The stock market consolidated Monday through Wednesday while it waited for the ECB decision, which was followed by a volatile two days into the end of the week. Friday's rally saved the week, making it the 4th positive week following the February 11th low. The indexes are now pressing up against strong resistance and showing overbought conditions as we head into opex.
Review of Major Stock Indexes
Following the highs on Friday, March 4th, the market rallied slightly higher on Monday but then chopped sideways/down through Wednesday as it waited to see what the ECB's decision would be on Thursday (morning for the U.S.). The ECB blessed the market with more than it expected but that prompted a selloff instead of an expected rally.
The bears jumped in short and drove the indexes down Thursday morning, but as we've seen happen so many times before, a decline on Thursday prior to opex is often a head-fake move that leads to a rally into opex. Many large funds sell puts and buy calls in front of opex and look for an opex rally to collect their monthly income. Friday's gap up added insult to injury for the bears who had thought Thursday's selloff was the start to a stronger reversal back down and the resulting short covering into Friday pushed the indexes up to their highs for the week.
The indexes have rallied up to some strong resistance levels, as I'll review on the charts, and trading volume has been in decline as the rally has progressed. These are not rally stoppers but the straight-up rally from the February low is another too-far, too-fast kind of rally that looks more like a bear market rally than something more bullish. That could change but at the moment what we're trying to figure out is what this rally means in the larger picture. It determines whether we short the rally or buy the dip. I'll give you my opinion but obviously it should be one of many that you evaluate for your own trading decisions.
A Look At the Charts
Dow Industrials, INDU, Weekly chart
Friday's rally for the Dow got price above price-level S/R at 17140, which is the level that was sharply broken in January. Closing above this line for the week is bullish and now we wait to see if it will have trouble with its 50-week MA, near 17290. If the bulls can power above that level there's not much resistance on the weekly chart until the downtrend line from May-December 2015, near 17675. But a failure to hold above price-level S/R at 17140 this coming week, on a weekly closing basis, would leave a failed recovery attempt.
Dow Industrials, INDU, Daily chart
While the Dow hasn't quite reached its 50-week MA yet, it did climb above its 200-dma, at 17153, on Friday. It rallied back up to its broken uptrend line from February 11th, which could result in a back-test and bearish kiss goodbye if it turns back down from it. But if the bulls can keep the buying going on Monday the next level of resistance is its downtrend line from December, near 17325. Not shown on the daily chart, there are two price projections for the 3-wave bounce off the February 11th low at 17175 and 17211, both of which were achieved on Friday. For this reason a turn back down on Monday would be the first sign of a reversal. But the rally would not be considered complete until prices drop below Thursday's lows (Dow 16821).
Key Levels for INDU:
-- bullish above 17,300
-- bearish below 16,500
S&P 500, SPX, Daily chart
The weekly close for SPX was above its 200-dma and downtrend line from December, both near 2020. It was looking like SPX would close at that level on Friday but a final little push into the close made it to 2022. The bulls now need to prevent a selloff on Monday since that would look like a failed attempt to break through resistance. As for the next upside target, the 78.6% retracement of the December-February decline (a common retracement level in the past several years) is at 2041.
Key Levels for SPX:
-- bullish above 2042
-- bearish below 1969
S&P 100, OEX, Daily chart
OEX closed about a point above its 200-dma and price-level S/R, both near 895. Like SPX, it was a final push into Friday's close, which was likely just short covering that accomplished a close marginally above resistance. Holding onto Friday's gain on Monday is what the bulls are going to need and if they can do that then the next level of resistance is a downtrend line from December, near 903, and a downtrend line from November, near 910. Above 910 would likely be clear sailing to new all-time highs.
Key Levels for OEX:
-- bullish above 910
-- bearish below 874
Nasdaq-100, NDX, Daily chart
The bullish thing I see on the NDX chart below is Thursday's pullback to support at its uptrend line from March 2009 - August 2015, which it had recovered back above at the end of February. The successful back-test on Thursday has it looking like it should be able to make it up to at least its 200-dma and 62% retracement of its December-February decline, both near 4420. It would be more bullish above 4420 but it would turn bearish if it drops below Thursday's low at 4232.
Key Levels for NDX:
-- bullish above 4420
-- bearish below 4220
Nasdaq Composite, COMPQ, Daily chart
The Nasdaq pulled back on Thursday almost to its crossing 20- and 50-dmas, near 4580, with its low at 4608 and it has now rallied back up near its broken uptrend line from February 11th. Two price projections for its 3-wave bounce off the February low point to 4762-4764 as an area of interest -- if it rallies up to that level and rolls over it could indicate a top is being made. Otherwise there's rally potential to resistance at the 62% retracement of its December-February decline, at 4807, its 200-dma, near 4880, and then price-level S/R at 4920.
Key Levels for COMPQ:
-- bullish above 4920
-- bearish below 4607
Russell-2000, RUT, Daily chart
After leading the market strongly back up from the February low the RUT was the laggard this week and it was one of the few indexes not to make a new high on Friday for the week. Monday's high near 1095 came very close to testing its broken H&S neckline at 1100. Friday's rally did have it back-testing its broken uptrend line from February so it's possible that's all there will be for the rally but if it pushes higher on Monday keep an eye on resistance near 1100, or slightly higher near 1105 where it would retrace 62% of is December-February decline. Above that level it would have very little in the way of a rally to its 200-dma and downtrend line from June-December 2015, both near 1151.
Key Levels for RUT:
-- bullish above 1105
-- bearish below 1040
SPDR S&P 500 Trust, SPY, Daily chart
As can be seen on the SPY chart below, it looks bullish with price pressing up against the top of its BB with only a relatively small pullback this week (not even back to the midline of its BB, which is the 20-dma). The top of the BB is now at 204.26, which is upside potential by this measure. While MFI has reached overbought (at/above 70) there's room for it to become more overbought. The VAP starts to build above 204.25, which is an area of resistance but at the moment the lighter VAP offers minimal resistance. This chart shows very little to be concerned about if you're a bull but not a whole lot of upside potential and more downside risk, especially being overbought with declining volume.
Powershares QQQ Trust, QQQ, Daily chart
The QQQ chart below shows it did not quite make it up to the top of its BB the week before this past week and it then pulled back to its 20-dma on Thursday. That's been followed by another rally up toward the top of its BB, which has curled over and is currently at 107.78. Williams %R had turned down earlier in the week but then jumped back up with Friday's rally and is now again in overbought. What the bulls need to do is keep the rally going and not let MFI turn back down and create a bearish divergence with a lower oscillator high. And like SPY, the bulls could use a little more volume in the rallies instead of the declines.
The market wasn't quite sure what to make of the ECB's decision on Thursday but liked it better on Friday. The trouble is these central bank decisions are having less and less of a positive effect on the markets (they're lasting for shorter periods of time) and that makes Friday's rally suspect. This is especially true when you factor in Draghi's statement that there might not be much more they'll be able to do, primarily because the German central bank is already balking and could put its foot down on any further attempt at more QE. There are reports that Draghi was able to do more than was expected only because he promised the Bundesbank there would be no further attempt to increase QE.
We have an overbought market with declining volume and that's reason enough to be careful about the long side. We're heading into opex week, a typically bullish week and therefore it's also a risky time to be thinking short just because the market is overbought. We all know it can stay overbought far longer than we think possible. As long as last Thursday's lows hold it keeps the market potentially bullish but it would look better for the bulls if Monday rallies since Friday's closing prices were essentially at resistance and short covering into the close might have left the market vulnerable to a downside reversal on Monday.
Expectations for a bullish opex week typically has many of the large trading houses selling puts and buying calls in front of opex week, looking for their payday next week. This could result in a stronger decline if the rally does not continue (buying back puts and selling calls are both bearish trades). We could have some volatility ahead of us in the coming week so trade carefully.
Trade safe, have a good week and good luck with your trading. I'll be back with you next weekend.
Keene H. Little, CMT
Technicians look ahead. Fundamentalists look backward. The true language of the market is technical. - Joe Granville