THE BOTTOM LINE -
The S&P 100 (OEX) continues to trade within a trading range now 11-weeks old, after the recent rally failure around key resistance in the 580 area. OEX is showing a double top which will only gain in significance the longer that 580 cannot be exceeded.
The Nasdaq Composite trend appears to be perhaps "locked" in a 2100-2000 trading range for some time after its downside reversal upon reaching the 2100 area where the rebound failed in early-January.
Tuesday or Thursday are often (trend) reversal days - IF the market is going to reverse I often look for it on the 2nd or 4th trading day. It seemed a definite change in tone on Thursday - you could see the push on the S&P was in trouble ahead of time by looking at the capping action that had been going on for a while now in individual stock bellwether's like GE
FRIDAY'S MARKET -
INDEX TRADER - ** NEW ** A MIDWEEK UPDATE
S&P 500 Index (SPX) - Daily chart:
Near support begins at 1200 and extends to 1195-1190, with a close under this area suggesting downside potential to around 1175. I suspect that SPX is headed lower, and the test will be on how the Index fairs on any further dips under 1200.
Significant buying interest (support) may develop if the index drops back to the 1164-1166 area of the last (down) swing low. Major technical support is implied by the intersection of the Aug - Oct trendline in the 1150 area.
579-580 was and remains the key resistance price area and those who went long puts because of the rally failure should look for an objective in the underlying index to 570 - a fall to this area then should be watched closely for signs of a rebound. If 580 is pierced, a next upside objective is to 590.
A close under 570, if not reversed in the following 1-2 days, would be significant, possibly signaling a further 10 point or so downside potential, to the 560-556 area with 556 being the last correction low and at the lower moving average envelope line, where SPX would be pretty well extended on the downside.
As to my Sentiment indicator above, it indicates a fairly consistent bullishness with the last extreme registering in "overbought" territory. There may need to be a re-test of the prior low or, a lower correction low (than 556) in order to get a final washout bottom and a build up in bearish sentiment.
The theory of contrary opinion often is true - bottoms tend to be associated with a high level of bearishness and tops with a high level of bullish conviction.
S&P 100 (OEX) Hourly chart:
The bearish hourly chart divergence that set up between OEX going to new highs not being "confirmed" by similar action in the RSI offered a good signal that at least a short-term top was coming - reinforced technically by the fact that this drive back up to 580 was the area that was the stopper to the December rally.
This bearish divergence "set up" offered a good trading opportunity. Chances were that the rally was going to fail - if so, buying puts when OEX got to 580, with an exit point of 582, offered an excellent risk to reward equation, if you assessed downside back to 566-563 area which is a reasonable downside objective.
For now, the OEX remains in the same trading range it has been in for about 3 months.
It is also worth noting that the last low (late-Jan), at the bottom of the aforementioned price range, offered a bullish price/RSI divergence on the hourly chart, as the RSI did not see a confirming new low (RSI length set to 21). Couple this divergence with the fact that the Index held a prior important low and it was a slam dunk call buying opportunity.
NOTE: I covered the topic of how price versus overbought/oversold Oscillator divergences can be alerts for upcoming trend reversals in my Wednesday 2/16 Trader's Corner, which can be found in the 2/16 Newsletter or by clicking here.
Dow 30 Average (INDU) - Daily chart:
This past week's rally failed in the area of the previous top and makes this prior high the one to better. When there is a possibility for a double top in the same area separated by a number of weeks to a few months, it becomes a key area to watch.
The longer a double top (or bottom) is in effect the more significant it is - the coming 1-2 weeks is key as to whether this top will stand and suggest a possibly lengthy period of a 10850-10400 trading range.
While another try for a new high or, success for a new up leg above 10850 can't be ruled out, I think it more likely that the Dow 30 (INDU) will drop back to at least the low-10600 area first.
The 21-day slow stochastic when at the extremes shown has worked pretty well with INDU and pretty consistently has highlighted significant (i.e., tradable) tops and bottoms.
Dow 30 Average (INDU) - Hourly chart:
The next 2-3 days should tell the story - watch the 10750 area near-term as a fall under here will suggest more weakness ahead.
The Nasdaq Composite (COMP) also reversed from a key resistance area around 2100-2105. The move up to this area was both a return to the previously broken up trendline, now acting as resistance, but also a return to the cluster of prior highs at the top of the early-January rebound.
The Composite looks too weak to re-attempt scaling the 2100 area and instead looks headed again down toward the low-2000 area and closer to the 200-day moving average. You can see the times in recent months when the both the 50-day and 200-day moving averages acted as either support or resistance.
Overbought/oversold measures are in mid-range and so are neutral.
Nasdaq 100 (NDX) Index - Daily:
Interestingly, the downside chart gap created a few week's back in the Nasdaq 100 (NDX) had its part in the fireworks of the past week as there was a brief spurt up through the top of the gap, fueled in some part by short-covering once it did. But, on a closing basis - the moment of truth, the close - we could say that the gap is still acting as unstoppable resistance.
If long puts, I suggest exiting if NDX climbs back above 1550 by more than a few points. Otherwise stay with puts for an objective or move down to the 1500 area. There might be further downside potential to as low as 1450 in the next 3-4 weeks.
There was a good likelihood for a rally failure in the 38 area, which represented a place where there could be assumed to be substantial further selling interest based on the market breakdown before in this area - an area I would call the last "breakdown" point. It's harder to project what the further downside might be in the Q's.
Near support seems likely around 37, then in the 36.60 area of the 200-day moving average. I think an eventual target for the Nasdaq 100 tracking stock is to 35-34.50.
Judging by a lot of weak tech stock charts I don't see that the recent rebound in bellwether Intel (INTC) and the Semiconductor Index (SOX) is going to be enough to keep the tech biggies represented by this Index from sinking still lower.
Good Trading Success!