Usually when the indices make a possible/probably bottom after a 'full' retracement of the prior advance and have an initial oversold rebound that FAILS to pierce the 21-day moving average, there is another period of decline and backing and filling; this second subsequent pullback will typically hold at or near the prior bottom in a 're-test'. Those bullish will tend to pull some of their bids and see how buying interest shapes up again as prices again drift lower. Especially critical is what happens when/if the prior recent index lows are reached.
For buying index option calls, it's a good idea to buy a successful SECOND pullback in a retest of the prior lows. A 'successful' re-test of a prior low is where there's a subsequent low at near the prior low and a rebound ensues. If already long index calls, as long as its not too far above recent lows and assuming you want to play the bigger price swings, its ok to stay put (no 'pun' intended!). Especially, as there is a logical point to risk to by setting a 'stop'/exit point just under the recent lows.
The S&P 500 (SPX) and the Nasdaq Composite (COMP), which were the 'lead' indexes in the prior broad-based rally, retraced approximately 62 (COMP) to 66 percent of the prior advance. This amount is about as far as retracements go, unless they going to retrace 100 percent of the prior move. Neither index reached a fully oversold extreme, which would have given somewhat more certitude that the correction was over with. A more oversold extreme may occur yet and there's another downswing ahead. Time will tell on this. There is a 'benchmark' now: the recent lows.
Katrina and the sharp spike in oil prices should not prevent a fall rally ahead, especially if the Fed stops raising interest rates. While the US economy has taken a shock (as have those folks in the Gulf, big time), the US has still solid economic growth and there's a lot of money available for buying equities.
MIDWEEK INDEX TRADER UPDATES:
In fact, my Wednesday (8/31) Trader's Corner column was about the number of major technical aspects that would suggest that the market bottomed this past week. You can go back to that Newsletter; or, see it online by clicking here.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I think that we'll see prices sinking again some in the week ahead and it's still possible that SPX will reach my lower trading band or moving average envelope line, around 1190. That might finally build up bearishness; it still seems that is too much complacency or the view that the market won't sink much lower. It could, and still be within a longer-term uptrend.
I've redrawn my lower trend channel boundary, which is always kind of a theoretical construction, but gives an idea of its possible trendline. I mark support there, around 1204-1205; if this is pierced and 1200 fails to find support, my next lower downside target is to the 1190 area. 1224-1225 is resistance.
You'll notice if you look closely that there was no single 1-day close over the 21-day moving average. I look for a close above it that's NOT reversed the next day; as an indication of some staying power for an advance and not just an oversold 'bounce'.
The other thing that I look for as a convincing sign of a bottom, but which of course doesn't always happen, is that prices register an oversold extreme, down at the lower (green) line on the Relative Strength Index (RSI) chart.
S&P 100 (OEX) INDEX; DAILY CHART:
With the indexes, there is a tendency for double-declines or for there to be a decline, rally and then another decline. It looks like there will be another downswing. A big question is of course whether the recent lows will hold.
I've drawn a hypothetical lower trend channel boundary. Once you have a well-defined UPPER trendline, the lower trend channel line becomes a line parallel to it, intersecting the LOWEST low to date. This method gives me my first possible 'support' for around 557. The prior low at 553 is another possible target.
Resistance is at 566-567. I said last week, resistance was 566-569 and OEX reached 567 at last weeks peak. I'm not sure a 'final' bottom is in. I'm looking for it, but will wait and watch price action in the coming days; and will update by midweek.
OEX did have one day where the RSI touched the oversold zone and so achieved one of the conditions often seen at significant tradable bottoms.
My call-put 'sentiment' indicator, as had 1-day where it got to the downside extreme that so often precedes at least a good-sized rebound WITHIN 1-5 days. It worked again. Where there is not a single 'spike' down, but a rolling bottom, there will AGAIN be readings at or under 1.2 (see chart above).
I find, for saying it again, that there seems to be too much of a view that, after this 'little' pullback, the market is (of course) going to go right back up. After all, the economy is strong. Like Katrina, be alert for the unexpected in the market.
DOW 30 AVERAGE (INDU); DAILY CHART:
INDU tends to trade fairly 'technically', and often within well-defined trendlines or within a price channel. I peg near support at the low end of this channel, around 10360. A close below this level, would suggest a next downside target for around 10275.
I think that the Dow will have a period of 'basing' action ahead. There won't be much more negative news on the natural or oil front (absent another hurricane) to drive it much lower. A rally should come after another, or a few, lows make it clear that INDU is now getting down into an area of buying interest or support.
I said last time I favored buying Dow Index (DJX) calls in the 102.8 - 103.3 zone, which was not reached. I'm going to wait and see how the chart pattern shapes up this week rather than pick a specific level; however, the aforementioned zone may be where a good buying opportunity will come.
To date, the Dow has had an exact 2/3rds or 66% retracement of the prior advance. This and the oversold condition seen using the 21-day stochastic, are favorable benchmarks for a bottom.
NASDAQ COMPOSITE (COMP) INDEX; DAILY
Resistance is in the 2150 area, repeating what I said last week. A close over 2150 would be a favorable sign for a more prolonged rally ahead. But, as always, it would then be necessary to watch what happened the next day to see if there will upside follow through the next day.
As I've been saying, bottoms where the index in question gets 'fully' oversold (down to the lower green line on the RSI), have the lowest risk generally in playing options for a price rebound. COMP had an exact 62% fibonacci retracement to date, which is a plus. Nevertheless, the pattern suggests that there's likely to be another dip to the 2100 area at a minimum.
NASDAQ 100 (NDX); DAILY CHART:
My long-standing downside objective in the Nasdaq 100 (NDX) was to at least 1560 and it of course got closer to 1550 before it rebounded; NDX had an opening week low last week around 1551, before it rallied to the 1588 area.
Technical support is at 1555-1556; if pierced, I don't see any nearby next support except potentially last week's low at 1551.3. If this gives way, there is nothing but 'air' below; a way of saying that NDX could reach significantly lower levels; e.g., to the 1510 area, at the lower envelope line, where on a PRICE basis the index would be at an oversold extreme.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Besides the other factors that keep QQQQ in a certain relationship to the underlying NDX, it may be that the high degree of market bullishness I've been talking about, have brought in buying interest in the stock, keeping it a 'premium' to NDX. However, before this correction is done, it wouldn't be surprising to see another fall ahead, one even taking the stock closer to the 37 area.
Near resistance is at 39.0. A close over this level that holds, is an indicator for a move still higher. Next resistance above 39 is around 39.6.
I am backing off from my suggested purchase of the stock in the 38-37.75 area and taking a wait and see attitude. It may hold the lower trendline around 38, if the stock dips under its lows of last week, but I'm estimating that buyers can take their time to assess how support shapes up on a further dip, which is what the pattern is suggesting will happen.
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Good Trading Success!