THE BOTTOM LINE: Market bottoms are fairly predictable in some ways. Easier than tops, which tend to build over time. Significant lows, unlike tops tend to see 'V' type bottoms as when everyone finally gets done dumping stocks and lightening their portfolios, the market often turns on a dime. Like tops, lows often go on past the 'predictable' targets like prior lows. Bullish sentiment built up very quickly again on this recent rebound. We'll see how long that lasts! Sharp price breaks like we've seen take a while to 'repair' and get buyer confidence back up to do the more sustained buying necessary to lift stocks above the 'oversold' levels good for quick in and out bottom fishing trades.
My midweek Trader's Corner column didn't have a title link (they forgot to create this section's title in the Wednesday Option Investor newsletter) but was in the Wednesday (5/24) market letter; seen on a scroll down, or jump (Cntl + end) to the bottom. I wrote a review of RETRACEMENT targets relative to the OCT. to early-May (or April) advances in the major indices. Somewhat predictably, the Dow 30 (INDU) which had been showing such solitary strength, retraced the least; a 'minimal' 38% before it turned around.
Next was the S&P 500 (SPX), at the common one-half or 50% retracement level (same with the OEX); the tech-heavy Nasdaq retraced 2/3rds or 66%, which is also a 'common' downside retracement for a weaker stock or index; a downside retracement of this amount but not lower, keeps it still within an uptrend pattern. This versus a 100% round-trip retracement back to re-test a prior important low. Bringing up the rear was the big-cap Nasdaq 100 (NDX).
It could be foreseen or guessed at, that the stronger indices were unlikely to see 'round-trip' returns to THEIR Oct. bottoms. By using the NDX '05 JULY low, the retracement for NDX was that it dipped under but basically held on to a 2/3rds 66% retracement. This was a clue that NDX also was near a bottom.
The other thing seen over and over for BOTTOMS, is that major price lows are close at hand soon upon or soon thereafter the point when both NYSE and Nasdaq reach re-occurring 'baseline' 10-day averages of total UP (Advancing) Volume. These charts are shown below with the S&P 500 daily chart accompanying the New York Stock Exchange (NYSE) Advancing volume 10-day average and the Nas Composite (COMP), plotted above the Nasdaq up volume daily readings.
A MAJOR BENCHMARK INDICATOR FOR BOTTOMS: UP VOLUME
When the average turns up, it always seems to be within 1-3 days of a bottom, if it didn't occur more or less simultaneously with an upside reversal. Sometimes, this occurs AFTER a major low turning point. More often this upturn in the 10-day average from a baseline amount is BEFORE the actual price rebound which is the why of an old trader saying that 'volume precedes price'. The sellers tend get all the stock sold they want to coinciding with these low points in that 10-day upside volume average. Up Volume shows the willingness to buy on upticks and this just doesn't tend to happen until the liquidation selling gets done.
Pivotal if not major resistance is suggested in COMP around 2250.
With the New York Stock Exchange (NYSE), the re-occurring 10-day Up volume average 'baseline' figure is around 600 million shares as noted on the bottom of the S&P (SPX) 500 daily chart below. The SPX bottom in October is an example of where the 10-average turned UP after the Index had bottomed already (by 2-3 days) in terms of price.
The particulars on each major index is below in their usual sections.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I suggested last week that buying interest in SPX ought to begin in the 1255 area, especially given the oversold extreme that we were seeing. The fact that the S&P 500 (SPX) was very oversold was not a good indicator to pinpoint a PRICE level that might be the maximum extent of the decline. However, the 50% retracement (of the Oct - May advance) was highly accurate for that, as can be seen on the SPX daily chart below.
Prior support in the 1283-1285 area still looks to be a first pivotal area now as resistance. Above that possible 'showstopper' resistance looks to be back to the previously broken up trendline currently intersecting around 1308. 1300 begins a big resistance overhang.
I also noted last week my thought that only a daily close below 1250 in SPX, not reversed the next day, would suggest another down leg that might carry to the low-1200's. No such close happened. The 1250 area continues to look like major technical support.
The S&P 100 (OEX) Index also held its 50% retracement perfectly and the area of its 200-day average, an important technical consideration that was true of the S&P 500 Index as well. Portfolio managers tend to get very nervous about the level of stocks they hold once this key average is pierced; especially when stocks don't seem to stop once the S&P indexes knife through it without much pause.
Key or pivotal support is apparent now in the 575 area. Heavy resistance should be found on a return to the previously broken up trendline around 590; also, the area of the 50-day average. Only a close above 590, not reversed the next day, would suggest to me that this recent sharp rebound was going to develop back into a sustained rally without first going through a lot of backing and filling sideways action.
My trader 'sentiment' indicator, not shown here, shot up to a bearish 2.1 by week's end as the buyers strike appears to have ended, at least among the traders. I don't think this means that this rally will fizzle straight away, but it could well lack staying power. This recent sky shoot, after it looked like the market was never going to stop going down, is very characteristic of what happens after the 13/14-day RSI gets well into oversold territory below 30; as happened at the recent bottom. Stretch a rubber band taut enough and it snaps back sharply!
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) as said when I started this section, on a closing basis, never dipped below a minimal fibonacci 38% retracement of its Oct. - May advance. The Average held prior lows apparent on the chart below; a great place to cover DJX puts. An approximate double bottom low around 10075 was apparent on the hourly chart. I said last weekend that I expected INDU to hold the 11060-11070 area. I did also rate the chance of a double bottom setting up as greater than a retest of prior lows in the 10930 area. WHAT NOW?
Friday's Close near just at the 50-day average brings INDU back above first resistance implied by some prior support in the 11240-11250 area. Good going, but the key is what happens at 11400. I don't think that there will be a move back above this resistance anytime soon. Not for nothing did someone coin the phrase the 'kiss of death' trendline to describe the usual tough resistance seen on a rebound back to a long-standing and previously 'broken' support/up trendline such as the case here.
My suggestion last week was to expect the fall in the INDU to stop around 11100, with a countertrend rally to set up after that. Now we'll see what happens on a rebound to the 11400 area if that's what comes next; this is the key technical resistance for the Dow in my estimation. If you bought calls near the low, good going, but I would treat it as a short-term trade and a play this for an oversold bounce only. I think that there will be a fair amount of backing and filling ahead.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
Recent lows in the 2150 area 'filled in' an important upside price gap that hadn't been touched since the strong October rally got going. Gaps do tend to get filled in on reactions, but also tend to act as support; gaps suggest an area of potential or latent buying interest. The total retracement (of the Oct - April advance) was very close to 66% even on an intraday basis. That and the oversold extreme was a good tip off to cover Nasdaq related puts.
Near resistance in the Nasdaq Composite (COMP) is suggested now around 2230; then at 2263. I don't look for more upside, if that, than to 2263-2265 in the next 1-2 weeks. Major resistance begins around 2300. I figure that COMP will struggle to stay above its 200-day moving average at 2230.
Support is apparent at 2175, then in the 2150 area. A close under 2150 makes COMP look vulnerable for another 100-point decline.
I mentioned last the 2225 area as a benchmark resistance on the weekly chart, which represented a break of a long-term up trendline. 2225-2230 looms as the possible key test of staying power for this oversold rebound. I don't think COMP will sail through this price zone soon. Buyers are going to leary of tech for some time after getting reminded so vividly how quickly the tech sector gave back so much of its gains over months of inching higher. They 'slide quicker than they glide' as the commodities traders used to say!
NASDAQ 100 (NDX) DAILY CHART:
The first key Nasdaq 100 (NDX) resistance is in the 1635-1650 area. The Index
would need to close for a couple of days running above 1635 to suggest that
buyers were coming in again in big cap
tech. The 1580 area on the downside is
where the buyers were willing to come in and is the start of its pivotal
A close below 1575, not reversed the next day, could mean that NDX was on its way to a re-test of its Oct bottom in the 1515 - 1525 area. If you bought NDX puts on the dip below 1600, I suggest making this a short-term trade; look for a bounce near-term only, nothing sustained. Stay tuned on that!
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
QQQQ has resistance at 40.3 to 40.5; then at 41.3, which was the recent 'breakdown' point. This is the highest upside potential I would see in the Q's for some time ahead. A close over the down trendline noted on the chart, currently intersecting around 41.7, is needed to suggest that the stock was gaining any substantial upside traction.
The recent high volume reversal looks like it marked a significant low. 38.5 is the key or pivotal near support. A close under 38.5, not reversed the next day, would not bode well for the bulls, as the potential would then be for a decline to test the October bottom in the low $37 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.