Clear & Present Danger
Hope you don't mind looking at a "few" different charts here tonight. The spirit came over me to spend some time with the screen capture program to share with you what may lie ahead in the coming days & weeks. We're going to cover quite a few different market thoughts in here and it's liable to get a tad long-winded, so pour yourself a nice drink and join me for the ride!
Today was another low volatility event on expiration Friday. We had a deliberate drop near the open and then rather steady ascent towards the close before customary final hour gyrations began. This comes in great part by traders unwinding calls and puts alike after waiting the entire session to see if market action will break their way. We can never quantify what happens from 2:00pm EST into the close as fundamental buying or selling.
This was one of the quieter expiration weeks I've witnessed and if it weren't for Wild Wednesday there'd have been no action at all. That session may have been a key moment in the market for now as we'll dissect in the charts.
(Weekly/Daily Charts: Dow)
Weekly charts for the Dow shows resistance held its first test near 9,500 area. That point firmly rejected a strong opening pop as waves of selling on anthrax news and government reports poured in. Stochastic values are still pointing straight up but they never call a top or bottom in weekly charts. These oscillators could continue on up for weeks ahead or gradually turn bearish if the Dow slips considerably further.
Speaking of which, daily charts show support near 9,100 held as we figured it would. Stochastic values pointing straight down suggest further distance below before it bounces but we still have two measures of potential support in the 9,000 area first. The 20-DMA (middle Bollinger Band) and 38% retracement of recent high to low (red line) lie in wait for ready arms to cradle any descent.
(Weekly/Daily Charts: SOX)
Similar story for the Semi-Conductors which are for all purposes the NASDAQ. Since April 2000 we've had firm resistance in a descending trendline in place and trendline of support dating back to October 2000 as well. One giant, long term bullish pennant that will someday break to the upside with force, but for now we see serious resistance near 540 area on two counts.
Meanwhile the daily chart suggests price action might break lower with 377 area the next measure of support if 410 zone fails to hold. Mixed bag on this one: could go either way.
(Daily Charts: Healthcare & Banking Indexes)
For a broad spectrum opinion, let's consult the two largest SPX component sectors; financials and healthcare. HCX Healthcare index (left chart) is forming a clear bear flag consolidation and stochastic values are pointing straight down. Its weekly chart (not shown) already has stochastic values weakening at overbought extreme measures as well. This one could see 795 zone for support in a real hurry if not a bit further below.
BKX Banking index (right) shows a similar picture. Consolidating wedge and bearish stochastics suggest lower levels confirmed if the wedge breaks down on a close below bottom trendline.
The same picture is seen in other indexes such as insurance, drugs and others. I scanned the top 300+ SPX components today and saw nothing but sideways to downward signs in every chart except one. That lone screaming bullish company was Coke (KO) and it looked just great earlier in the week. I made a mental note to pick up some Oct or Nov calls one strike OTM around Tuesday but got busy with website chores and forgot the whole thing. Very costly mistake! Mental notes are only worth the paper they are written on.
This is not to say every chart is a short: far from it. What I do find is that most major components are either in a state of flux or looking to be ready for a rollover of recent ramped-up action.
(60/30 Charts: QQQ)
The QQQ has been very active lately compared to the summertime snooze it took. While we may never see the five-point average intraday ranges of yester-forever ago, it has become a tradable vehicle once again. Right now I'd be looking for another trip down the charts as overhead resistance lies near and stochastic values are topping out. Keep in mind daily chart signals are still in steep descent, so when all three charts line up it is time to play puts once more.
(60/30 Charts: OEX)
Same goes for the OEX. Forming a rather wide triangle pattern here with support down around 540 area and resistance overhead. I would play puts on a break below 550 or better yet, pop above 555 and breakdown below it for those who watch every tick of the market. That 555 level has held six touches of it in the past two days and is an obvious price magnet for resistance. One more failure below it with stochastics rolling down and I'd look for a ride to 540 area next.
(60/30 Charts: SPX)
As for the SPX, same story with different numbers. 1077 area (give or take a couple of points) seems to resist upward tests and stochastic values are poised to reverse in bearish fashion soon. I say poised, not ascertained! We could very well see the Dow soar to 9,600 or beyond next week but that is a lower-odds proposition than 8,900 based upon all the longer-term charts we looked at above. Long puts on a break below 1068 area or better yet, failure near 1076 on a pop to or above and back down thru.
Heading To Retest Recent Lows?
Analysts love to analyze data... that is what they do. Humans love analogies and comparisons as history tends to repeat itself. But there are times when history is made that defies comparison and we're mired in such a period right now. I personally believe the chances are high that we will see major indexes roll between recent high and low values in a huge sideways fashion for months if not years into the future. Sobering thought? That too is part of history as we've seen decades long rolling markets before. What is unusual are straight-up bull market moonshots like most market participants just cut their baby teeth on and expect to be the norm.
Right now we have a VIX at 35.84 and total put/call ratio at .80 that tell us fear still exists. October put/call ratios and short interest were heavily skewed as too many participants played the downside and lost. There is still a high level of shorts and more who are ready to jump in on a moment's notice, which will support the markets.
Also, recent lows were arrived at by an unprecedented event that really shook a large number of weak hands and some reluctant strong ones out of the market. Huge down volume, incredible advance/decline disparity and margin calls for seven to nine- figure account balances in dire straights are the type of things bottoms are made of. Near term, anyways.
There are zero fundamental reasons to buy stocks right here and more investors realized that this week. But too many shorts are ready to hammer the market for it to plunge straight down right now. In the same manner we saw the market chop its way higher, I expect it to chop lower for awhile. Retest of the lows? New market lows? Don't rule anything out, but it will take unknown outside catalyst of incredible magnitude to do so without a fight from hardened bulls.
Those are the conditions we face. The capture of Bin Laden and overturn of Taliban could see markets take off in screaming eagle fashion. Retaliation for that from surviving factions outside the Middle East could turn things on a dime as well. These are perilous times we trade in with weak markets, a weaker economy and unknown factors to deal with the likes of which our generation has never seen. Nor do the majority realize it yet and hopefully never have to.
Best Trading Wishes,