THE BOTTOM LINE:
Months back, in one my Trader's Corner articles I constructed a Gann chart to look at longer term price resistance and time frames for a correction to the up market cycle we had been seeing since last summer and it looked like this and suggested a significant 'trend change' around the week of 3/9. Close enough:
I must have made the calculations seen in this first chart back in the early to mid part of last year. It's been amazing when these kind of projections come true months later. I kind of forget about them in terms of actually setting up trades. But I have had this March target time frame in my mind for some time; moreover, significant March corrections occurred in two of the last three years. Everyone who only believes in rational cause and effect and believes that the market is (somewhat) randomly driven by 'news', won't give much credence in market cycles of this type, but events do 'conform' to where the market is headed in terms of cyclical phenomena and that's a fact. Well, it's my story and I'm sticking to it!
It's rare to see the pattern of a sideways trend, accompanied by declining relative strength (as shown by the RSI), develop over a prolonged period without the market taking a dive at some point. While the S&P 100 (OEX) was not leading the market by any means, it showed some key market aspects technically; e.g., OEX hit significant resistance implied by the Index reaching a fibonacci 62 percent retracement of the 2000-2002 decline and 2.) as already mentioned numerous times, with its lose of (trend) momentum on DECLINING relative strength:
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** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The recent technical breakdown point was at 1450, a level that the S&P 500 (SPX) knifed through on the Tuesday opening. What was technical support in the 1450 area should now be the key or pivotal resistance as noted with the red (down) arrow. Old saying in the commodities markets, they 'slide faster than they glide'; and how!
In nothing flat SPX has retraced a fibonacci 38 percent (at 1385) retracement of the entire August-February advance, as seen in the daily chart below. 1378, at the prior low shown at the blue level line is an area of potential support also. The 50 percent retracement would be reached in the low-1360 area and should be an even stronger technical type support, if reached. My lowest expectations, assuming the Index slides further, is for SPX to reach the 1360 area. However, in a underlying strong market a 38% retracement and already reached, is often as much as will be seen.
1410-1415 is near resistance, then at 1431.
Near resistance is suggested at 646, then around 658, with major resistance in the 670 area. Close by support is apparent in the 634 area, then at 630 even; with major support anticipated in the 620-618 area.
Last week I suggested that the hourly RSI, using a 'length' of 21 (i.e., 21-hours) had been useful in buying calls and puts in the Index in the pattern it HAD been in up until this recent volatility. However, with the kind of break seen this past week, the first 'oversold' reading on a 21-hour basis, used as a trading (entry) trigger, may not work out profitably in calls; this measure would have suggested closing puts and buying calls around 639-640. Well, the put side was very good!
The 13-day RSI is now under the level usually associated with 'oversold'. When the daily RSI turns back up would normally be a time to look at call entry. However, again, a first time in oversold territory and a first rebound may not be followed by a sustained rebound. As in all human affairs, breaks take time to heal!
DOW 30 (INDU) AVERAGE; DAILY CHART:
When you see the upward sloping 'wedge' type pattern as outlined in the Dow 30 (INDU) in light blue, be very wary of the potential for just what came this past week: a very sharp break. The wedge pattern is one of a NARROWING range between rally peaks and downswing lows; it's a type of 'compression' so to speak. Buying power or bullish forces start to lose steam and after such a long and strong advance, the dynamic often ends up being eventually a stampede for a single exit. Hey, got to protect those big profits made on the way up!
Support should be found around 12,075 where INDU was attempting to stabilize last week; even stronger support should be found in the low-12000 area, representing a 50% retracement. Near resistance looks to be at 12,300-12,325. 12,535 will likely prove to be major resistance.
Last week I wrote that: "given an approaching short-term 'oversold' reading in the hourly RSI, look for a next low to set up soon. (Well, it was SOON!) My follow on statement that a "likely (bottoming) area was somewhere between 12,630 to 12,540" was how can I put it, WRONG! Maybe support in that area for the market we had coming into last week, the one that looked like it was never going to come down! Lesson: don't start to believe the 'bull'.
The Nasdaq Composite (COMP) chart was bullish after its push to a new high, before the 'bull-trap' reversal of last week. A bull-trap is precisely a move to a new high, followed by a collapse to lows well under the lows occurring before the new high.
It's very hard to predict such reversals from a purely chart standpoint. The backdrop was the quite long period where the market didn't correct much at all. Those kind of markets tend to engender a belief that a correction is never going to come as the market 'hangs' up longer and longer. The break usually comes, but it can be very hard to keep remembering that bull markets do fall of their own weight.
I like to be index options as long as an Index is trending. When it stops (trending), I favor standing aside and taking trading breaks. It can be tempting to buy puts if you're sure that a sizable break will come sooner or later; the 'later' part and how MUCH later, is the nerve wracking part and not my favored thing to do with my time.
Support/buying interest is suggested in COMP in the 2331 to 2317 area. I don't think the Index has seen the low yet for this current move. Near resistance is at 2420-2425, then at 2445-2450.
NASDAQ 100 (NDX) DAILY CHART:
Unlike the Composite, the Nasdaq 100 Index (NDX) could have been seen as warning of a possible double top coming into this past week, which turned out to the case. It's always insightful to look at the big-cap indexes; when they lag the broad market, its not often a bullish sign, although broadening 'breadth' usually is taken that way.
NDX knifed through anticipated support in the 1800-1810 area and took out technical support around 1740. NDX closed the week under its prior trading range. Unless the Index fairly quickly regains 1747-1750 and starts to build support in that area, it looks headed to 1700 next. 1650 then is further, and probably strong, support suggested by it being a retracement of fully one half of the entire July to February advance.
Near resistance is at 1750, then at 1770, with major resistance at the previously broken up trendline with a current intersection at that line around 1810.
The RSI never got to a 'fully' overbought reading on a 13-day basis in NDX contrary to what might have been before last week. There has been a definite tendency in NDX for the extremes in the RSI to come ahead of at least moderate corrections. After so long without a pullback that was long and strong enough to pull this indicator down to an oversold reading, it was only a matter of time, not if, that it would happen.
The RSI seen above has now dipped below the typical oversold extreme. NDX may next see a rebound then dip again one or more times such that RSI will fall to at or near oversold readings one or multiple times; all before much of a sustained rebound sets up. The RSI is not a great tool for close in (market) timing but it does give useful background information.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
As I've been saying for some time, if the Nas 100 tracking stock (QQQQ) falls under 42, the 'reverse megaphone' pattern usually called a broadening top, will be suggested. This is significant as the pattern usually suggests that a bear market will follow, rather than a correction to a bull market. Stay tuned on this.
42 is the key or pivotal technical support in my estimation; next support is in the 41.6 area, with intermediate-term support at 39 and major support at 37.
Near resistance is 43.4-43.5, then at 43.8, with major resistance at the top end of the downside 'gap' at 44.5.
I usually find it useful to follow the On Balance Volume (OBV) indicator whenever a stock might be starting to roll over and begin a long-awaited or 'overdue' correction. This most recent break was no exception as OBV started down while prices were still up appearing to challenge its overhead (resistance) trendline. I've noted this point and day on the chart above.
The combination of a trendline that appeared to be offering strong resistance and the turn down in OBV was a combination of factors that suggested shorting the stock; it was a bit tough to do a week ago Friday with the weekend ahead, but by Monday of this past week the trade looked to have a favorable risk to reward equation. I favor trade entry in a stalled stock NEAR a trendline; exiting stops can then be placed just the other side of the trendline, making for a relatively low risk trade (especially in an overbought market) relative to the reward potential if even a moderate price break follows.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) bullish chart became a bearish chart in short order this past week. The 'breakdown' point was at 820 or even a bit above this level; as soon as the upper trendline (see the green up arrow) was penetrated. The 'confirmation' of an intermediate reversal was when 800 was pierced at the dominant up trendline.
Near support in RUT is suggested at 771-769, then in the 760 area and finally at 752, representing a 50 percent retracement.
Resistance is first at 785, then at 795-797. The Index would have to regain 800 to suggest it was back on a bullish track. I don't look for a sizable further downside mover from recent lows, but also don't believe that this thing is going right back up again. Breaks take time to repair; meanwhile look for nervous trading and a lack of strong conviction. The bulls are shaken, maybe not totally 'stirred' up yet, but as I started out my piece, they have noticed that the market not only gives, but takes away too.
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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.