Option Investor
Index Wrap

Oversold Rebound or Bottom\?

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The Bottom Line -
While Thursday's strong rebound looked impressive and came after a bullish previous 1-day reading on my sentiment indicator, the overall pattern for the prior week in the major indices has the appearance of consolidation (bear flag type patterns) ahead of another downswing. Volume on the rebound was not big enough to help conclude that a bottom was made.

Providing another take on the charts is that the S&P indices (SPX + OEX) completed retracements equaling 2/3rds of the October to early-March advance and then rebounded strongly. If a decline retraces no more than 62-66% of the prior move, an overall uptrend can still be considered intact.

The percent retracements to date make the existing lows in SPX and OEX (1136 and 543) important benchmarks. Closes under SPX 1140-1136 and OEX 543-540 would suggest another down leg was underway, with such a decline falling toward last fall's lows.

The Nasdaq Composite and Nasdaq 100 (NDX) reached significant technical objectives and possible support in the 1900 and 1400 areas respectively. These levels are also key areas to watch now.

Closing index prices, a recap of market action, specific company influences and government releases are covered in the e-mailed and online OIN Newsletter, in the 'Market Wrap' section.

I'll update my Index Trader column midweek (Wednesday) when my schedule permits and if there is a significant change or adjustment needed to my Sunday commentary.


S&P 500 Index (SPX) - Two daily charts:
What was important prior lows around 1165 now looks to be key resistance technically. What was support becomes resistance. Many who bought the lows in this area last time, will be tempted to sell some more stock if the S&P 500 (SPX) rebounds again to 1165. A close over 1165 would be bullish; a further bullish move would be a close above the minor down trendline at 1173. Finally and quite key, is an ability to pierce 1180 technical resistance.

Support is at 1140-1136. Below this area, a next downside objective involves some guesswork. The technical view would be that prior lows around 1100 are a next possible target.

CBOE's Market Volatility Index shown above for the S&P 500, symbol VIX, has an interesting bull flag outline. This pattern is the reverse of the BEAR flag pattern outlined on the price chart below. It suggests that volatility could jump again while SPX has another downswing; a possible price objective for another down leg is to around 1108.

The chart below also highlights the 62 and 66% retracements. If prices falls under 1136 again, SPX would be exceeding a 2/3rds retracement. Such a breakout below the bear flag pattern would also suggest another significant decline was underway. Ability or inability to close back above the 200-day average at 1154 is a technical benchmark that money managers watch.

The indices are all now oversold enough that NEW put positions and betting on another down leg, has become more risky. Some positive economic report or earnings reports could create a sizable short-covering and bargain hunting rally in these kind of market conditions, as was the case on Thursday.

S&P 100 Index (OEX) - Daily chart:
Key support and resistance levels become clearer after this past week's price action in the S&P 100 (OEX). Key resistance is at 556; the low end of its multi-month trading range. Not far above is resistance at 559, at the down trendline. A close over this trendline, especially assuming that this support held up the next day too, would suggest a bullish turnaround.

Support is implied at the prior recent bottom at 543. A close below this prior low sets up a possible further 20-point decline, to the area of the October lows at 521-524.

I suggested exiting puts in the 540 area - if you exited when prices reversed from the 543 area, way to go! My suggested call buy in the 540 area didn't get done - I was looking for a rebound back up to 555; OEX came within .50 of this level already.

The sharp decline in bullish sentiment that occurred a week ago Friday (4/15) "set up" the Wednesday low so to speak. However, trader sentiment jumped on the rebound, which I think reflects a still too-complacent view about the rally potential of this market. Nevertheless, that 1-day sharp fall in sentiment AND the touch of the lows to my lower (moving average) envelope line at midweek did suggest that an upside reversal was due.

Dow 30 Average (INDU) - Daily chart:
The Dow Industrials (INDU) have retraced more than 2/3rds of its last advance. Since INDU led the S&P type stocks up, it led also on the downside and I key in on retracement levels with the broader S&P indices more than the Dow.

The 10,000 level is more of a psychological level, but has established itself as near support. Since it's a key number for the "public", you can figure that a close under 10,000 would get bearish publicity.

Key resistance is at 10,370-10,365, the "line" of prior lows that formed on the prior (brief) dips to below 10,400. 10,400 is where the down trendline intersects currently and so a close above this level would represent a bullish turnaround to the current bearish chart picture.

I have some downside technical targets for the 9800 area, which based on measured move type objectives. Such objectives are realized about as often as not, so consider it having a 50/50 possibility.

I was looking for a rally to set up by Tuesday; the low and the reversal of Wednesday came close to what the cycles suggested. Sometimes, it's easier to guess at how much longer a decline should run, rather than what price target could be hit.

Nasdaq Composite (COMP) Index - Daily chart:
The Nasdaq Composite (COMP) reversed from the 62-66% retracement area. Once a decline goes beyond this much of the prior advance, it's a pretty good sign of a possible eventual "round-trip" back to the prior low. The 1904 recent low is now the level to watch if prices sink back toward 1900. A close under 1900 sets up a possible next objective for the low end of COMP's downtrend channel, intersecting at 1877 currently.

Key overhead resistance at 1971 is implied by the intersection of the minor down trendline; with 2025 being where major chart resistance is implied by the top end of the bearish (price) channel.

The other aspect of the chart providing support for a view that recent lows just over 1900 could be part of a bottoming formation, is the cluster of lows in the same area back in October. Prior price history suggests that the Composite may have pretty strong support around 1900. If so, the index may also hit this area a few more times.

Nasdaq 100 (NDX) Index - Daily:
I noted a first bear flag pattern as the upward sloping (cyan) lines that outlined the rally pattern into early-April, before the subsequent sharp fall took the Nasdaq 100 (NDX) 50 points lower. It was not surprising to see the turnaround come after prices reached my lower envelope line on Monday-Tuesday.

This past week has produced a similar bearish pattern again; a sharp decline (the "flagpole"), followed by a highs and lows that, when connected, make the upward sloping flag formation. Such rally patterns that slope AGAINST the trend that preceded it, often form ahead of another downswing.

If the bear flag is valid there may be a further decline ahead, one carrying to the low end of NDX's price channel at 1350. If Friday's low around 1412 starts to be exceeded, a fall though support at 1400 may not be far off.

An NDX close above 1460 at the line of prior support and the breakdown point is needed to suggest a bullish turnaround. Above 1460, key resistance is at 1475, at the down trendline.

Nasdaq 100 tracking Stock (QQQ) Daily chart:
$36 was the "breakdown" point; the level that, once pierced, saw an avalanche of selling in QQQQ. This area is now key resistance, especially on a closing basis. Recent lows came from an area that had most to do with the Nasdaq 100 index itself.

Prior lows in the tracking stock at 34.25 still looks like key support in the Q's. It's difficult to say if the stock will get down into this area. We can know more about potential resistance than we do about whether recent lows will hold if/when another decline occurs. Above 36, key resistance comes in at 36.50, at the current intersection of the down trendline as noted by the red down arrow on the chart below -

I note on the chart the rule of thumb about declines exceeding more than 2/3rds of a prior advance. This aspect is worth noting, but what the Composite (COMP) does in this regard is the most significant.

I get objectives to around 34-34.25 if I look at where the current down leg would equal or carry as far as the FIRST decline. I would use another decline that carried to 34-34.25 both as an area to cover short positions and one to buy some stock for a trade; in which case my exiting sell stop would be at 33.50, with an objective to 35.75.

The stop relative to my objective meets my minimum of a risk to reward of at least 1 to 2; risking .50-.75 for a gain potential of 1.75-2.00.

I described my risk to reward criteria in some detail in my last TRADER'S CORNER article which can be reviewed by clicking here.

Please send any technical and Index-related questions to me at support@optioninvestor.com with 'Leigh Stevens' in the subject line; also, for your question or comment's possible use in my coming week's Trader's Corner article.

Good Trading Success!

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