound has broken out above resistance implied by the rounding top which is bullish. I'm taking a wait and see attitude as far as forecasting upside potential beyond 848-850; or, to above the 868 prior high.
GOOD TRADING SUCCESS and a HAPPY AND SAFE FOURTH OF JULY!!