THE BOTTOM LINE:
Last week I predicted a consolidation before a push higher and this week I still have a bullish outlook since this past week saw a successful test of the prior highs as 'new' support. While bigger price swings seem here to stay with hi-frequency trading, technical principles still work.
The technical 'principle' that I'm referring to specifically is that prior highs in a well establish trading range, once penetrated (to the upside), should 'become' new support on subsequent pullbacks. There are various reasons why this dynamic tends to be but chief among them is that traders who bought the breakout move were willing to step up again when prices came back to the 'breakout' area. This just seems to be natural area where short-covering will ensue and buyers in general will come in.
The 200-day moving average assumes some importance here as one of the most widely followed technical type indicators among otherwise fundamentally oriented traders and fund managers; the S&P 500 (SPX) and 100 (OEX) faltered and reversed in this area this past week, as did the Nasdaq Composite (COMP). The Dow 30 (INDU) quickly got back above this key moving average by week's end and NDX found support on a pullback BACK to its 200-day average. Look for NDX and INDU to lead the way higher.
The low point was seen on Wednesday (the 9th) on a day when my CPRATIO sentiment indicator fell to a bullish 1.1; i.e., total CBOE equity put volume was close to being equal to total daily equity options call volume. You can follow this number, the way I keep it at least, by simply dividing daily CBOE equities-only call volume BY total daily equities put volume. Takes a mere minute to check on the CBOE web site statistics page.
Traders 'shouldn't have gotten overly bearish as support was found exactly where it 'should' have to maintain a bullish chart; i.e., at the prior upside 'breakout' point. If there's a decisive downside penetration of this expected support, then it's another story as that would be bearish action.
The weekly INDU chart is of interest below. The recent 3-week consolidation looks like a bull flag pattern which suggests a push higher ahead, such as a run to the 13000 area. If the Dow gets to around 13000, strong resistance is suggested by both the prior 12-month high and by a return to the previously broken up trendline; which I sometimes whimsically call the 'kiss of death' trendline.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) remains bullish on technical/chart basis as the recent pullback found support exactly where it 'should' have for a presumed bullish trend. Which is to say that SPX pulled back to what had been prior resistance for a prolonged period. After the breakout move above this resistance a stock or index meets a bullish test when this same area 'becomes' support on pullbacks. If you want to call the heart-stopping Wednesday sell off as a mere 'pullback'!
Key support is in the 1230 area, extending to 1200. Key near resistance is seen (again) in the area of the SPX's 200-day moving average, currently at 1272. A couple of consecutive day's closing above this average would suggest renewed upside momentum. Next pivotal resistance comes in around 1300. A couple of closes above 1300 would suggest further upside potential back to the prior highs. Not in a straight line necessarily.
There's room on the upside for further gains before the Index would again be in an overbought situation. Trader 'sentiment' would have to get substantially more bullish to suggest danger from a contrary opinion point of view.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart remains bullish. It hasn't been able to break out to the upside and there is congestion as they say just under the 200-day average; that back and forth 'churning' in a 10-12 point zone. Nevertheless, a bullish pattern is that there are some stair step lows even in rough patches like this past week. The index is holding up and inching higher.
A bullish sign would be a strong move above OEX's 200-day moving average; the same as with SPX. That would in turn suggest further resistance starting around 580 could get churned through. If so, OEX would then look like it was good for another 20 points on the upside, to the 600 area. It may look like 600 is in the cards but a cautionary note is possible heavy supply (S&P big cap stocks for sale), above 570. The buyers have been at times shall we say 'timid'. We're scaring ourselves to death with Europe!
The coming week may make the trend clearer. Suggested to me is OEX gets above 570 heading to a test of 580 resistance. Not my top view of how this goes but an alternative view is OEX spending another 1-2 weeks bouncing between 550-580. A prolonged fall below 550 turns the near-term trend lower. The chart would then begin to look like a secondary top formed in the 570-580 area.
Near support begins in the 560 area with 550 as a pivotal support and a dip of much time under this level would turn the chart mixed again from its current bullish hue. Not that the price and volume action is wildly bullish, but OEX keep bouncing higher and lately has been making stair-step lows as it inches above 550-560. I anticipate further gains and a key to prospects for further gains is what happens if/when OEX hits 580 again.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average continues bullish in its pattern. BA, DIS, JNJ, MRK, UTX have or are breaking out to the upside and CSCO, HD, MCD and WMT remain in strong uptrends; other Dow stocks are mostly in a holding pattern or inching higher. A 'bottoms' up approach to the individual INDU stocks suggests further gains ahead.
Unlike the S&P, INDU rebounded back to its prior highs by the end of this past week already, seemingly all set to challenge levels above key resistance at 12200 and a level INDU looks ready to pierce on the way toward next resistance at 12400. With simply a strong move above 12200, 12600 becomes an upside target based on its last leg up. 13000 is a potential major target per a pattern I'm seeing with the weekly INDU chart seen above with some of my initial 'bottom line' comments.
Support is apparent in the 11800 area. A fall to below 11800 checks the more bullish view I'm seeing with last week's action.
Next key support is at 11650-11600; if the Dow falls below 11600 it could be setting up a retest of 11400 and what should be fairly major support.
INDU is leading the S&P side of the market. The group of stocks, although small, that Charles Dow envisioned as the most representative group of stocks to judge the overall economic trend. There have been of course stocks that fall out of INDU and new ones that come in. When I worked for Dow Jones (pre-Murdoch days) I never saw much info about what individuals made the selections and how. Somehow the Average does continue to 'work' and allow some good forecasting of the overall Market trend.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) consolidation above 2600 that's gone on for a while now suggests to me 'basing' action for a push through 2700 that gets sustained for more than a day or two. Initial resistance still is in the same area around 2700 and the 200-day moving average. Next key resistance comes in at 2750. If COMP gets through 2750 the index could be starting a push back to its 12-month highs in the 2880-2890 area.
My general rule of thumb is to assume at least potential for a retest of prior highs if an Index gets within striking distance such as the pattern we have here, especially enhanced if COMP pierces 2750.
The chart would turn mixed again with future closes below 2600; next support comes in at 2560-2550. I look for 2600 to hold up as support and resistance at 2700, then 2750, to be pierced in a possible next move toward my upper (red) envelope line.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) rebounded from key support in the 2300 area, after clearly establishing (again) the strong resistance/selling pressure that's getting triggered around 2400. There was a bearish downside chart gap the day following what had been a strong march to 2400. But Europe got very muddled and intense again. I assess that NDX weathered the storm nicely. You often get a sense of an index's strength by how it holds up on heavy selling. In the case of NDX, heavy selling only pushed the index back to, but not under, a line of chart support at 2300. The subsequent bounce from there suggests NDX is perceived cheap around 2300 and the stocks will get bought.
The index is perceived 'rich' currently at and above 2400. The chart pattern suggests potential for another test of 2400 and the resistance layered above. I'm watching closely on any rallies into the 2412-2438 zone; if NDX clears this resistance, upside potential is suggested to the 2500 area.
Key near support is at 2280-2300, extending to 2250. A Close below 2300 sets up a bearish break in the recent 30 day pattern. The next day then becomes the key test of whether the prior day's close was a fluke OR marked the start of a reversal and downside potential to 2200.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) continues to trade above support in the low-56 area and 56.5-56 is again 'established' as the low end of our current trading range. From the past month is established the high end of this trading range at 59. The fact that the index has again tested its support floor in the 56.5-56 area suggests the potential for another rally to 59, with its possibility of a breakout above this level and a move to 60 and above.
A break below the line of support at 56 changes the chart picture. Back to back closes below 56 would suggest another secondary top has been completed and there's potential of a further fall to 54.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart remains bullish to 'mixed' with support still established in the 720 area. Resistance is in the 760 to 770 zone and clearing this would set up a test of resistance from 780 to 800.
Conversely, a decisive downside break below 720 would suggest a test of key support at 700, extending to 680.
GOOD TRADING SUCCESS!