Technical Analysis Based Stock Market Commentary

Our Stock Market Commentary services, which you can access by subscribing to any of our Membership Packages, bring you up-to-date with all of the goings-on on the charts of the major stock market averages.

We provide you with a no-nonsense, evidence-based approach to stock market analysis. With a sole reliance on actual price action (as seen on the charts), we eliminate fluff and opinion to bring you the purest form of analysis possible. No corridor is left open for emotion or bias to interfere with our assessment of the investment climate.

A detailed commentary piece, named The Bigger Picture, is provided each weekend. A brief update is also provided after each trading session (Monday-Thursday), in the Nightly Commentary segment.

Sample Edition

The following is a sample edition of 'The Bigger Picture.' 

Big Breakout for Bulls. Watch Bollinger Bands on Weeklies.

It was another impressive week for the bulls.

And now that the S&P-500 has broken intermediate resistance, the onus is on the bears to prove that they're not dead in the dirt. As long as SPX remains above the old intermediate resistance level (955), there is the potential for the index to gain an additional 30%, over the next 3-12 months.

But, as we'd highlighted on Thursday night, there is a very important development on the weekly charts that could leave this rally virtually dead-on-arrival...

S&P-500 Index - Daily Chart

The markets have enjoyed a very fruitful two-week period. The S&P-500 has gained 100 points from the minor lows at 875. While an 11% up- or down- move might not have seemed like a big deal a few months ago, this move is quite impressive for two reasons: firstly, it wasn't quite expected by many and, secondly, there has been nary a consolidation or retracement that would have allowed traders to "buy-the-dip."

One basically had to have gotten on-board early and stayed in. So, all in all, we're pretty glad that we dropped our bearish bias two days into the rebound and loaded the lists with a dozen or so solid setups.

Coming back to the chart of SPX, the breaking of resistance at 955 is significant because it brings about a minimum target of 1030 (another 5%); this target is derived based on measuring implications that assume that the May-July consolidation was a bull rectangle.

Any bullish target is based upon the presumption that the index will stay above broken resistance (955), of course. If the index falls back below that level, all bets are off, and the breakout will be seen as having been a potential "fake-out" that will pave the way for a potential bearish reversal.

While the presumed rectangle provides a target of 1030, there are they who will believe that the inverted H&S pattern, which we had been highlighting for a couple of months, is still alive and well and that Thursday's breakout was actually a completion of that pattern. We'll talk more about this following the next chart.

There are a couple of points to be noted on the chart above, first. Firstly, note that RSI has reached overbought levels. This is the first such instance since the index set a major high above 1550, 27 months ago. Secondly, the bollinger bands are still expanding.

Ardent followers (such as we) of the bollinger bands will ponder about the fact that the bollinger bands are not rising, given the strength of the rally. As long as the lower band is falling, traders will have be wary of any correction of the rally that goes as far as the 20dMA; if the 20dMA does not hold up in such an instance and prices move towards the lower band in search of support, the fact that the lower band is far lower than it was even during the recent consolidation phase, will make the bulls extremely nervous. 

S&P-500 Index - Daily Chart - Projected Path of Inverted H&S on Major Trend

We first showed you the chart above, around three weeks ago. It now looks like the most bullish of all scenarios - the green line highlighted last week - has won out. While we cannot unequivocally say that the inverted H&S pattern is moot, it must be said that the odds of it's being a legitimate pattern are far lower now than they would have been had the right shoulder taken a more typical path (red line).

Having said that, it must be noted that there have been rare instances of inverted H&S formations wherein the reversal of trend has been as strong as to have left a much smaller right shoulder than left one. If this is such an instance, the index is set to experience a move to a level of 1245 - at a minimum - over the coming 3-12 months.

That would be nice, wouldn't it? Well, let's take it one day at a time, and see if the index can stay above the broken resistance level (955), in the meantime.

Dow Jones Industrials Average daily chart

The Dow, which unlike the S&P-500 had not retested the early-Jan highs during the formation of the Jun-highs, has finally done so. In fact, as of the close on Friday, the index has moved a smidgen above the intermediate highs set in early-Jan.

But is this a bear trap? After all, RSI has moved into overbought territory for the first time in a while and the bollinger bands are still expanding (we spoke about this earlier, in the case of SPX). There's also the small matter of the gap left on the chart in the week prior to this one...

In any case, as long as prices are above 8850 (we'd consider that level more important than 9050, for the time being), the bulls have to be given the benefit of the doubt, as far as the technical picture goes.

Nasdaq-100 Index - Daily Chart

NDX blasted through resistance at 1510 last week and sits at 1600, at the end of this week. RSI is highly overbought and there has been a spike in volume (a potential blowoff top in-the-making?), not to mention the gaps on the chart. In the end, you can't argue with the trend; you just have to hang with it as long as you can.

Let's move on to the weekly charts now. There are a couple of simple, yet very important, developments to be kept in mind.

S&P-500 Index - Weekly Chart

The markets rallied once a few of the broader indices found support from their 20wMAs. Now, there is the possibility that the bull run could be nipped in the bud, two standard deviations away.

Notice that despite the spectacular move over the past two weeks, the bollinger bands on the weekly chart of SPX are tightening. What that means of course is that the upper band is falling into rising prices. That is potentially not a good sign for the burgeoning trend.

There will need to be an immediate expansion of the bands or else there could be one hell of a reversal. The fact that the bollinger bands are tightening is both good and bad news for the bulls, however, because it means that the lower band is rising (strongly, by the way) and should provide support to prices, if prices approach it fairly soon.

Dow Industrials Average - Weekly Chart

The weekly chart of INDU is showing tightening bollinger bands, as well. So traders will want to watch the bands over the coming week.

That aside, there are positive centerline crossovers on RSI and MACD; the bulls will hang their hats on that fact. In a nutshell, the centerline crossovers are potentially a sign that the rally off the lows is potentially only half complete, as long as the bollinger bands co-operate.

Nasdaq-100 Index - Weekly Chart

The RSI reading on the weekly chart of NDX has reached a level of 67, which is not very far from overbought. This is a confirmation of the fact that we've seen a really strong intermediate trend. MACD is showing a clear positive 0-line crossover, as well.

The only spot of bother on this chart is the fact that the sharp rise seen over the past two weeks has caused prices to smash into a flattening upper band. Unless the band starts to rise again, it could bring about a stalling, if not a reversal, of the trend.

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The stacked chart below provides a look at the important lateral prices levels, as well as Fibonacci retracement levels of the '07-09 bear market, on SPX, INDU and NDX.

Support/Resistance & Fibonacci Levels on S&P-500, Dow Industrials and Nasdaq-100

Finally, let's take a look at implied volatility...

The Volatility Index (VIX) - Daily Chart

With the VIX now trading in the low 20s, it seems like implied volatility is finally reaching more sane levels and this breeds a very satisfactory trading environment for options traders who play their cards right.

That's it for this issue of The Bigger Picture. Have a great trading week!

Asher Pinto