THE BOTTOM LINE: I don't anticipate much further downside in the next 1-2 weeks relative to the lows already seen this past week. I suggested taking profits on puts on further weakness into Thursday. I wrote on what I thought the further downside possibilities were in my Wednesday Trader's Corner column. I also thought that at least a short-term low would set up by Thursday. By Friday there was a small rebound.
See my midweek (Trader's Corner) column by clicking here.
Thinking that the lion's share of profits on puts may have been realized at this juncture is not the same as figuring its time to jump into calls. The market may not do much for a while and move sideways on balance. Big shifts in investor perception, such as where the realization hits that there may be more RISK (e.g., from rising interest rates) in stocks than further REWARD (upside) potential, take time to settle and sort out after a wave of panic-filled selling.
The recent reversal came right after the Dow 30 (INDU) hit the top end of its broad uptrend channel. As I noted last week, most often historically the end phases of major rallies that are led by the narrow Dow 30 Average (INDU) usually have ended the same way... "with a sharp reversal across the board." And how! and what a week, as the major indices went into free fall, especially the Nasdaq.
As Charles Dow pointed out more than a 100 years ago (nothing new under the market sun), investor/trader psychology is a major factor in spotting key reversal points. At tops there is always significant bullish sentiment and limited perception of stock market risk.
I notice myself that the longer market advances go on, even if having narrow leadership and being suspect in my mind, the more I doubt that a major put buying opportunity is coming. I can think it all I want, but the more that the market doesn't act like it's ever going to break the more doubt comes into my head that it is ever going to.
But true to form, patience is rewarded. Eventually, a trend reversal comes and you get one of those big trading opportunities. It teaches me ever again and again, that there are typically only a handful of trades per year that have a major reward potential relative to risk. Easy to say, hard to wait and wait and wait. The bears were rewarded finally if they initiated trades on this last push of the Dow toward record highs that was so inconsistent with what the broad market was doing.
A MAJOR BENCHMARK
However, the decline to date has stopped at SPX's conventional ('external') up trendline at 1256. There is also support at 1245. If there is no weekly close ahead that is below 1245-1256, the major uptrend will still look intact. Stay tuned on that!
I'll update the Russell 2000 (RUT) chart in this space as I showed it last week. I thought that RUT would have support in the 720 area and the Index did rebound back above this level after it fell to some prior lows around 711.
Support implied by the bottom of RUT's broad uptrend channel comes in well under this recent low, down in the mid-660 area. I don't see it going there next. What happens if the Index rebounds to near resistance around 740 should tell us more. Support in the 700 area may get tested but look for a rally attempt after that.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The chart is bearish in that the S&P 500 (SPX) pattern of higher highs and higher (down) swing lows has been broken. The index has gotten to the lower end of its 2006 trading range at recent lows, although the January bottom around 1246 hasn't been tested, or bested, yet. Near term support should be found in the 1255-1260 area, especially given the oversold extreme that has been reached.
What had been near support in the 1283-1285 area now is indicated as a pivotal resistance. I thought last week that major support would be found in the 1255-1260 area and I still think that, although the 1246 intraday low from early-January might get tested yet. A daily close under 1250, not reversed the next day, would suggest another down leg could carry to the low-1200 area.
SPX is very oversold on a daily chart basis, not quite fully oversold in terms of its weekly chart indicators. The oversold condition is seen in terms of price, with recent lows being down to my lower 3% envelope line, as well as declining to under 30 in the Relative Strength Index or RSI.
S&P 100 (OEX) INDEX; DAILY CHART:
570 is a key prior support that hasn't yet been tested again; the 'line' of prior lows of late-December to early-February. A close under 570, not reversed the next day, would suggest that OEX might be headed to a next target of 560, maybe even to the 545 area. I think that the S&P 100 should stay above 570, maybe in a 570-590 price range in the next 2-3 weeks.
Trader 'sentiment' has finally gotten bearish and the TREND is down this time, so it's finally not just a fluke 1-day reading. This trend suggests that a more sustainable rally can set up at some point, but I just wouldn't look for an immediate turn around. This thinking looks at the market in a 'contrary opinion' sense.
I don't rely on this 'sentiment' indicator seen above solely in index timing but it's very good at forecasting upcoming bottoms when showing a high degree of bearishness, when the RSI is ALSO under or still near 30, AND the 10-day average of Nasdaq and NYSE total Up (advancing) volume has reached its typical low end 'baseline'. These up volume averages (not shown) are approaching a common historical low point; I'll write about this in my upcoming Wednesday (Trader's Corner) column.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) went from the top of its broad uptrend channel to and below the low end of this channel, reaching the area of its prior lows in just 8 trading days. 550 points! Not untypical of what happens when markets and particularly narrow groups of stocks, get overbought or to over-inflated values.
The inflation news was the precipitating event, but there's always some change in fundamentals that seems to follow when the charts show a possible top. Chart and technical patterns tend to signal tops ahead of the actual events perceived as the cause of a reversal. This has rarely changed since ever.
I said Wednesday in my update on the indexes that I thought there would be a re-test of the prior intraday or closing lows made last month in the 11050-10773 area and the Friday low was 11075. What now? INDU can surely work sideways holding the 11060-11070 area for a few days as it did in April. I rate the chance of a double bottom setting up somewhat greater than an immediate retest of prior lows in the 10930 area.
Near resistance implied by the prior support up trendline (support 'becoming' resistance) is at 11240-11250. Next resistance comes in the 11400 area. Key support I mentioned already, first at 11050-11060; then at 10930.
I suggested midweek (in my Trader's Corner column) that the most I was looking for on the downside in INDU was to the 11100 area before a countertrend rally sets up. That may have started. We'll see what Monday-Tuesday brings.
My guess is for a relatively quiet market week ahead of the long Memorial Day weekend coming up. Maybe a little bargain hunting type buying but the bulls have been shocked significantly.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
Near resistance in the Nasdaq Composite (COMP) is at 2240-2250; then at 2300. The free fall in the Nasdaq caused me to increase my downside percent envelope to 5%, representing a more normal 4-5 percent range of fluctuation above and below the 21-day average; more 'normal' in terms of its volatility historically. The prior (early-January) intraday low at 2190 was pierced intraday, but COMP rebounded back above this level by the Friday Close. An approximate double bottom is not ruled out yet.
There is no potential 'support' we can point to that is close at hand; we have to look back to the October lows in the 2025-2050 area to see where the last major bottom was formed. COMP is very oversold however, and I anticipate an easing of selling pressure in the near term and an attempt made to hold the 2170-2200 area.
On the weekly chart (not shown here) there is some suggestion of trendline support at the recent 2165 low, but the dominant and long-standing trendline was pieced by the weekly close under 2225. This level of 2225 will be sort of a 'benchmark' level to watch in how COMP closes in the week ahead. Ending Friday back above this level would be a bullish rebound of sorts.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) has fallen under its prior trading range and it now looks like a major top has been formed. NDX fell to below my most recent bearish expectation of 1600, although the index managed to close back above this level on Friday on a round of short-covering and some bargain hunting buying.
Some support developed in the 1580 area as seen on intraday charts (not shown) on Friday and is also where my lowermost 5 percent trading band or moving average envelope line intersects. 3% under the 21-day moving average was where we were seeing lows forming in the past few months, but the low volatility implied by a 3 percent band is not historically what tends to be seen in NDX.
At Friday's low, dipping to 5 percent under its 21-day average, this Index is oversold on a price basis; and, quite oversold in terms of the 13-day trend in the Relative Strength Index (RSI).
Key resistance is at 1640 at the prior low; once pierced such lows will tend to become an area of selling interest as those who bought Nasdaq at those prior bottoms turn seller at their 'break even' point. A close at or above 1640, not reversed the next day, would suggest that the index was recovering some; or, at least that the low was in for a while.
1525 to 1540 is probably a next major support if NDX started falling again under 1600, particularly on a closing basis.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
QQQQ has gone from being in a sideway trend or in a trading range, to an intermediate down trend.
Support is at 38.75-39.0, with major support in the 37.5 - 38.0 area. Near resistance is at 40.3, then at 41.3.
The heavy volume on Friday, given that the stock rebounded some is suggesting to me that QQQQ may have reached at least a short-term low. Stay tuned on that. The stock and its underlying index is certainly oversold enough currently for prices to at least stabilize if not rally at least back up to the 40-40.25 area.
Good Trading Success!
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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.