THE BOTTOM LINE:
To be bullish on this recent rally, one excess that needed to be dampened was persistent and high (and unrealistic in most markets) bullish sentiment. A moderation of bullish expectations on the recent rally, coupled with the double bottom low, suggests more upside to come.
This past week went pretty much as expected with the prior lows holding as support and the "W" bottom pattern that got traced out; as highlighted on the S&P 500 and Nasdaq Composite charts. The subsequent rally off the recent bottom has now some important emerging bullish aspects as of the Fri, 6/11 close:
Nasdaq back above 200-day average; the Composite (COMP) on Friday and the Nas 100 (NDX) and Russell 2000 (RUT) on Thursday.
The S&P 500 (SPX), 100 (OEX) and the Dow 30 (INDU) closed above their late-April to early June down trendlines.
To gain perspective it should be noted that, relative to its March 2009-April 2010 run up, SPX has so far just retraced 33% of this prior advance. An even more 'shallow' retracement to date is seen with the Nasdaq Composite. In strong or dominant trends, corrections are rarely more than a quarter to a third, or to the well-known fibonacci 38%, of the prior advance. Assuming the line of prior lows holds up, a shallow correction such as we're seeing to date in terms of the primary trend is an indirect suggestion that the correction has likely run its course and the next significant leg will be up. This is not to say that we won't continue to see periods of intense volatility as summer heats up, including failed rally attempts. Near support is seen in the 1075 area and now more than ever, major support comes in around 1040.
Another decline might also 'set up' an oversold RSI (seen above) as measured on a 2-month/8-week basis for SPX. That would then be an optimal time to buy in addition to anything bought at the recent double bottom. (As always in buying at 'assumed bottoms', exit points for trades should be at or near recent lows.)
Only 10, a third, of the 30 Dow stocks are trading above their 200-day moving averages, a couple just recently regaining life above this important 'benchmark'. Still, these 10 are the ones that big fund managers will tend to buy and that buying will help pull up still other Dow stocks and beyond just the INDU 30.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
While no confirmed chart reversal is seen until/unless the S&P 500 (SPX) gets back above 1100, the index has had an initial bullish breakout above its current down trendline as highlighted on the daily chart below.
Per what I what last week: "We can assess the upside 'breakout' point as being at this trendline, as well as in the area of the 200-day moving average." Check on piercing the trendline. The 200-day average is another story and as highlighted below, an area of possible resistance at 1108 currently.
On the last sell off, support/buying interest resurfaced in the 1040 area. The pattern now takes on a bullish "W" bottom shape.
Near support is seen now in the 1075 area and more than ever, major support comes in around 1040.
Near resistance is at 1100, extending up to 1108. Fairly major resistance begins at 1150 and extends to the 1170 area.
As I noted in my initial 'bottom line' comments, the recent moderation or drop in bullish sentiment readings now 'supports' a bullish double bottom chart interpretation here. Even though a technical indicator, which is derived from price action, can't be a primary signal for trade action, it can add to or subtract from what the chart pattern suggests.
The see-sawing back and forth during Friday's session no doubt led to more put buying than if the rally had simply continued from early trade. Still, the fact that bullishness doesn't immediately shoot up during a rally off a prior low, suggests that the market is ready to do better on the upside.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has to be rated bearish until/unless OEX pierces its prior 501 high. (There's then a next rally high on the chain for OEX to climb). However, the exact double bottom low traced out to date, in an oversold market, suggests that the OEX can continue to recoup more of its recent steep decline dating from late-April high into the recent twin bottoms.
From last week: "No possibility for a V shaped bottom any longer and it may end up looking a 'W'..." and "I'm not currently looking for a new down leg in an oversold market." Sometimes you're reading the unfolding pattern correctly, sometimes not. Mostly, you can bet on the upside as soon as a double bottom forms in an oversold market. Not only is the upside potential substantial, it is especially substantial in terms of the dollar risk for trade exit just under a second double bottom low. This means actually placing (whenever possible) an exiting 'stop' exit order or adhering to your exit point on a manual order-entry basis. Near support is seen in the 1075 area and now more than ever, major support comes in around 1040.
We'll see where this rally goes. Resistance remains potentially quite stubborn in the 500 area, extending to 510. Ability to trade back above its 200-day moving average at 510 would be another 'confirming' sign of renewed upside momentum.
Near support is suggested at the (previously pierced) down trendline, currently intersecting at 487. Significant support is anticipated on any further dips toward 480, extending to the area of the twin intraday lows at 473.
DOW 30 (INDU) AVERAGE; DAILY CHART:
As I noted about the Dow 30 (INDU) Average in my initial general comments, only 10 stocks or a third of the INDU (as of the Friday 6/11 close) are trading above their 200-day averages; however, the most recent rebound brings this up from 8.
Fund managers will tend to do their initial buying in a recovery rally within the stocks leading the pack before a correction and holding up best DURING the correction. In this case we can anticipate further buying interest in AXP, BA, CAT, DD, DIS, HD, IBM, KFT, MCD and PG.
As anticipated, significant buying interest surfaced this past week around 9800 and where expected in terms of the prior bottom. This kind of predication has more solid footing in an oversold market. By week's end INDU was back above 10000 thereby giving market mavens big talking points. While I may have pooh-poohed the technical importance of 10000, the psychological importance of a big round number like this is important for 'mood' and reassurance that the sky isn't falling.
Pivotal resistance remains the 10260 to 10325 area. A close above 10300 should help keep this recent rally going.
Near support is noted on my Dow chart at the previously penetrated down trendline, intersecting currently at 10040. Major support remains 9800. Last week I suggested that Dow Index calls RISK protection was an exit at INDU 9800. More than 'my bad' to have not made clear this as an exit on a close below 9800, where major technical support was indicated.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index has completed the other side of what looks to be a "W" bottom. Last week I was anticipating significant support (again) in COMP on dips to the 2150 area; more so at major support at 2100. The bulls have more choppy ground ahead no doubt but I wouldn't bet against tech just in here or going forward.
Key resistance is 2250, at the down trendline and 21-day average. Next pivotal resistance is 2300. Friday's close put COMP back above its 200-day moving average and a fair gauge of the longer-term trend.
Near support, 2192-2200, with major support in the 2140 area. The early-February dip to 2100 was short-lived.
Bullish sentiment, as I discussed in my SPX commentary, has been what I was thinking was 'stubborningly' high, at least in terms of expecting a bottom. Bullishness, per the fluctuations of my 'CPRATIO' indicator, finally moderated this past week as our last rebound was not accompanied by a similar jump in call activity. The bulls may be cowed and subdued for awhile. The longer they are (cowed), the 'better' to see our recent rally extending to another challenge of the 2300 area, perhaps beyond.
NASDAQ 100 (NDX) DAILY CHART:
After this last dip under 1800, the Nasdaq 100 (NDX) had a good-sized rebound from a 1770 low; a low that was above the prior intraday low at 1756. That low in turn was above the 'flash' wind down of early-May (5/6). Hey, definition of an UPtrend is exactly that of reaction lows being successively higher on a rally that is strong technically. So far so good, but technical resistance at the down trendline remains a key test ahead.
Crossing above the 200-day average on Thursday was a bullish plus; more important technically is what happens at the trendline. Consequently, I've noted first key resistance on my NDX chart at 1857. An even more pivotal resistance is apparent at 1900. Based on the pattern I'm seeing, NDX could easily see another run to 1900 or more.
Near support is 1800, extending to 1770, then 1750.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The chart pattern suggests some potential for a move back above 45.8-46.0 resistance. The next key test would be for QQQQ to retest its prior 46.8 top. Trendline resistance seen at 45.8 is the immediate pivotal resistance; more so from an overall chart perspective is any successful (or not) retest of the Q's prior upswing high at 46.8.
Pivotal support is 44, extending to 43.6.
This most recent rally was not accompanied by a volume surge, which suggests continued caution in buying and typical for the NDX tracking stock; e.g., volume surges tend to come on holders of the stock bailing on big price breaks.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has seen a snappy come back rally this past week from a sell off that took the index close to 600. I'll be a mild bullish believer with a continuation of this recent rebound that carries above RUT's down trendline at 652. Next major technical resistance then is at 670-675 and what would put RUT back in the area of its previously broken up trendline dating from 2009 lows.
RUT cleared resistance pegged at its 200-day moving average this past Thursday, then found support right at this line the next day (Friday, 6/11) and tacked on more gains, suggesting continued long-term investor interest given levels that start to look 'cheap'.
I've noted support at 620, extending to the recent 607 low.
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.