THE BOTTOM LINE: This concept has been around for a long time. There are times when a market advance, especially in a period of a mixed outlook for the economy and earnings, is led far and away by the behemoth companies of the Dow 30 (INDU). Everything else lags, the S&P and especially the higher beta stocks of tech, small and mid cap. When the Dow keeps soaring like this, savvy traders have called this a 'solitary walk of the Dow'.
This type action usually ended the same way. As this kind of bullish advance in the bluest of the blue chips doesn't typically draw in the smaller investors and traders so much, being a mostly 'institutional/fund' play, such rallies tend to end with a sharp reversal across the board as institutions react in lemming like fashion to keep up with their peers. Across the board selling because the strength in the Dow pulls up the S&P and Nasdaq to levels well above what would be warranted by their own fundamentals. They then slide faster than they glide!
INDU is the KEY index to call in such a Dow dominated market. Last week I projected a move to 11660-11700, not higher. The high was 11670. In my Wednesday Trader's Corner, due to the exact approach and 'touch' of INDU to its upper trend channel, I was able to refine what was likely going to be strong resistance if not a very significant top.
As I say week after week, my Wednesday 'Trader's Corner' is almost always a chance for me not only to talk about some relevant (this time on trendlines and price channels), but relate this to a midweek update on any possible tops or bottoms. I hope the comments were timely for as many as possible!
"... In the case of an uptrend channel seen in the INDU daily chart below, the one highest high that was used to 'anchor' an upper line PARALLEL to the lower up trendline goes back to November. And, guess what, INDU advanced all the way to reach this upper channel line TODAY!
There is nothing to suggest [WRONG!] that the Dow won't break through and above this upper trend channel line. .... At some point after prices reach the upper end of an uptrend channel like shown in the INDU chart, prices will tend to reverse lower and head back more toward the middle of its channel."
You'll see that chart again below, as well as the Nasdaq Composite chart which had traced out what looked a lot like a bearish 'rising wedge' pattern.
See my midweek (Trader's Corner) column by clicking here.
This past week turned out to offer a terrific put buying opportunity. These type trades, assuming you can ANTICIPATE a top (or bottom) through technical patterns and buy in that area, don't come more than a few times a year. Which is why I say wait, wait and wait some more if you want to take only high potential trades. High potential traders are ones with a high risk to reward ratio.
Example: buying DJX puts as INDU approached major resistance in the 11,700 area, according to the charts you'll see. The 'risk' is to set an exit point just over 11700 (e.g., at 11730-11750). The reward potential, assuming INDU came back down to the middle of its uptrend channel, is to at 11400 (at least), which is actually above where the Dow closed (at 11381) in its 2-day rout.
As I said, none of the prior major favorite sectors or indices (except those relating to commodities like oil and precious metals) were immune and a good example was the pattern seen in the Russell 2000 (RUT):
RUT looks like it key or pivotal next support will be in the 720 area. Looks like a further fall ahead, after a short-term rebound. Stay tuned on that.
My favorite DOW and S&P, 'bellwether' stock, GE was badly lagging the Dow 30 Index (INDU) and far from moving to ever new highs, having in fact just recently gotten back above its 50 and 200-day moving averages. This is note in retrospect, as it's hard to use this kind of divergence as a market 'timing' measure, it's just something to note to 'support' a bearish strategy IF the Dow got to a significant technical resistance.
The best 'bellwether' signal was clear cut technically, that of a double top. CISCO Systems (CSCO) had been (finally) leading the Nasdaq higher, but formed a noticeable and probable DOUBLE TOP this past week:
The reliable 'double top' formation made for a better timing 'signal' so to speak, than the only bearish looking Nasdaq charts.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The chart is bearish in its pattern after the S&P 500 (SPX) pierced its uptrend line on the daily chart. While I thought SPX could reach the 1340 area if this was a full-blown (up) 'leg', the Index had fulfilled most of my near term upside targets when it reached 1320-1325.
Key near support is at the prior lows in the 1283 area. Major support is assumed in the 1255-1260 area per the prior lows there from late-December into early-Feb. Last week I had near support as 1315, which gave way big time.
Near resistance now is at the previously broken up trendline and is currently suggested for just over 1300, at 1302, but rising some over the course of the week; a weekly close over 1305 is needed to put the chart back on a bullish footing.
WEEKLY SPX CHART:
A good juncture to look at the weekly chart; my Wednesday Trader's Corner article that I referenced above, was largely about the fact that so-called 'internal' trendlines are very important, some consider them the key way to construct a valid trendline. The internal trendline connects the MOST number of highs or lows, as can be seen below. SPX is at a key juncture now.
If SPX continues weak, it will start dipping, then close, under its very long-standing (internal) up trendline. The conventional ('external') up trendline, connecting just a few intraweek low extremes, intersects this week at 1257. A break below 1257 would suggest that SPX's long-term trend was reversing, although 1245 is a key support also. These levels and trendlines bear watching in the coming week(s).
S&P 100 (OEX) INDEX; DAILY CHART:
Instead, prices retreated sharply and fell under near technical support implied around 596. When OEX then knifed through its 21-day moving average, there was only air under the market.
The Index needs to regain 595 to get back into a bullish pattern. Pivotal near support is at the trendline intersection at 586. At 582-583 OEX would look to be at a minor 'oversold' extreme. I suspect that there will be a rally attempt early in the week and the index won't dip under this area, which is also where the cluster of prior (down) swing lows come in. However, a close under 582, not reversed in the next day or two, would suggest a reversal of the intermediate up trend.
Trader 'sentiment' got to a bearish 1-day reading on 5/5, which was then within two trading sessions of the recent top, just about the way it often works. I didn't pick up on this last week as strongly as was warranted, at least in hindsight. But we've seen multiple bullish readings before; this was a last burst of bullish trader enthusiasm before a deeper correction set in.
I did indicate that if ..." if 605 was seen, I would take at least partial profits on long calls." OEX got to 604. I also noted that it might be "... a little early to get out, but then I usually am quick to exit after a strong run." Jack be nimble, Jack be quick!
DOW 30 (INDU) AVERAGE; DAILY CHART:
You see this sometimes and I wish I saw it more, as it makes for some major trading opportunities: the Dow 30 (INDU), which looked last week like it was going to go to the moon, reversed exactly at the top end of its uptrend channel (see the red down arrow in the chart below). That pattern and the overbought extreme seen in the 21-day stochastic indicator turned out to be the exact peak and reversal point. That's a thing about INDU also. It trades very 'technically'.
The reversal and sharp 2-day drop and close around the 21-day average makes the chart and technical pattern look like the average has further to go. I see best support as being at the up trendline, intersecting currently just over 11200. If INDU reaches this area and you were prescient enough to buy puts up near the top, take the money and run!
It's hard to peg near technical resistance after this recent free fall, but it looks to be in the 11500 to 11575 area.
Although INDU may dip yet to the 11100 area it's long-term chart pattern is still bullish. However, a close under 11100 would reverse at least the intermediate-term trend from up to down.
WEEKLY INDU CHART:
4 weeks ago, saw a week as strongly higher as was the decline of this past week. That week's low formed another point in the up trendline that has 11200 as trendline support now.
The advance since the autumn lows makes an advance that is well above the Dow's long-term rate of price change; the major up trendline intersects way down in the 10600 area currently. When the market gets ahead of a 'sustainable' rate of increase, it reacts.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The support seen at 2300 in the Nasdaq Composite (COMP), didn't led to much of a rally. COMP stopped advancing as soon as it reached its minor down trendline. Two day's highs, as can be seen on the chart below, gave even better 'definition' to this down trendline. It was sharply downhill after that! I had pegged key near resistance right at the line, at around 2345; the peak was just over 2347.
I also thought that the Composite might break out above its minor down trendline; how influenced we get by the Dow when its on its tear to the upside! The second and third day of slightly lower intraday highs, shy of the aforementioned downtrend line, was the tip off on a bearish outlook and trading strategy on the Nasdaq.
The sharp decline carried to under the narrow (it's price swings and volatility have been historically low) 2% envelope line and carried slightly under the wider 3% envelope. This and the nearness to the low end of the prior trading range at 2240 and the oversold condition suggested by the RSI ('length' = 13), suggests potential for at least a minor rally in the near-term.
Use of the hourly chart will amplify the chart picture as to potential near resistance at 2300, although that shows up on the daily chart also; as the prior support 'floor'.
COMP HOURLY CHART:
The cluster of prior hourly lows in the 2300 area looks like the key near resistance that must be overcome to suggest that the Composite was likely to hold the low end of its prior trading range at least since mid-March. .
Once the 21-hour RSI gets this low, as seen above, it has a strong propensity to rebound for at least a 1-2 day or more period.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) is bearish in its pattern and has now exceeded on a CLOSING basis the lows of this year. The Index needs to rebound to suggest that it has again only reached the low end of a trading range; this, as opposed to being in a new down leg.
NDX needs to get back above 1686 to suggest that the Index had regained its bullish footing. There is likely to be significant resistance/selling interest in the 1680 area. Minor resistance is suggested in the hourly chart (seen further on) around 1660.
1600 is likely major support, especially as implied by the November upside price gap that was the sharp acceleration of the rally that got under way in October.
NDX is now at a fully oversold extreme based at least on the 13-day RSI, which has been associated with past lows and subsequent rallies. This is not suggesting to jump into NDX calls necessarily as there could be only a very short term rebound; depends on how short-term of a trader you. Selling puts seems favorable.
Definitely taking some profits on puts is a good idea on a risk to reward basis; the probability of a another 10-20 points drop is statistically well under the potential for a 10-20 point rebound.
HOURLY NDX CHART:
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Key resistances in the QQQQ tracking stock are suggested at the down trendline that was pierced on Thursday at 41.5 and in the are of the prior recent lows around 41.25; also an area to watch for significant selling interest. This decline was a real route and took the stock lower relatively than the underlying (NDX) Index. The effect of sell stops!
$40 held as support so far and it may continue to hold, given the amount of selling that's already gone on judging by the Thursday and Friday's volume numbers. Given the oversold condition, and how far the Q's are under its 21-day average currently, look for a rally developing early in the coming week.
If there was a close under 40, not reversed the next day, how low can it go? Good question, self! Based on the long-term weekly charts (not shown), the stock could find it way down to the 38 area. It has already pierced its long-term up trendline.
Happy Trails & Good Trading Success!
Please send any technical and Index-related questions to me at Click here to email Leigh Stevens Support [at] OptionInvestor.com with 'Leigh Stevens' in the subject line; not only for answer, but also for possible use in my coming week's Trader's Corner article. Your emails are appreciated and where I learn what YOU are thinking or wondering about. Yes!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM) strike prices in order not to 'overtrade' my account. Exit or 'stop' points, as well as projected profitable index price targets, are based on my technical analysis of the indexes.