THE BOTTOM LINE -
The last time I wrote two weeks ago I saw some rally potential and the S&P 500 (SPX) did rebound from the 1080 area to 1105 or so and the Nasdaq Composite (COMP) from around 1830 up to 1895 over the week that following. This was short-lived and this past week saw this ground given back fast and then some.
To keep things a bit in perspective: from weekly low to high, SPX has now retraced 25% of the late-2002 to early-'04 advance, with the Nasdaq Composite giving back around 36%. This retracement has been fast of course, relative to the long advance, but per the old commodity expression, they always "slide faster than they glide". The market in rally phases builds in an overly optimistic earnings expectation and then adjusts - unlike buying, selling tends to be closer to a one-time decision.
But, says the option trader, should I cover my index puts soon and look to maybe buy some calls? Probably so - maybe after 1-2 more days of this decline or choppiness, such as into Tuesday.
My indicator of bearish sentiment got to an extreme by Friday. Traders finally got a healthy dose of fear and went into puts heavily enough to suggest that the market could be near a tradable low. This was the only thing that didn't quite fit for me before - traders were "too" bullish to suggest that that the 1080 SPX low was going to be it for a while.
FRIDAY'S TRADING ACTIVITY -
THE NUMBERS -
The Nasdaq Composite (COMP) fell 44.74 (-2.5%) to 1,776.9. You have to go back to a year ago August to equal this close. For the week, COMP was down almost 6% in a tech wreck.
REPORTS & ECONOMIC NEWS -
To add insult to injury, payroll growth in May and June was revised lower by a cumulative 61,000, as well. The unemployment rate fell to 5.5 percent from 5.6 percent. Of course, the Administration could tout this drop but the market is influenced by job creation as it discounts or assesses the coming months ahead.
As has been the case this year, this was THE report for the month as job creation is what can fuel continued consumer spending - certainly business spending remains relatively lackluster.
Bonds rallied strongly after the report, which showed the worst monthly job growth this year. The benchmark 10-year note jumped 1 and 16/32, to 104 and 7/32 to yield 4.22%, down substantially from a yield of 4.4% on Thursday.
OTHER MARKETS -
Most of this climb in Oil prices is attributed to unrest in the middle east and Russian supply disruptions real or imagined. Most of it is a "risk premium" and not related to current supply and demand conditions.
U.S. crude inventories are at a "comfortable" level, near the 300,000-barrel level. The Strategic Petroleum Reserves have been increased for emergency use. The Russian dilemma over Yukos oil company is reported to be closer to a short-term resolution.
Some oil traders in the know suggest that prices could drop back under $40 in the coming month, but may also hit $45 a barrel first, even $50 as a wild card possibility. Even with a fall in oil prices ahead, gasoline prices would typically continue to rise over the next 30 days or so due to the lag in refining - not good for the summer driving season.
In currency trading, the dollar was off 1.2% against the yen, at 110.36 yen and lost 2% against the euro, with its close at $1.228 in New York.
MY INDEX OUTLOOKS -
S&P 500 Index (SPX) - Daily chart:
Based on the area reached on the downside on Friday of this week, relative to my lower trading envelope (3% under the 21-day moving average) and the accompanying "gap", the S&P 500 (SPX) should not have much further downside potential left. Perhaps a bit lower such either on Monday or a mild rebound and then another slide to the lows or a bit lower such as 1060-1058, but further downside from here is not huge in my estimation.
The slight price "gap" that occurred as Friday's high was below Thursday's low is important from a technical standpoint. I would anticipate a rally back to that gap area around 1080 in the not too distant future which would then be met with renewed selling - a close above this area, if it held as support on subsequent pullbacks, would be a key way to measure further rally potential beyond just an oversold rebound.
An indicator I rely on very much and that has finally given a solidly bullish reading is my call to put ratio for daily CBOE equities options, as it fell to under "1" on Friday since put volume was greater than calls. As you can see from the chart above, such low readings often, not always, occur in clusters at significant bottoms - enough so to pull the 5-day average down closer to the line.
However, any 1-day reading like the one on Friday is enough to suggest that the market is at or near a low within 1-5 trading days assuming my other main indicators line up bullishly also - more on my "tree of indicators" further on.
S&P 100 Index (OEX) - Daily chart:
Near-term, I don't have objectives much beyond 520 - allowing some slippage, perhaps to 518. I don't think the S&P is headed to the 500 area again, certainly not near-term. The 530 area is key resistance and I would expect a rally back to this area this (coming) week. However, more selling should be expected on a rebound to this area.
The OEX is about as oversold as it tends to get without at least going sideways to "throw off" some of the oversold condition. The new low was "confirmed" by a similar new low in the RSI, so there is not bullish divergence that set up. This market is adjusting to a new set of economic and earnings assumptions.
S&P 100 Index (OEX) - Hourly chart:
As you can see by how I have outlined it, the OEX is near the low end of its hourly downtrend channel - this at least suggests that the decline will likely slow. The steep declines tend to occur for the top of these channels when the index is in a downtrend; i.e., anytime we have a pattern of lower rally peaks and lower lows.
Of course the S&P 100 is oversold short-term so the potential for a rebound is there. Those who come in and buy OEX puts on Monday morning are snoozing - too late to get into a winning situation most likely.
S&P Main Indicators:
The red arrows are areas where my "tree of (main) indicators" for the S&P segment of the market were lined up to suggest a top. The green arrows show the reverse. The Up Volume indicator is mostly only useful to show a bottom, so no red arrows there.
The indicators are all getting into bullish readings and the S&P 500 index could find some support at the low end of its downtrend channel. The rally potential on a first rally might not be much however - I think more bearishness will build up first.
The volume indicator is one that I have not shown as much in my column but will start to include it when it could be suggesting that it is reaching the area where the market typically bottoms. Looking at the last time that these indicators seemed to suggest a bottom was early - at least the rally that followed was limited, not major.
Nasdaq 100 (NDX) Index - Daily:
As with the S&P indices, the Nasdaq 100 is about as oversold as it gets and the extension of this decline to the lower envelope line (4.5% under its 21-day moving average) typically, more or less, marks the low end of its range. Some further lows around 1315-1310 will offer some call buying potential, for at least a rally back up the 1350-1355 area at some point.
I will be watching for a rally attempt, say by Tuesday, then another decline back toward the lows already established - if put volumes stay high at that point, this may be a buy point. So much for my crystal ball - stay tuned for what the market tells us next.
Nasdaq 100 (NDX) Index - Hourly:
NDX has reached the lower end of its hourly downtrend channel - what does this mean? Not much, except, that it does suggest that the best part of the decline is over. The "easy" money so to speak, for those positioned in puts from the 1380 area especially, has been made. A next good entry for puts may come with a rebound back into toward the top of the downside gap area around 1350.
The hourly chart of the Nas 100 has the same appearance as QQQ's hourly chart, so I don't include both. The Q's are also at the low end of its hourly channel.
Nasdaq 100 tracking Stock (QQQ) Daily:
The $34 area was support - once broken and so decisively, it is a key near technical resistance as suggested by the green (support) and red (resistance) arrows on the chart below. The downside gap area is typically a place that prices come back to. Next lower support suggested by going back on the daily chart in QQQ looks to be 32-32.25. Resistance as noted is 34. Unless there is a daily close above 34, and the subsequent ability to hold above this area, I would anticipate prices trading in a 32-34 range.
There is nothing much volume shows us here - the jump in volume on the market break on Friday is consistent with a bearish turn of events. If it has been low volume, it might have suggested that the decline would be brief. On the other hand, many long holders of the stock sold once the 34 technical support was decisively penetrated. Not a good day to be a bull.
I would do some buying in the 32 area if reached - a rebound back to the 34 area at that point is a good bet.
Good Trading Success!