Option Investor
Index Wrap

No Change, Little Chance

Printer friendly version

There's no basic change in my opinion that there's little chance for the prior strong bullish trend to resume anytime soon and I anticipate still lower price levels ahead. The August to December advance went well beyond a reasonable expectation of earnings growth in the year ahead and the market is still adjusting to more realistic levels. Technically, the tip off for the top were the key reversals made early this month (1/3) - in the case of the Nasdaq 100 (NDX), which trades quite "technically", there was an obvious double/triple top.

The indices have hit oversold levels by some basic measures, but with the kind of market action we're seeing, I expect more of a period of being oversold.  Especially since there is not yet the level of bearishness that tends to be associated with significant market bottoms. The market which tends to anticipate events quite well, doesn't act like there is going to a bullish surprise in how the Iraqi elections go. Specific trend and price projection are found in my Index Outlook section below.

Friday's and the week's closing index prices, a recap of market action, influences (mergers, oil, etc.) and government releases (GDP) are covered in the Market Wrap.  I would note that the pullback in the nearby oil futures contract, before climbing over $50 again, was helpful, but crude prices are still quite high. 


S&P 500 Index (SPX) - Daily chart:
The rally of this past week in the S&P 500 (SPX) looks like an oversold rebound only and that prices are headed still lower.  I anticipate a decline to at least the 1153-1150 area in the near-term, at the lower trading envelope, when tends to be the lower end of the typical SPX price range.

Even the 1150 area is not a natural technical support, unlike around 1142-1140, at the intersection of the support up trendline and the October price peak. You may recall me saying that prior resistance and tops, once exceeded, often become an area of buying interest (support) on the way back down. 

You can also see how, once pierced, the 21-day moving average acted as a resistance deflection point on the rebound of two weeks ago.  I use the 21-day average as a trading benchmark - a close above it, better two consecutive closes above it's current level of 1184, suggests the trend is back on an upward path.  Absent, that I assume that momentum will carry still lower, such as to the aforementioned targets/support.

Very important to me here is what my sentiment indicator is showing, or not saying really - it's not showing a fall to a more bullish reading around 1, where daily equities put volume starts to equal daily call activity.  Along with the chart pattern, sentiment is not registering favorably for the bulls.  

I'll mention that there's no symbol I can provide for the above
indicator which is in a custom spreadsheet type format in order to graph it. What is taken out of the calculation is Index options, as they reflect enough hedging activity to give a less pure read on bullishness or general bearishness. 

I also divide calls to puts, rather than the common put/call study, to get a reading like the overbought/oversold indicators - high extremes are bearish and vice versa.  

S&P 100 Index (OEX) - Daily chart:
570 is still key resistance in the S&P 100 (OEX), at the top of the 3-week trading range.  I also take into account the 21-day average as a potential resistance, at 565.

As with SPX, I don't see that OEX has gotten down to a natural support, which looks to be around 550. Specifically, 548 is support implied by the prior double top (Sept-Oct) and the key 200-day moving average. This average is often, not always, a key level, as it was when it was a deflection point at the aforementioned double top.

I see OEX headed lower, unless there's a close above 265, then 270, which would turn the chart picture around. 

The RSI reading, on a 14-day basis, suggests that OEX has not yet reached an initial fully oversold condition. It's getting near to this but would have to fall some distance further before I would say that OEX is "oversold" on a daily chart basis. 

You can better see the large rounding top pattern on the hourly chart, as well as the parameters of the current downtrend channel below -

What makes a good case for a saucer top pattern is when its asymmetrical - when the right (declining) side unfolds much like the left (ascending) side.  A rounding top, if it's a valid bearish pattern most often brings a sharp drop once prices get about half way down the circular arc.  You can go back and see this pattern in MAJOR tops like the 2000 peak.

Reinforcing the prior mention of 565 being significant - a move to this area would be a bullish breakout above the bearish circular arc.  The 550 area looks like a next downside target, at minor support implied by the low end of OEX's downtrend channel.       

S&P 100 Hourly chart:

Dow 30 Average (INDU) - Hourly:
The Dow 30 (INDU), has the appearance of a Head and Shoulder's (H&S) top, and is well seen on the hourly chart.  The neckline (dashed) blue line was broken on the decline.  As is fairly common, classic even, on the rebound this prior support acted as resistance as noted on the chart below.

There is a minimum downside objective implied by the H&S pattern, which is for a move equal to the fall from the top of the "head) to the neckline, projected (subtracted) from the neckline.  This calculation implies a possible and eventual decline to the 10,100 area in INDU. Even if this downside target is realized, it would unlikely be a straight-line decline. 10,300, as the 50% retracement point to the Oct - Dec advance, is a possible next target and support area.

Nasdaq Composite (COMP) Index  - Daily chart:
2100 is a key technical resistance point in the Nasdaq Composite (COMP), at the previously broken up trend and at the 50-day moving average.  2050 is near resistance.  The 1970 area is support implied by a retracement of half of the prior upswing and the 200-day average. I think that COMP is headed lower along these lines.

A noteworthy aspect to the rebound of this past week is that, so far, COMP has not gotten back up into the downside gap area, which is another type of "resistance" or area of selling interest - more on the downside gap with the Nasdaq 100 chart.

It will be noted by many that the Composite fell to a reading of 35 on the RSI, which has previously defined an oversold rallying point in recent months.  However, while this reading is suggesting caution about taking out new put positions, my expectation leans to a pattern like the July-Aug one, where COMP fell significantly further after first reaching this kind of RSI extreme. 

Composite Hourly chart:
Use of the hourly chart shows a possible "measured move" objective to 1980, where the distance covered by the first downswing would equal the second. You can see also see clearly how the return to the prior multi-month up trendline (at the red down arrow) was the kiss of the death to the rally - not for nothing that I sometimes refer to this as the "kiss of death" trendline.   

Nasdaq 100 (NDX) Index  - Daily:
1600 is major resistance in the Nasdaq 100 (NDX), but with very significant intervening resistance implied by the recent downside price gap between 1535 and 1150.  There was unfulfilled selling in this area so to speak, as prices fell on the opening.  A return to this area will bring in more selling.  If NDX could churn through this area, my objective for still lower levels seems less likely. 

A move to the 1470 area is my next downside target.  1425 ought to represent significant support, at the low end of the October price range and is an objective that could also be reached.  Sometimes a "gap" area like the one in NDX measures about half way in a move - a so-called measuring gap. This occurs more often in individual stocks but is sometimes seen in the Indexes also.

If in puts from higher levels, I suggest holding some portion of them still. The other portion - well, it was tempting to take profits on the sharp Monday decline.  The second day of the trading week often bring at least a minor rebound after several days of decline and it was reasonable to convert some options into cash then.       

Nasdaq 100 tracking Stock (QQQ) Daily chart:
An historical note and saying something about volume as a secondary indicator and that volume often "precedes" price is provided by the continued rally after mid-December accompanied by a declining daily volume trend. 

One of the pluses in trading QQQQ is that we can match the two trends in both of the ONLY two components of technical analysis - price and volume. On that note, the only noteworthy aspect to the volume trend is that On Balance Volume (OBV) is still trending lower as I think prices will still be doing ahead.

The Q's got to minor support this past week at 36.70 and did manage to hold this area which is a plus, as well as the fact of staying above its 200-day moving average. However, I think a next decline could take the stock to at least the 36 area with a possible lower target to around 35.30 after that. 

A close above 38 would turn the (chart) picture potentially bullish.  If so, QQQQ should then find support in the 38 area and regain its former support from earlier in the month. Absent that, I would rather be short the stock, with an objective to 35.50.     

Please send any technical and Index-related questions for Leigh Stevens to Contact Support for possible use and an answer in my next Trader's Corner article.  

Good Trading Success!

Index Wrap Archives