Here is the Deal:
Impressive! Expiration likely had a big roll
magnifying the pre-market action Thursday and Friday. But
earnings came though and people wanted to buy, mostly at the
open. The Dow opened a staggering 141.81 points higher reaching
a high of 12,950.44 on the open. The mid-day low was 12,901,
that’s 92 points above Thursday’s close and well above the top
of the 21-day 2% trading band, which now 12,847. After
digesting the open for most of the day, in the final hour the
Dow came on strong surging towards 13,000 in the final minutes
of expiration. It closed at 12,961.98 up an impressive 153.35
points, the Third largest one day gain since July 2006.
The Dow easily took out the higher Fibonacci
target at 12,890 on the open. The next higher short-term
Fibonacci level is 12,975 and the focus is now on 13,000.
Sooner or later, these mega moves correct, the question is when
and from what level. With the Dow just 38 points from 13,000,
it seems reasonable to expect an attempt at 13,000 on Monday,
baring weekend developments.
Support is now 12,900 followed by 12,825.
Unless or until we see a downtick, meaning a down day, it is
just a little pullback. Technically the market consolidated for
three days and has pushed higher. With expiration behind us,
this current runs should be near some sort of exhaustion type
short-term high.
The biggest problem for the Dow on Monday is
no companies report earnings, and there are no economic data
points to act as a catalyst. There are plenty of earnings
reports though and the flow of economic news picks up later in
the week. At this point there are two things that should
happen. One, it typically takes take two to four weeks to
consolidate a move of this magnitude and said correction should
be very close at hand. Second, once the corrective move has run
its course, the indices should move to new highs.
Here’s why:
The Dow’s 5-day RSI climbed to 92.6 on Friday.
It is clear the market is capable of pushing higher despite
overbought conditions. However, I find these market phases
remarkable and worth studying. The chart below shows the Dow
with its 5-day RSI for the past ten years. I set the scale so
you only see vertical lines when the 5-day RSI is over 90.
Prior to Friday, there are only six previous periods over the
past ten years when the Dow’s 5-day RSI pushed above 90. Most
of them were multi-day periods. Of the previous six, five of
them were in the fourth quarter. The sixth was during the first
phase of rally off the 2003 mega low. While difficult to see in
the chart, all but two were followed by multi-week
consolidations.
- November 1998 was followed by a very sharp
correction, the rally continued higher.
- March 2003,
after the major low, followed by a sharp correction, the
rally continued higher.
- December 2003 no
consolidation, the market continued to grind higher into
the massive Q1 2004 high.
- November 2004 was followed by a month
of choppy action, the rally continued higher.
- November
2005 saw a month long pullback, the rally continued higher.
- October 2006 saw a one week pullback, the rally continued
higher.
How much further this run persists is anyone’s
guess, but history suggests it is very near its zenith. By most
metrics, it is of record proportions with the exception being
percentage distance traveled. What I can tell you is when the
market runs this strong for this long it usually takes a month
to consolidate. Minor or major correction aside, once
completed, the move continued higher.
With that thought in mind, the S&P 500 is on
track to reach its 2000 bull market high of 1550 over the
course of the summer, maybe sooner. From a large scale
perspective, as long as the S&P remains above 1365, the major
bull run remains in tact.
On a very short-term basis, the pattern on the
S&P 500 is looking somewhat complete though it may extend
higher to Fibonacci targets at 1490 at the first of the week.
There is a complete looking five wave pattern up from the late
March lows. A minor pullback should find support around 1480,
but from a pattern stand point it should be a larger scale
consolidation and or pullback that finds support between 1467
and 1473. Breaking 1473 over the course of this week will
indicate a much larger consolidation has begun.
While the Dow and S&P were soaring to new
highs, the Russell 2000 never made it above Tuesday’s high.
However, it did close near Tuesday’s high and that leaves a
bullish candle pattern call a rising three methods. Ideally
Friday’s close would have been above Tuesday’s high. The
concept of the pattern is a strong thrust higher followed by a
three day correction, and then the rally continues. That is
essentially what happened over the course of the week. It will
take a move below 820 to disrupt the near-term bullish
potential.
The NASD traced out the same pattern as the
RUT, but it easily bettered Tuesday’s highs leaving a better
formed pattern rather than a better looking pattern. The NASD
finally reached is January high on Friday, something that was
telegraphed when it closed above the 76% line a week ago.
The NASD and NDX both turned their Monthly
trends up. The trend table is as positive as it can get with
everything on a buy signal. In short, it doesn’t get any better
than this. With the current configuration, odds are the Dow
turns its daily trend down Tuesday or Wednesday. Monday’s low
should be a focal point.
Detailed Trend Report on Web &
CLX Count and Weekly Signal Counts &
NYSE & NASD 5-day up and down volume charts
Total breadth peaked on the open at +3500. It
fell to +2000 and recovered over the balance of the day to
finish at +2990. It was a tremendously positive day internally
with huge volume virtually all to the upside on options
expiration.
As I described last time, the best way to sum
up the internal metrics: all internal metrics are either
extremely overbought or continue diverging negatively relative
to the price movement. Their action of the internal metrics is
the result of continued rally on generally contracting volume
with the fall off in volume due to a significant contraction of
selling.
Friday’s 90% up volume signal remains. Extreme
readings of this nature indicate an excessive short-term
condition has been reached. Despite the many excesses reached
over the course of this rally, Friday was the first 90% up
volume reading.
We have seen an impressive run, which should
be running on vapors at this point. After a series of negative
opening gaps, we finally saw a positive opening gap magnified
by options expiration. Earnings driven jumps were probably
enlarged by expiration too. Unless or until it cracks, more
records will be set. That said, history strongly suggests we
are within a few days of an important intermediate-term high,
and it is common to see a gap higher near the zenith. Our
Longer-term cycle turn date, April 20, is in the history books
and it was expected to be a high. The stage is set for a
consolidation, which should begin in the first half of the
week. The expected consolidation should morph into two to four
weeks of choppy yet constructive action.
In 1983 the Dow peaked at 1,297 and
consolidated for almost six months before the rally resumed. It
finally broke out above 1,300 in 1985.
Enjoy the weekend.
Jim Patterson
Most Obvious chart resistance levels:
()
Dow 13,000, 14,000
SPX 1485, 1500, 1550
NASD 2530, 2543, 2570
NDX 1852 (high), 1856 (fib) 1877 (minor Fib)
NYSE 9690, 10,000
RUT 2K 832, 838, 847
Most obvious Chart Support levels:
Dow 12,900, 12,825, 12,730, 12,600, 12,480, 12,350
SPX 1475, 1460, 1448, 1436, 1413, 1397, 1373, 1362, 1340
(50% retracement)
NASD 2520, 2507, 2480, 2455, 2425, 2400, 2385, 2335,
2316
NDX 1840, 1825, 1808, 1795, 1775, 1755, 1738, 1695
(Fibonacci 38% & Nov 06 lows,)
NYSE 9650, 9575, 9470, 9400, 9350, 9280
RUT 2K 825, 818, 811, 803, 790, 760
Here’s where we are now:
NASD 100 Index (NDX) Trading System,
trade the QQQQ:
Again the NDX reached its high on the open,
but as long as it is above 1840, the trend is higher.
S&P 500 (SPX) Trading
>> 3-16-07: With strength on the open
it made sense to hold off on the SDS purchase for an hour or
so. The SDS bottomed at 60.55, well below the 60.80 I am using
as an entry price. We have a full position in the SDS with an
entry of 60.80. 3-20 we added another 50% position to the SDS
when the SPX pushed above 1407. 100% @ 60.80 + 50% @ 59.60 =
Avg cost 60.40. The SDS closed at 53.75, looking to reverse
this position during the expected two to four week correction.
ICLR rec Long 01/24 @ 39.53 stop 34
close, Target >46, closed at 43.51
CBEY rec Long 02/20 @ 31.31, stop 28 close, Target >38,
closed at 34.32
3-30 > Long-term Put AAPL October 100 Put
Entry @ $12.00 | AAPL closed at: $90.97, Puts Bid 12.70
AAPL reports on the 25th, after the close. Est
= 63¢
ICLR reports on the 24th before the market opens est
= 39¢
CBEY reports on May 3 after the close, est = 9¢
**
PRS Open Actives making noise:
This far into a rally the breakouts are less common.
Top Patterson Relative Strength Stocks.
The stocks in the table below all have PRS ranks of 96 or higher at 12, 6, and 3 months making them the best performers across all time frames.
Jim Patterson
Editor
Tactical Trading Outlook
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