THE BOTTOM LINE:
The big cap S&P 100 (OEX) index and the Nasdaq 100 (NDX), continue in strong uptrends, while the broad based S&P 500 (SPX), the Nasdaq Composite (COMP) and Dow 30 (INDU) have been going sideways for the past 2 weeks, backing off from some key resistances. The small cap Russell 2000 (RUT) is already in a correction and could be the canary in the coal mine. Action in RUT may be signaling that the major indexes could also experience the kind of 'normal' but significant pullbacks last seen in November-December.
It takes a lot of buying to keep this kind of rally going the way it has been for the last 11 weeks. The 'average' individual investor has decided that they won't be fooled by another apparent bull market only to then see big downswings.
As the Journal reported the other day, many individual investors, remembering the dot-com collapse, the 2008-09 financial crisis and volatility since then have viewed the latest rally not as a 'buy signal' but as an opportunity to raise some cash. According to mutual-fund flow tracker EPFR Global, individual investors have pulled $8.3 billion out of U.S. stock funds since January 2nd and have sunk almost $10.6 billion into bond funds.
Hey, great choice! Go from stocks, a standout performer, to bond funds, which are paying 2 percent, at least for the 10-year note. Hey, go out to 30 years, what used to be called the 'long bond' and you can pick up a whooping 3%. Meanwhile, when rates start going up again, fund (redemption) values will start going down. Brilliant choice! But, investors do tend to fight the last war.
The S&P 500 has doubled since bottoming in March 2009 but of course it's had some roller coaster rides, most recently stemming from the Greek debt crisis and causing many individual investors to look at this year's run up with skepticism.
Going back to the fund tracking EPFR firm, it hasn't found a single week since July in which individual investors put a net amount of new money into stocks. In the entire period since the March '09 bottom, there's been just TWO months of net inflows from individual investors.
Institutional investors, on the other hand, are buying. Well, they HAVE to when the market goes up or they will underperform other funds. If you take individual AND institutional investors, U.S. stock funds have seen inflows of nearly $600 million this year. That's not small change of course but it's not much compared to the aforementioned figures on net outflows from equities at $8.3 billion.
Without individual investors coming into the market with new money, it will be difficult for the rally to continue. Consumer confidence is up of course, but individual investors remember seeing fund values dive in roller coaster periods.
As to the Dow 30, which many media commentators equate with 'the' market, there is some cause for cynicism as INDU has closed above 13000 a number of times since the Dow first crossed above 13k in April 2007. I'll take an opposite bet and say that after a correction runs its course and one seems due, bet on more upside. Meanwhile take some profits off the table like individual investors are doing. I'd expect the red-hot Nasdaq 100 to correct last.
Watch Apple (AAPL) for early clues to an NDX correction. It's possible AAPL reaches the $590-600 area or a bit higher (640-650) before coming down. Hey, a bearish story or stories on Apple are due, especially by those who would are short the stock or would like to short it!
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is bullish but the Index has encountered resistance in the 1370=1375 area recently. Given the prolonged overbought condition suggested by the 13-day RSI, a pullback is a risk at this juncture. For example, if SPX retraced a nominal 38% Fibonacci correction from its recent high relative to its December low, this would result in a pullback to the 1310 area.
Meanwhile, SPX has continued to advance within its uptrend channel and it's up trendline has held to date. A decisive downside penetration of SPX's up trendline, currently intersecting at 1365 would suggest potential to test 1355-1350 support, which extends to 1340. 1330 is a next support, with significant technical support in the 1310-1300 price zone.
Resistance above 1375 is suggested at 1400, extending to 1418. I mentioned the relatively high 13-day Relative Strength Index/RSI. However, in terms of bullish/bearish sentiment, there is no 'extreme' in bullishness. As with investors, options traders are not going overboard in buying equities call options.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has maintained a bullish uptrend line for many weeks now. This is a 'problem' in terms of the length of time without more than minor short-lived dips. A problem in the sense that if not in it already, its high risk to take to the long side. Buying puts? I don't anticipate a deep correction, but it depends on how short-term oriented you are.
A correction that retraced a Fibonacci 38 percent of the last advance, would take OEX back to the 595 area. 600-595 is about the 'worst case' I envision for a pullback currently, although a further dip to 585, representing a 50% correction, is a possibility if 600 gave way. Just saying ...
Technical support is seen at the 21-day moving average around 613-612, with next support at 605. Resistance is highlighted (by the red down arrow) at 630, then up in the 645 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) continues overall bullish in terms of its chart but the recent sideways trend has formed a minor sideways rectangle formation which could warn of an interim top. The rectangle formed after INDU fell under its prior up trendline.
13000 is seen by the media and many market pundits as 'THE' key resistance. I don't see it as so important given the strong uptrends in many of the 30 stocks of the Dow. Still, technically, big even round numbers are often not insignificant in terms of potential resistance.
AXP, PFE, HD, IBM, INTC, KFT, MCD and MSFT are particularly strong and if you wanted to watch these 8, weakness in this set would exert a strong bearish influence. 5 of the 8 are consumer defensive type stocks so the market is not going wild here. 3 are tech and that's the other strong component of this bull market.
Resistance is seen at 13000-13050, then back at the previously broken up trendline, currently intersecting at 13240. This previously pierced up trendline becomes the so-called (as coined by Michael Jenkins) 'kiss of death' trendline, which suggests simply that a return to it often represents tough resistance.
Support is suggested by the 21-day moving average in the 12900 area, with next support at 12750. An eventual decline to 12553 would represent a 38% retracement of the last big up leg from the mid-December bottom. INDU is overbought but that's been the case in terms of the 13-day RSI for weeks now. Bull markets get overbought and stay overbought. Still, this situation warns of eventual shake-out potential after a prolonged period.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bullish and the Index is in the middle of its broad multimonth uptrend channel, which sometimes is the place where corrections develop, absent a push to the HIGH end of the price channel. The Index has hit resistance recently at 3000, which represents a major upside objective and milestone for COMP.
The declining Relative Strength Index (RSI), as prices trended higher, is a bearish divergence that suggests potential for a more substantial pullback than has been seen since the early to mid-December correction. If however COMP pierces 3000 decisively, there's no real technical resistance I can point to shy of the 3100 area, at COMP'S upper trend channel boundary.
Initial support is suggested at the 21-day average, currently at 2938, with support extending to 2900. If 2900 is pierced, there's potential for a fall to the low-2800 area, with 2815 representing a Fibonacci 38% retracement of the last up leg, dating from the mid-December low.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart continues to look quite bullish and NDX has climbed steeply higher, staying within its well-defined uptrend price channel for some 11 weeks now, with only very minor corrections. When bellwether Apple (AAPL) starts faltering, expect the same of NDX. AAPL has continued to race higher even after clearing $500. No trend lasts forever, it just seems that THIS stock will! I project AAPL resistance at 590, extending to around 640 currently. An amazing run from the $250 area in August-September!
As to 'resistance' in NDX, it's hard to figure except at its upper trend channel boundary in the 2700 area. NDX technical support is at expected initially at its up trendline, currently intersecting at 2611; next support is implied by its 21-day moving average at 2578.
If NDX retraced a quarter/25% of its run up from its mid-December low, the Index would fall to the 2540 area. The very strongest uptrends rarely retrace more than this; a 38% retracement would be to be to 2481.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock is in a very strong uptrend but has recently hit some resistance/selling pressure at 65. Next resistance is up in the 66 area; 66.3 is the current intersection of the upper channel line, where QQQ would again get close to my upper moving average envelope line set at 5% over the 21-day moving average and representing another type of 'overbought' extreme; e.g., compared to such measures as RSI, stochastics and MACD.
Support is at 64 even, then at 63.3. The same 25% retracement in QQQ as discussed for the underlying NDX, would be to 62.3. This is somewhat of a 'worst case' downside target for the stock currently, although a move to 60.9 (and a still-nominal 38% retracement) is another possibility as a target for a deeper pullback/correction.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has turned at least short-term bearish as RUT has fallen from a recent line of resistance that formed at 833. The Index pierced its up trendline, rallied back to that line which has 'become' resistance, then dropped to technical support at 800. Next support looks like 780.
A decline to 769 would represent a 50% retracement of RUT's last up leg dating from its mid-December low. Given that the Russell has been lagging the rest of the market for some time now, a retracement of at least 50% wouldn't be surprising.
'Setting up' or setting the stage so to speak for the recent decline was a period where prices were trending sideways, whereas the Relative Strength Index was drifting lower, making for a classic bearish RSI/price divergence.
GOOD TRADING SUCCESS!