THE BOTTOM LINE:
How could further advances in the market be predicted without knowing the resolution of the debt ceiling crisis? Simple, in that price action tends to predict future Market direction. This is one of the primary foundations of technical analysis and why Dow theory 'works' to predict whether a recessionary period of bad earnings is in the cards for example. I got asked this question more than once after I wrote last week that price action from the prior week (before the Congressional logjam was broken) suggested higher levels ahead period. I didn't write that what I was anticipating ahead was 'contingent' on the United States NOT going into default.
I recall thinking I should have hedged myself and said my projection of a higher prices would ONLY work out IF Congress did its part but am pretty habituated to forecasting on a technical basis alone. Not that there can't be unanticipated events and surprises but price action of the major indexes was implying that the political crisis was going to be resolved and stocks were going UP. Amazing how chart pattern analysis WORKS in forecasting much if not most of the time!
If you looked at my column last week, you may recall that I put some bullish stock in the 'key' upside reversal I highlighted with the S&P 500 (SPX). By way of follow up, I include next the updated weekly SPX chart. Based on the upper end of SPX's broad weekly uptrend channel SPX could reach 1800 and above before it would hit any technical 'resistance'.
Speaking of possible upside resistance ahead I anticipate technical resistance in the red-hot Nasdaq market around 4000 basis the Nasdaq Composite (COMP) Index. What's the saying about "too hot not to cool down"! Moreover, bullish sentiment spiked on Friday in terms of my (CPRATIO) indicator as slightly over 2 million equity calls were traded on the CBOE. I tend to want to exit when so many traders are jumping into calls.
I've noticed the tendency for the SPX volatility index, in recent months at least, to be associated with bottoms when the VIX got up to the 20 area. VIX ended the week at 13. There's a minor tendency for interim tops to be associated with relatively low VIX levels around 12 or under.
The Dow is sort of being 'dragged' along as many of the 30 INDU stocks are in congestion patterns with trade below prior highs. INDU did make an apparent double bottom low on its dip under 14800 support, which was a 'confirming' bullish indicator for the overall market, but TECH stocks are leading the way. We can of course point to the love affair with Google and some other stocks within the Nasdaq market for putting the Composite on track to probably getting to or near 4000.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart saw good upside follow through in the bullish action of the prior week. I wrote last week that "SPX looks headed still higher". A risk to say so unequivocally no doubt and I wondered about this as I watched weekend political pundits predict disaster ahead on a default scenario! Anyway, bullish upside follow is what occurred. So much so that SPX has now reached minor technical resistance implied by SPX's upper channel line intersecting currently around 1745-1750. Next key resistance is projected in the 1800 area.
Key support is seen down in the 1700 area, with support extending to around 1680. SPX is now back into overbought territory, as is the most recent daily reading of my call to put (ratio) sentiment indicator. SPX may be getting close to having a short-term pullback/correction.
We're of course in earning reporting season so look for cross currents. Goldman (GS), now in the Dow 30 Average, is an example of how the charts PREDICT as the stock traced out a triple top from mid-June on and then boom came a disappointing Q3 earning report this past week.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart saw a strong bullish follow through dating from the Index's recover from a level above its prior downswing low. A series of higher relative (downswing) lows being of course the definition of an uptrend.
OEX may now be at least minor resistance at 777-780 as suggested by the upper trendline. A breakout move above this trendline, that's sustained, would suggest further upside momentum and potential to the 800 area. Technical support is highlighted around 765 and then extends down to 755-752.
I noted last week that OEX had gotten within a hair's breath of a 'fully' oversold (RSI) reading at its last bottom and now is getting close to an overbought RSI reading. However, in terms of the Relative Strength Index, I don't necessarily anticipate tops in a strong bull move until or unless RSI gets well into its 'typical' overbought zone and then sometimes not before it gets there two or more times. I would shy away from initiating further bullish trades when RSI hits the 70 area or above, given the significant risk of a downside correction.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart is bullish as the recent rally saw a further 200 point gain to next resistance in the 15400 area. Key next resistance is seen around 15000-15550, then at prior highs in the 15665-15710 zone.
The Dow stocks are a mixed bag with strong bullish moves seen in AXP, BA, INDU bellwether GE, MMM, NKE, PFE, VZ and V. Not enough stocks to say that the Dow is going to be leading this market. Moreover, bearish charts are apparent with IBM, MRK and UNH. The other 19 Dow stocks are in mixed, mostly sideways, patterns. Not a lot to get excited about in the Industrials unless you have participation in the stocks mentioned in strong uptrends.
I'll repeat what I said last week that "I'm mildly, not wildly, bullish" on the Dow. Study of the weekly INDU chart (not shown) would suggest that if the Dow can achieve a decisive upside penetration of its 15560-15700 resistance zone, especially on a weekly Closing basis, there's potential to 17000 ahead.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index chart continues strongly bullish and COMP has reached a new high after breaking out above 3820 resistance, now seen as initial/near support. Pivotal next resistance now looks like 3965-4000, possibly extending to 4100 over time, based on a broad daily chart uptrend channel. On long-term weekly and monthly charts (not shown) 4000 is also seen as potential major resistance area.
While COMP isn't yet showing a fully overbought reading on the 13-day RSI, on longer-term charts the Index is about as extreme as I've seen previously. I don't know what would moderate this very strong advance, almost 'bubble' like, but as the old saying goes, bull markets can die of their own 'weight'. Valuations may be too high to be sustained but that's a further off consideration at this point it appears. I don't underestimate runaway upside momentum, especially in tech stocks as what is a normal or 'proper' price to earnings ratio is a lot of guesswork; and what investors and speculators are willing to chase after.
Also at a bullish high point is my sentiment indicator, which is staring to reflect what may be unrealistic expectations for exceptional earnings growth. We've been through these cycles before. PE's get very high until there's an earnings stumble.
Near support as noted already is suggested at 3820, with next support at 3750, extending to 3700.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart also is strongly bullish and the most recent upside price gap looks like either a runaway type gap occurring around the midpoint of a move or something else. Beware of a top forming in these circumstances as price gaps can then look like an 'exhaustion' gap which sometimes comes at interim tops. Hard to predict yet as to whether NDX is only at the midpoint of a move or nearer the end of one. I suggest being cautious and not taking on further bullish positions.
I wrote last week that "a re-test of prior highs seems likely", something of an understatement as the big cap Nas 100 accelerated so strongly. Once traders get on a bandwagon, especially in sexy tech/internet areas, it's look out above, and below!
I've highlighted potential resistance at 3400, extending to 3450, and then possibly to 3500 based on the broadest possible uptrend price channel based on the daily NDX chart. Weekly chart considerations would suggest the same 3450 resistance area, but NDX could certainly hit 3500 given current upside momentum.
Near support is suggested in the 3250, extending to 3200. Fairly major support comes in around 3100. Hang on for the ride, roller coaster or otherwise! Long-term charts suggest that NDX is about as overbought as it gotten historically, which is not to say that the first high such reading is the last one.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) chart is showing an accelerating bullish momentum advance fully consistent with the underlying Nas 100 Index. Next resistance is projected in the 83 area. The broadest possible uptrend channel suggests next higher technical resistance around 85, possibly closer to 86. Long-term weekly chart (not shown here) considerations suggest the 85 area as where QQQ would be quite 'extended' on the upside.
Showing a type of unusual volume pattern for QQQ anyway is the jump in daily trading volume on Friday's overnight (from Thursday) runaway gap higher as QQQ shot above 82.
I've highlighted support in the 80 area, then back at 78.
Speaking of volume considerations, On Balance Volume (OBV) is in a strong upward trend, which is consistent with the strong price advance.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart is also in a quite bullish pattern as RUT rallied strongly though its prior highs and looks headed toward the upper end of its broad uptrend price channel. The same type of 'runaway' price gap as seen with Nasdaq suggests that RUT could be about half way in its current move. A possible test of the upper end of RUT's uptrend channel suggests potential to the 1130-1135 area. The upper/resistance end of RUT's weekly chart uptrend channel (not shown) comes in not far off from the daily chart, at 1143-1145.
Near support is highlighted in the 1080 area, then at RUT's up trendline, currently intersecting around 1052.
RUT looks headed still higher but I wouldn't be chasing this Index higher, with possible further upside potential about equal to downside risk, assuming RUT were to pull back to support at the 21-day moving average.
GOOD TRADING SUCCESS!