THE BOTTOM LINE:
The recent overbought RSI extremes seen in the Indices, the halt at the Dow 30's (INDU) down trendline resistance and a potential double top in the Nasdaq 100 (NDX) suggest technical reasons for a pause/correction.
I don't currently envision a major top forming and odds favor at least a retest ahead of prior highs ahead in the S&P 500 (SPX) in the 2130 area and the Nasdaq Composite (COMP) around 5230.
The aforementioned outlook assuming it goes that way in the near to intermediate-term would suggest that the big cap tech-heavy NDX would move still higher but 4800 looms as longer-term chart resistance. Over time NDX 5000 could be seen but that seems more likely as a late Q1-early Q2 potential objective.
Recently, we've (finally) seen traders get more bullish, given a pick up in equities' call volume relative to puts. It wouldn't be unusual for bullish trader sentiment to increase just when the Market has already had substantial gains from a bottom and now looks vulnerable for a correction or a minor pullback. Corrections could also include a period of sideways action that 'throws off' an overbought condition. It's frequently the nature of bullish sentiment to take time to build (consensus formation) and more time to subside.
The Russell 2000 (RUT) is the 'odd man out' here in that RUT hasn't yet managed to rebound even HALF of its prior decline. The Russell's recent rally fell a bit short (8 points so far) of a 50% upside retracement. If this lagging in the Russell is a warning relative to the other indices making much further upside progress, RUT has sounded it.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX) DAILY CHART:
The S&P 500 (SPX) has had strong upside momentum since the double bottom low, which is a 'strong' bullish chart formation. Ahead it remains to be seen if SPX can pierce its prior top and prolonged line of resistance that formed in the 2130-2132 area. The current 'overbought' extreme registered in the 13-day Relative Strength Index/RSI suggests possible backing and filling and a corrective pullback before SPX could retest, or substantially exceed, its prior top.
A sustained advance above 2100 is needed to regain long-term upside momentum. Resistance is highlighted at 2100, then in the 2132 area. Long-term resistance extends to 2200-2230. Near support is seen at 2050, then at the milestone 2000 level. I'd be watching for any sustained bearish downside penetration of SPX's 21-day moving average; this key trading average intersects currently at 2030.
SPX, as is the case with the other major indices (except RUT) is showing an overbought extreme in terms of the 13-day RSI. Bullish 'sentiment' shot up recently after lackluster 'neutral' readings in my CPRATIO indicator over much of the strong recovery rally. Traders were quite slow on the uptake as they seemed not to 'believe' actual price action over perceived economic and earnings uncertainties.
No trade suggestions. Buying SPX calls after the second bottom formed is behind us with its outstanding risk to reward potential. I would suggest buying a good-sized pullback only, such as back to near 2000. An actual print AT 2000 seems unlikely or unrealistic given proof of the bull market trend resumption.
The S&P 100 (OEX) INDEX DAILY CHART
The big cap S&P 100 (OEX) has had strong upside momentum since its late-September low which formed a secondary higher bullish low on rising 'relative strength' per the RSI indicator. Next up technically is a key test in the ability for OEX to pierce its key 940-948 resistance zone.
Near-term it may be unlikely for any move to a new Closing high given the overbought condition as seen with the Relative Strength Index. We could see a drop next in the RSI back to a more 'neutral' mid-range reading. Traders have gotten (finally) more bullish as seen above with my CPRATIO indictor with the SPX chart. Buying was scarce at the bottom, now there's more buying interest but 'timing' may be off. Some backing and filling or a sideways move may be up next.
Near support is highlighted at 920, extending to the milestone 900 level. I'm bullish on the big cap S&P 100 on pullbacks such as back to near 900. Over time OEX 'projects' to the 1000 area which would reflect a move to the upper resistance end of its bullish long-term uptrend channel.
THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:
The Dow 30 (INDU) hit and has initially at least failed to pierce resistance implied by INDU's down trendline currently intersecting at 17760. Next resistance above the trendline then comes in at the 18137 prior intraday high.
The Dow is currently above the important 200-day moving average which is a well-watched indicator from an 'investment' trend point of view. Near support is highlighted at 17500, with next support in the 17200 area.
I'm anticipating a dip ahead, which would relieve the overbought RSI extreme. INDU is important technically relative to the other major indices in terms of having a well-defined down trendline. A sustained Close above this trendline could set up a potential retest of INDU's two prior highs; i.e., first at 18137, then at 18360.
Weekly chart patterns with bullish recovery or continued strong bullish action is seen with BA, DD, GE, HD, MCD, MMM, MSFT, NKE, TRV and V. MORE than these 10 would be encouraging in suggesting the potential or likelihood for a bullish upside breakout in the INDU Average.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart has made of course a strong recovery move after formation of a double bottom in the 4500 area. We have to note that the first low in both the Composite (and the Nasdaq 100) on the panic sell off of late-August had printed lows in COMP well under 4500 but negligible actual trading occurred at those lows; reflecting computerized selling overshooting where much Nasdaq trade actually occurred.
The Composite may be stalled around 5100 resistance given the possible double top that may have formed in the big cap NDX. COMP would retest ITS prior high at 5232. I've noted resistance at 5200 but that extends to the prior intraday peak at 5232. This area (5200-5232) is at my upper 6% trading 'band', reflecting where COMP is 6 percent above its 21-day moving average. 'As below, so above' so to speak; COMP, at least within 2-3 trading sessions, rebounded from 6% BELOW the 'centered' 21-day moving average.
Key near support is at the milestone 5000 level, with next support coming around 4925-4900. COMP has hit an 'overbought' high extreme in terms of the RSI indicator.
Bullish sentiment also spiked higher but hasn't yet reached what I consider to be another type of overbought 'extreme' and what I define as excessive bullishness; i.e., possible unrealistic expectations of prices continuing substantially higher.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) has stalled just below its prior intraday highs in the 4686-4694 area. While near to intermediate-term momentum is up, long-term upside momentum is uncertain until and unless there's a decisive upside penetration of the previous top. Moreover, NDX has hit an 'overbought' extreme in terms of its Relative Strength Index or RSI, so a pause or pullback is quite possible.
Near support is seen at 4600 and the top end of its sizable upside price gap. The low end of that gap, at 4500, is considered to be an underlying chart support in technical analysis terms.
I've noted key near resistance already at the prior highs just under 4700. Next resistance is projected at 4800. The long-term weekly chart (not shown) has resistance implied by its upper channel line intersecting in the 4800-4815 area. Looking out over the next few months such as out into April, a milestone resistance is projected at 5000.
The NASDAQ 100 Tracking Stock (QQQ); DAILY CHART:
The Nasdaq 100 ETF (QQQ) like the underlying NDX of course could be forming a double top at 114. This level is certainly key to saying that the Q's have resumed its prior long-term uptrend. Stay tuned on that! As is seen with NDX above the big cap Nas 100 is at an overbought 'extreme' in terms of the 13-day Relative Strength Index. It would unusual for the Index to tack on another substantial up leg given this reading. I've noted next resistance in QQQ at 116.
Key near support begins around 112, then extending lower down to 110 and the top (support) end of QQQ's sizable upside gap.
Daily trading volume is noticeably lackluster on this last spurt higher. On Balance Volume (OBV) just turned lower and may be the start of further corrective action. It would not be surprising to see QQQ pull back toward the 110 area. 108-110 looks like a support zone and potential next buying opportunity. Long-term resistance looks like 118 currently, extending over time (e.g., into December, to 120).
The RUSSELL 2000 (RUT); DAILY CHART:
As I noted in my initial Bottom Line commentary the Russell 2000 (RUT) is substantially lagging the other major indices in that it has yet to retrace even HALF of its late-June to early-October decline.
The RUT recovery to date is contrasted with the S&P and Nasdaq having retraced most of their prior declines; e.g., SPX at its recent recovery high has regained 85% of its prior downswing and NDX has recovered 100% of its. The question relative to the overall Market is whether the lagging RUT is a harbinger of limited further upside in the other indices. RUT's lagging performance is noticeable. INDU for example has reversed from its down trendline so other signs of a pause/pullback are out there.
Sticking with just what's showing with the Russell, its chart remains bearish in its pattern. RUT would have to regain the 1213-1220 area to suggest it had regained upside momentum.
Near support is highlighted at 1140, which is the pivotal support. Below 1140, RUT is showing continued weakness. 1120 is next lower support.
Near resistance is seen at 1187, representing the 50 percent retracement level. In a 'normal' recovery rally a stock or index will typically only rebound about half of its prior decline before selling pressures tend to mount again. Next key higher resistance is suggested at 1213-1220.
GOOD TRADING SUCCESS!