Another Gap Marks Another Bottom

 | Mar 06, 2013 | 5:00 PM EST
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It was all about the Dow Jones Industrial Average Tuesday and how the index popped to a new all-time high. I certainly got that one wrong as I had been looking for the Dow to stall at the 14200 level, home of its October 2007 highs. It certainly didn't. But my Dow call wasn't totally worthless, as I was looking for that new all-time high to be unconfirmed by everything else, at least in the sense that nothing else was expected to make a new all-time high. I wasn't disappointed because not only did nothing else make a new all-time high, but also the Russell 2000 (RUT) still hasn't returned to its gap from Feb. 20 or its all-time high from Feb. 19 at the same level, 932.

RUT: Still no net progress since Feb. 19.
Source: optionsXpress

Accordingly, I remain a bit circumspect at these rarified levels, looking for some backing and filling in the days and maybe weeks ahead -- maybe from slightly higher levels where I still have outstanding upside targets, notably in the S&P 500 (SPX). Recall that since early February I have been looking for the Nov. 1, 2007, gap in the SPX at 1549 to be filled. That's the last gap in the SPX. It's the last gap (or gasp) going back to, well, forever. Given these higher outstanding targets in the SPX, I didn't sell any of my mutual fund positions Tuesday. I'm still holding modest positions in a range of 25% to 35% at Guggenheim Investments (formerly Rydex).

Below is the chart of the SPX that I have been showing for the past couple of months. It's updated to reflect today's latest new high at the 1545 level, about 4 points shy of that gap. If that gap is exceeded, the next big number is the all-time high at 1576.09 from October 2007. In between, however, there is bubble-gum resistance at the 1553-1555 level, which marked the high in 2000 as well as the early high in 2007. Bigger picture, somewhere in that area, from 1549 up to 1576, I expect the market to stall and turn down for a while.

SPX: Closing in on its Nov. 1 '07 gap.
Source: optionsXpress

As for the Dow and its mission to continue higher presumably forever, it won't. Though we will likely see somewhat higher levels over the near term as the SPX churns in the 1549-1555 area, the Dow, too, will likely succumb to selling pressure and ultimately pull back, at least for a while. The initial downside target is an easy one. It's the prior all-time high from Oct. 11, 2007, at 14,198. That level should be seen before the Dow makes significantly more progress on the upside.

DJIA: A return to its prior highs is likely.
Source: optionsXpress

But Tuesday, while the Dow story was unfolding, there was another story taking shape but not getting much attention. That was Apple (AAPL), which the day before had set a new 13-month low at $419. You may recall that on Jan. 24, the day of that big gap-down opening in AAPL, I wrote about downside targets in the stock. "My preferred target is the bottom of the big gap from a year ago. It was actually formed on Jan. 25 of last year, and the gap is based on the Jan. 24 close of $420.41 and goes to the Jan. 26 low of $443.14. ... That could be worst case, at least for the near term."

Finally, on Monday, the stock collapsed to a new low of $419, a little more than a point below the bottom of that gap. Tuesday, the stock gapped up from Monday's close of $420.05 and bottomed at $420.75 before popping up to the $435 level. Once again, as I am fond of saying, "One gap begets another." The massive 23-point gap at $420.41 from January 2012 has been replaced by a smaller gap at $420.05. If that gap at $420.05 gets filled in the days ahead, I won't freak out about it, currently holding bullish short puts going out to January 2014. But a break below the $419 low will definitely cause me some consternation. For now,  I have mostly exited bearish March put spreads as I am betting on a near term low at the $419 level. I'm still holding bullish short puts going out to January of next year at the $310 and $300 strike.

AAPL: One gap begets another.
Source: optionsXpress

In the overall market, I would be more inclined to get bearish if it were registering a blistering overbought reading. But it's not. The McClellan Oscillator settled Tuesday at +53.48, just on the overbought side of neutral. Of course, the weakness in the bond market is a factor here, but there's always something.

Sentiment is frothy, but we've seen worse. This morning the VIX made a low of 13.17, which is still more than a point above the Feb. 19 low (not coincidentally when the Russell 2000 made its all-time high and everything else made multiyear highs).

VIX: At least there hasn't been a new low here.
Source: optionsXpress

Color me cautious but not yet bearish. I am bullish on AAPL as long as it holds the $419-$420 area.

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