THE BOTTOM LINE:
Areas of potential technical 'resistance' in this Market are still well above where the major indexes are currently. It'll be over when it's over and seasonally, April has historically been a strong month.
In the last 50 years in terms of the Dow at least, April has been the strongest month in the Market, followed by December, November, January and March.
This is no doubt why, as an OIN Subscriber reminded me, there's the old investor saying: "sell in May and go Away". Until, November anyway!
Usual measures of 'overbought-ness' don't 'work' in this kind of runaway bull move in terms of identifying areas where the market 'should' be due for a shakeout. That would include indicators like the Relative Strength Index and the like, 'sentiment' models showing extreme trader/investor bullishness and low Volatility numbers, such as seen in the CBOE Volatility Index (VIX) as measured for the S&P 500 group of stocks.
There is a heightened risk of a shake out no doubt. There's also a powerful move going on and that's an opportunity to stay with the trend, as in calls and other bullish strategies. If you are leery of a correction but don't want to go against the trend (wise choice), you can stay out of new bullish directional trades of much duration, including spreads where profits depend on a cap on the upside. Being on the sidelines, at least for any major further or additional commitments is a choice too.
Speaking of indicators, I took a look at VIX as a buy/sell indicator in my recent Trader's Corner (TC) article Thursday (4/8); you should have that recent e-mail or can go to it online by clicking on the OIN Trader's Corner tab. I mention it here, not as another 'worthless' indicator that is suggesting a top that doesn't come, but to show a method of using VIX that works often enough to keep tabs on.
You know the drill; high volatility numbers relative to some historical period (e.g., the past 1-2 years) suggest an impending major correction. Low volatility numbers suggest complacency and to be alert for a significant shorting opportunity.
Well, of course in this market, VIX is quite low in terms of the past year, but this Market hasn't been kind to those trying to pick a top because of the low VIX.
As a SHORT-TERM indicator there are traders who pay attention to when VIX rises to more than 5 percent above its 10-day moving average, as suggesting potential for the S&P (and the overall market) to rebound in the short to intermediate-term. This trading 'model' is used most as a short-term indicator. If prices accelerate to the downside, you can stay with that move and see where it goes of course.
Conversely, when VIX falls 5 percent or more under its 10-day moving average, there's potential for an upcoming few days (e.g. 5) or more where the market will underperform its prior rise and flatten out OR begin a downside pullback.
In the last couple of instances of dips BELOW the lower 5% VIX 'envelope' line (seen above), a correction (in February) followed, but there was a lag before it did. In early-March a second dip below this line produced only a flattening out the strong uptrend in the following few days.
The Market advance since early-March has not seen ANY occasion where VIX fell under the 5% lower line. This is something I'm going to track to see if the NEXT instance of a fall below the lower line leads to the correction that we all know will come; maybe not until close to, or in, May as the old saying goes. I'd like to have all the alerts I can to suggest a shakeouts is near. Meanwhile, if you are on long side, not the wrong side, enjoy the party.
A general note on my charts seen below of the major indexes: I've redrawn my major up trendlines on the daily charts. My revised up trendlines (forming the low end of bullish price channels) have reverted to a start point at the March lows of last year as connected to the cluster of early-February lows of this year.
Given the strong move we've been in, it no longer made sense that any significant major daily chart up trendline was violated in the January-early February sell off and brings my daily charts in line with the long-time bullish weekly charts.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
Note: Please see reference at top (in the 'bottom line' comments) about my redrawn of all the broad uptrend price channels.
The chart remains bullish in its pattern as the S&P 500 (SPX) keeps chugging higher. If you haven't seen it recently, look at the weekly SPX chart. Some of the down days, when viewed on a daily chart basis, kind of masks the strong weekly climb that has been going on since the early-February low.
How long can this rally go on is a big question, but I don't see 'major' technical resistance until significantly higher levels, at the top end of the broad uptrend channel traced out since the low of 13 months ago. April has tended to have the biggest monthly gains over the past 50 years. Earnings reporting period for Q1 lies ahead of course. Either key surprises will be reports that exceed expectations or, if only in line or down some, the market is probably going to continue its bullish focus on a growing economy anyway.
I've talked enough (in the last couple of weeks) about the 'overbought' condition seen by overbought/oversold models on both the daily and weekly charts. However, in a powerful move like this coming out of a major recession, certain conventional technical 'facts' like this haven't been of much import.
Extreme bullish trader sentiment and overbought extremes in the Relative Strength Index DO tell us that the market is at some risk of a sharp shakeout IF/WHEN some bearish news hits. These indicators do not tell us, with any precision anyway, how long this rally will continue to get stretched out.
If we see such indicator extremes at the same time that prices hit resistance implied at the top end of a major uptrend channel, OR there is a key downside reversal, then the indicators should be taken into account; such as by a quick exit from bullish strategies and/or a move into puts.
SPX technical resistance is likely to come in around 1200, extending to 1218, at the top end of the minor uptrend channel. Resistance above 1218 is not really measurable on the chart based on any trendline analysis or the like. Major resistance is likely just over 1300.
Very near support is at 1178-1180, then at 1150; major support is implied for the 1126 area currently, at the low end of SPX's broad uptrend channel.
S&P 100 (OEX) INDEX; DAILY CHART
I've taken a bigger chart view this week showing the longer term bullish uptrend for the S&P 100 (OEX). The index has yet again broken out of a minor consolidation to the upside.
I don't envision resistance coming in before 555 currently, extending to 560, with major resistance coming up in the 600 area. The index has a shot of getting there, the next big round number. If I sound 'too' bullish here, it must be time to short the market:-
Near support is at 540, then at 530, with fairly major support expected around 520.
OEX is quite overbought in terms of the both the 13-day and the 8-week (not shown) RSI. It seems that the period we are in can continue to move higher regardless. This situation does suggest caution however in getting complacent in a bullish viewpoint. Be alert for trend reversals as always, but even more so currently. Meanwhile respect the trend.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Enough Dow (INDU) Industrial stocks are in strong uptrends that INDU should be able to move above 11000 and then some, maybe going on over this month especially of getting near 12000. Well, we'll see. In particularly solid uptrends are AXP, BA, CAT, DD, DIS, HD, HPQ and MCD. Surging recently are CVX and XOM as oil prices seem to be disregarding the laws of supply and demand.
Many other Dow stocks are not doing much or are correcting. 11000 is the big kahuna resistance level currently; not only from it being a big fat round (1000) number that the media talking heads will be a-twitter about, but also in terms of potential trendline resistance as highlighted on my INDU daily chart below.
I've noted next technical/chart resistance for the 11200 area and major resistance around 12000, implied by the top end of INDU's broad 13-month uptrend channel.
Near support is in the 10885 area, then at 10700-10680, with fairly major support just over 10500.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Note: Please see reference at top (in the 'bottom line' comments) about my redrawn of all the broad uptrend price channels.
The Nasdaq Composite (COMP) is bullish in its pattern, as the index continues to trade higher within a relatively narrow, as well as a much broader, uptrend channel. It appears that regardless of an overbought extreme and the highest bullish sentiment numbers seen since August-September of last year, at time when prices last hit the upper end of the (broad) channel, COMP looks poised to go still higher. If the trend is our friend, we've got a real buddy here.
Near overhead resistance is suggested in the 2500 area, at the narrower upper trend channel line as noted on the chart. Major resistance implied by the top of the broad channel comes in around 2650 currently.
Near support is seen in the 2400 area, then at 2350, with fairly major support toward 2300.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) also continues to march higher and looks set to challenge resistance at 2000. Even more so than 11000 in the Dow, this is a key number for NDX and represents almost a doubling of its 1040 low of just 13 months ago. Impossible to believe back then that in the right tech stocks you would have a double or more as an annual return!
Next resistance looks like it would come in around 2050, with major resistance not seen until 2160 if there was another run all the way to the top end of its major uptrend channel. A move such as this puts the Nas 100 within striking distance of its all time high of 2239. A challenge to a prior high like this is always a possibility once a retracement exceeds 2/3rs or 66%. I've been always saying that in general about retracement theory, but the reality of it for big-cap tech is hard to believe when you think of the difference between late-2007 and somewhere ahead perhaps in 2010. Tech is forecasting not just a recovery but a major one.
Back to earth and a look at support, suggests 1965, extending to 1950, as near support. Next lower chart support is noted at 1900, with key long-term support suggested at the up trendline intersecting currently around 1860.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 (NDX) tracking stock (QQQQ) next looks capable of hitting $50, which will be a major milestone number for the stock. As usual the stock goes higher on less volume which would tend to look bearish in company stocks. Caution here by potential buyers. This isn't yet a market where Mr. and Mrs. Average investor is buying up a lot of stock. Not only are people holding on, not expanding what they got, they don't 'believe' this rally. The strongest rallies are often such.
Major resistance looks to be the top end of my redrawn uptrend channel currently intersecting just below 53.
Near support is seen at 48.0, extending to 47.7, with next support at 47 even and major support just under 46.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is another index that could see a double from its 393 closing low of last year. The index reflecting small and mid-cap stocks, where a lot of job growth comes in, look poised to finally stay above 700. Stay tuned on that but assuming RUT can hold above 695-680 going forward, the index looks poised to head up toward the 735 area, perhaps to 760.
Very near support is at 695, then at 680, with next lower support at 650-648. Support implied by the low end of its major uptrend channel intersects currently around 630.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.