THE BOTTOM LINE:
One 'missing ingredient' for a correction arrived in that trader sentiment got quite bullish into mid-week. While I don't see a major correction starting, bearish Market influences are coming into play again.
I indicated last week that bullishness indicated by a high ratio of daily equity call volume to put volume was rising but could get more extreme. It did by mid-week in the week just ended.
Moreover, I wrote that" ... given the overbought conditions of all the major indexes, I'm not going to chase any rallies in terms of buying into them. Typically, there are 2-3 weeks of high bullish expectations (high bullish sentiment') before the market will have a deeper correction..."
Well, we got a couple of weeks of high call to put volume; enough so that the 5-day average of my call to put (daily volume) ratio line (CPRATIO) line got pushed into 'overbought, extreme bullishness' territory as can be seen on my S&P 500 (SPX) and Nasdaq Composite (COMP) daily charts further on.
I also wrote last week that I was anticipating that major indexes were nearing some technical 'resistance' around 1430 in SPX, 642 in OEX, 13300 in INDU, 3080 in the Composite, and 2765 in NDX.
RESULT: SPX got to 1414, OEX to 643, the Dow to 13289, COMP to 3090 and NDX topped out at 2750. The point being that technical resistance/selling pressures were being felt in the major indices.
In terms of any major resistances, I don't see that most of the indexes are at that point but the big cap S&P 100 (OEX) did back off from its previously broken up trendline in terms of its long-term weekly chart. This will be my first chart shown, followed by the S&P 500 weekly chart where a return to this same resistance pattern isn't seen yet. However, you can see on the SPX weekly chart that it's showing an overbought extreme in terms of the 8-week Relative Strength Index or RSI.
Just as a return to a prior high will often act as resistance, a prior up trendline, once penetrated, often acts as resistance once prices return to it; or, more accurately, to an extension of that line out into the future so to speak. OEX provides a good example.
This is not to say that the Index won't eventually break out above this line but a return to this trendline is often AT LEAST a temporary stumbling block. Sometimes such trendlines act as a complete stopper to rallies or just slows them down. On the other hand, the same pattern isn't duplicated in the S&P 500 per the chart following my first one.
The weekly chart for the broader S&P 500 is highlighted below and if SPX returned to resistance implied by its previously broken up trendline, the Index would have to get up to 1458 in the near-term and so far SPX is struggling some to stay above the 1400 level last seen in 2008.
I would also point out with the weekly SPX chart, the high level of the 8-week RSI; it's gotten into its 'typical' overbought zone. Overbought extremes are often a rolling affair. Markets can get overbought and then STAY overbought for some time; more so than 'oversold' extremes, at least within a major or primary uptrend. Still, we're in a higher risk area of corrective action.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
I've adjusted the up trendline of the S&P 500 (SPX) daily chart to reflect the lows seen in the 1340 area. The chart remains bullish as long as prices stay within its broad uptrend channel.
Support is suggested at 1372, at the current intersection of the lower support trendline; next support is then seen in the 1340, as it is on the weekly chart seen above.
Near resistance is in the 1410 area, then up in the 1437 area, at the upper trend channel boundary.
Of my key technical indicators, the most bearish in a contrary opinion sense is my sentiment indicator (CPRATIO) seen at bottom as this got into 'overbought-extreme bullishness' territory on a 5-day day moving average basis this past week. Predictably enough it wasn't until there were (finally) more 'believers' in the bull market that a correction started.
Of course there was a brief correction in early-March, but that didn't have the participation on the call side that was seen as SPX drove toward 1400. Now, it's all in how the uptrend line and/or prior lows hold up. A bullish sentiment extreme only sounds a cautionary note.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is bullish. The up trendline has been re-calculated on this chart as it was for SPX. As with SPX, the chart is bullish as long as prices trend higher within the broad uptrend price channel. Trendline support comes in at 625 currently, with next support suggested by the prior lows around 609-610.
Near resistance is in the 640 area, as is apparent both by the recent highs but also by the weekly OEX chart shown in my initial 'bottom line' comments above. Above 640-641, resistance implied by the current intersection of the high end of the uptrend channel is at 655.
I don't see OEX taking off again in another up leg above 640 but the chart remains bullish so further rallies wouldn't be a surprise. If forced to bet on another test of the lower channel line versus the upper, I'd look for a drift lower.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) has declined to KEY support in the 13000 area.
There's some risk that there's a break below the bullish up trendline. Next support is apparent in the 12800 area, extending to the prior intraday low around 12735.
Resistance is apparent just under 13300. Next resistance then looks like 13475-13500.
Last week I noted that JPM, BAC, GE and AXP especially had helped lead the Dow and the S&P higher, as the bank stocks and those with big financial units were bullish performers. Bellwether Dow stock IBM is hitting potential resistance at the upper end of its weekly chart uptrend channel (not shown) and that's a cautionary note.
AXP, BAC, DIS, HD, IBM, INTC, KFT, KO, MSFT, and PFE all continue to be in strong uptrends. 10 stocks in the 30 can carry the Dow still higher; better if it's 15.15+ of 30. The aforementioned 10 are ones to watch.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart remains bullish. COMP is in the middle of its broad uptrend channel. COMP was most recently finding some resistance in the 3100 area; next resistance is implied by the upper end of COMP's projected uptrend channel.
Support is suggested in the 3000-2980 area, at COMP's up trendline. Next support comes in around 2900. The chart remains most bullish as long as 3000 is not penetrated.
The overbought RSI readings are of concern for the continuation of the long-standing bull move in tech stocks. I see key tech bellwether Apple Computer (AAPL) as maybe near the end of its current monster move. They've put their billions in cash to work or planned it. What they're next rabbit out of the hat?
Strictly speaking, the 'non-confirmation' by the Relative Strength Index of the last up leg is also a cautionary note, as is the high bullish sentiment.
NASDAQ 100 (NDX); DAILY CHART:
As with the S&P charts, I've re-drawn NDX's up trendline to reflect the last (down) swing low to 2575, making now for a broader uptrend channel. The NDX chart now reflects more of the pattern of the Composite.
Near resistance is at 2740-2750, with next resistance at the upper trend channel boundary around 2800, which also happens to be a 50% retracement of the entire March 2000 to October 2002 bear market decline. This makes 2800 a milestone level for NDX.
Near support is anticipated at 2700, then at the intersection of the up trendline around 2670 currently, extending to 2650.
No news to you that the Nasdaq 100 has been in a super strong move and I have longer-term projections to 3000 for NDX. This would be quite a milestone if reached. Near-term, it's a question whether the Index can just continue moving higher, without another correction developing. Generally, I give the doubt to the trend, which continues strongly up. Given a few doubts I have about how long AAPL can keep leading NDX higher, I'd rather be out of calls and holding unleveraged QQQ stock to continue to have participation in big-cap tech.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) chart is bullish. The stock has hit recent resistance/selling pressure at 67-67.1. The Q's are near the upper end of a broad uptrend channel; based on its upper channel line, next resistance is suggested around 68.4.
Near support is at the lower trend channel boundary (the up trendline), currently intersecting at 65.5. Next support is at 64, extending to 63.2.
Recent trading volume as diminished some, not surprising at the NDX has been drifting sideways. Not much of a pullback, but this pause has brought in profit-taking in the stock.
I'd rate the odds of another move to the upper end of the channel as less than for a pullback to 66-65.5. The chart remains bullish as long as there's no trendline break however.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has been struggling now for weeks to rise above a well-defined line of resistance in the 833 area. A decisive upside penetration of this line is needed to get upside momentum going again and a retest of the recent intraday high at 843. Above this area there's likely resistance around 870, extending to the 886 area, at the upper channel line.
A decline under 807 would put RUT below its broad uptrend channel and suggest a possible retest of the prior recent low just under 800, at 796. Next major support is in the 750 area.
I don't see a lot of promise for RUT to again lead the charge higher in the broader market. This chart most resembles a rectangle top. However, a decisive upside penetration of the line of resistance would suggest potential for a sizable next upswing. If we knew that the sideways trend would go on weeks more, that's valuable to know for non-directional strategies but its not something that can be forecast from this chart.
GOOD TRADING SUCCESS!