THE BOTTOM LINE:
The prior overbought condition suggested by the RSI and especially high extremes in bullish sentiment finally set the stage for a correction. Price action traced out a key downside reversal although there's no break yet of the pivotal 21-day averages of the major indexes.
As I noted last week, a correction could come at any time as suggested by overbought extremes in the 13-day and 13-week Relative Strength Index and the 'extreme' bullishness suggested by the call to put volume ratios for equity options on the CBOE.
Indictors that suggest 'overbought' extremes mostly can't be used for any kind of precise timing of a top as you just can't usually know HOW LONG an overbought condition in a major bull market will last. The key added element that would suggest a downside reversal is for one or more of the major indexes to hit prior resistance, a resistance trendline OR to have a downside reversal chart pattern.
No prior chart/technical resistance was reached, nor did prices bump against resistance implied by the upper end of broad weekly uptrend channels. There are two exceptions implied by upper channel lines, since the Dow 30 (INDU) and Russell 2000 (RUT) hit, and reversed from, resistance implied by the high end of their bullish uptrend price channels; see my daily charts for INDU and RUT.
Price action that suggested at least an interim top in the major indexes was that all traced out 'key' downside reversals. In technical/chart terms a downside reversal is defined as a new high, followed by a close below the close of the prior day or prior two days. This is an event that's mostly too common to often suggest the start of a significant pullback. What makes for the rarer 'key' downside reversal is a new daily high, usually a decisive new intraday peak, followed by a Close that is below the LOWS for the prior 1-2 days.
The above pattern of a key downside reversal, when accompanied by a very high RSI (above 70 typically on a 13-day basis) and very high bullish sentiment, usually over a few day period, as measured by my CPRATIO model, shown with the S&P 500 and Nasdaq Composite charts, IS a pattern that usually 'signals' an intermediate top.
There's a subsequent pattern typical of an intermediate-term Market correction, which is that the major indexes pierce their 21-day moving averages. This hasn't happened yet and it bears watching as to whether the major indexes will do so. If this key trading average is penetrated for more than an isolated day, downside potential could be back to a retest of the S&P, Dow and Nasdaq up trendlines for example. Stay tuned on that.
While I think that the strong prior upside momentum is in check for now, to date the correction that set in last week could just be a relatively minor pullback. Or, one that will lead to more of a lateral sideways correction without much downside follow through.
Moderating any bubble-like fears is the fact that bullish sentiment, as suggested by my CPRATIO indicator seen with the SPX and COMP charts, fell sharply in the recent correction. It seemed that late-stage believers weren't so convinced after all that the Market would tack on another big up leg given how far prices had already advanced in 2013.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) turned bearish on a short-term basis given the key downside reversal seen this past week; i.e., the conditions for that is, especially after a prolonged advance, a move to a new high, often a decisive such run up, followed by a collapse in prices and a Close below the prior 1-2 day lows. The intermediate and long-term trends remain up. An intermediate downtrend is 'signaled' only if and when the prior downswing low is pierced in the 1550 area.
The upper (gray) trendline, suggesting the high end of the broadest possible uptrend price channel, is from the long-term weekly chart (not shown) and transposed onto the daily chart. This upper channel line, intersecting above 1750, represents potential major resistance if it got there but isn't necessarily a projection of where SPX is headed next.
SPX fell back into its prior uptrend price channel and I've noted this line as suggesting very near-term resistance for the 1658-1660 area. Next resistance is implied by the prior 1687 intraday high at 1687.
Near support and a key one for SPX (and all the major indexes) is suggested by the current level of the 21-day moving average, suggesting support around 1630 currently, with support extending to 1600-1590. 1590-1587 should offer significant support at SPX's up trendline.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) broke near support in the 745 area, which now is suggested as immediate overhead resistance. As with SPX, the big cap S&P 100's short-term trend has turned bearish; OEX's intermediate and long-term trends remain up. A move back above 745 would be bullish if prices stabilize above this level. Next resistance is at the recent 757 intraday OEX high. Major resistance is anticipated in the 770 area currently.
As noted in my initial 'bottom line' commentary for all the major indexes, a downside penetration of the 21-day day moving average, currently intersecting in the 732 area, would be a further bearish development and suggest potential back to support in the 720 area, extending to 713 and the intersection of key technical support at OEX's up trendline. A Close below the 693 prior downswing low that persisted would suggest that the intermediate-term trend had reversed to down.
Some of the key S&P big cap bellwethers like GE haven't fallen below technical support. In GE's case a weekly close ahead below 23.5 would suggest otherwise.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) hit resistance this past week was deflected at the upper end of its trend channel as seen below on its daily chart. The higher upper (gray) channel line intersecting currently above 16000 is one implied by the broader uptrend channel suggested by INDU's weekly chart (not shown).
The existing and well-defined INDU daily chart uptrend channel, more so that the other major indices, was the one that looked most likely to stay intact and the upper resistance channel line deflected the rally into this past week. Quite often the Dow traces out the pattern that most reliably highlights either technical support OR chart resistance.
Key near support is implied by the 21-moving average currently intersecting in the 15100 area, with technical support then extending to 14930, the current intersection of the Dow's up trendline. Major support is seen in the 14500 area.
Near resistance is seen at 15550. Next resistance, well above current levels, is anticipated at 16000. An analysis of the 30 individual Dow stocks is noted below the INDU daily chart.
THE INDIVIDUAL DOW STOCKS:
AXP, BA, BAC, CSCO, CVX, DIS, GE, HD, JNJ, JPM, KFT, MCD, MMM, MSFT, PFE, PG, UTX, VZ, WMT, and XOM remain in strong longer-term uptrends; at least no trend reversals are seen with these 20 stocks; HPQ continues to climb higher from what looks to be a major V-bottom. The aforementioned 21 stocks are of course 2/3rds of the Average and this group looks like they could continue to work higher or at least haven't set up any obvious downside reversal patterns. From this 'bottoms' up perspective, the Dow just appears to be pausing here rather than looking particularly toppy; not yet anyway!
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) has pulled back to potential support implied by the uptrend channel COMP has been in over past months. The thinking here being that a breakout above resistance, or a resistance trendline in this case, 'becomes' an area of technical support on a subsequent pullback. Stay tuned on that but I've highlighted potential near support in the 3415-3440, with what should be substantial chart support at 3300, extending to the 3255 area.
If COMP is to resume its former strong upside rate of change or upside momentum it needs to climb back above its 3500-3530 resistance zone. Next resistance is then projected at 3600. The upper trend channel boundary is what is projected on the long-term weekly chart. Rather than also show the weekly chart, I've transposed this broadest uptrend channel to the daily chart for an all-in-one view.
Some disagree as to whether Apple Computer is a Nasdaq bellwether. I think it's an important Nasdaq stock to follow and I am watching for any breakouts by AAPL above technical resistance at 465, with even more pivotal resistance coming in at $500. A weekly AAPL close above $500 should see COMP also breaking out into a new up leg. Conversely, an AAPL close below $400 would suggest further tech weakness.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart, which had been in a strong accelerating uptrend coming into this past week, experienced a key downside reversal along with the rest of the major indexes. Unlike the broader Nas Composite, NDX fell back INTO what had been its uptrend price channel on a daily chart basis.
I wrote last time that: "Eventually, if this bull market rolls on into the summer, we could see 3300 in NDX eventually but a big further up leg would be surprising without a correction, even if more a sideways type move, coming first." It came!
Key near support is suggested by the 21-day moving average currently intersecting at 2960; next lower chart/technical support is seen at 2915-2900. Major support begins in the 2840 area, at the up trendline, extending to the area of the last downswing lows around 2740.
Near resistance is highlighted at 3006, extending to the recent intraday peak in the 3050 area. NDX needs to climb back above 3000 and hold this area to suggest that the index could resume its prior strong advance. It would be somewhat surprising to me to not see a more prolonged correction, even if that took the form of a mostly sideways move rather than a steep pullback. However, this market has often surprised on the upside.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) tracking stock has pulled back of course but not by a lot if viewed on a close-only basis; i.e., a line chart as seen below.
Near support is highlighted at 73.3, but support probably should be viewed as extending to 72.6 at the 21-day moving average. Next lower support is seen in the 71.5 area.
Near resistance comes in around 74.3; next resistance is projected at 76 even.
Daily trading volume shot up on the dip on profit taking and stop-loss selling. On Balance Volume (OBV) has fallen. Volume considerations add little extra to the mixed, but mostly still-bullish, chart pattern.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) Index saw its recent dip begin after RUT got up to, or very close to, technical resistance implied by the upper end of its long-standing (and well-defined) uptrend price channel. RUT, along with the Dow, could be one of the two best harbingers or predictors of what the overall Market will be doing.
RUT looks like it may pull back further. Near support implied by the 21-day moving average could easily give way to test of support in the 953-950 area. Support implied by RUT's up trendline intersects currently at 933. I don't see the Index piercing its up trendline.
Upside resistance is at 1015, extending to 1050. The chart pattern suggests to me more likelihood of lower support(s) being tested over an immediate resumption of the prior advance and a test of upper resistance(s).
GOOD TRADING SUCCESS!