THE BOTTOM LINE:
Speaking of Spain, I confessed that I was oblivious to the fact that the last set of charts I used in this space (last Saturday, 3/10), only were updated through Wednesday (3/7). I was in Spain briefly (Costa del Sol area) because I thought I had a buyer for my place there and was pretty jet-lagged when I wrote last Saturday. That's my excuse and I'm sticking to it!
By the way, like most things I've found in those Mediterranean climes it was no hurry over there, rather hurry up and wait. Am trying to capitalize on the strong euro (1 euro = $1.33 currently) among other things and hope to take advantage of this window. Since London days have liked to have a 'hedge' against the dollar. With our (U.S.) balance of payments I figure a currency-savvy investor should be thinking in terms of some dollar diversification. Besides I like it across the pond! Gives me a different perspective. But, I digress!
I wrote my last Wednesday Trader's Corner on some of the technical signs of at least an interim if not 'final' bottom for this correction; that article might be a useful look-see if you haven't perused it and it can be found on your saved Wed, 3/14 OI Daily Newsletter or on the Option Investor site by clicking on this link.
I will have my usual shorter-term perspectives further on, but first a long-term view of the two Indexes, the New York Composite Index (NYA) and the S&P 500 (SPX) that have been leading the upward charge for months and months now. The question in my mind is do the lead Indices come back finally to their long-term up trendlines; i.e., back to their long term (upward) trajectory or rate-of-change. And, a related question, will the major indices get a fully oversold condition, again on a longer-term basis this time. One of the big questions; I was going to say the '$64,000 question' but am not sure that is a relevant term anymore to anyone who wasn't around during the era of the TV show. Oh, my wife says it is; she saw the movie. Ok, so a big question is where do we go from here?
Judging by the well-defined uptrend channel that the NYA has been in for 3+ years now, part of which is outlined in the period shown in the weekly chart below, NYA would have to retreat almost to 8500 to again get down to its major up trendline. Well, it from high to low it has dropped 650 points already, so another 450 or so wouldn't be too much of a surprise.
On the question of getting fully oversold again in term of the New York Composite Index (NYA), I use two variations of 'length' in the Relative Strength Index (RSI), one with an '8' setting and one of 13-weeks, measuring a full quarter of year or the last thirteen trading periods; i.e., weeks when applied to a weekly chart. On the RSI graphs seen above for the weekly NYA, the 8-week RSI has gotten to oversold territory on each occasion when the Index fell to its well-defined up trendline. If this current correction conforms again to this pattern, prices would again fall to the support trendline, setting up a next substantial rally from still-lower levels; i.e., just over 8500.
NYA has been in such a strong uptrend that no corrections for the length of this present bull market have put the RSI with a '13' setting close to an oversold reading on a weekly chart basis. Given the PRESENT trend, it seems best to keep an eye out for major call buying opportunities when and if the lower trendline in NYA is reached AND the 8-week RSI dips to the 30-35 zone again. Stay tuned on this!
Studying the NYA is an exercise for foretelling what the S&P and the other big option indexes might also do, especially the S&P 500 (SPX), which has been leading the overall market to some degree also. SPX's long-term up trendline, currently intersecting in the 1320 area, is a likely area of major support.
The 8-week RSI has already touched a beginning 'oversold' reading but it often does drop lower as can be seen in the above weekly chart of the S&P 500. In terms of the 13-week RSI, the Index would have to fall substantially further before an oversold extreme was seen; e.g., back to the trendline!
Some patterns and indicators suggest that the market may have bottomed already. I bought some OEX calls after its decline this past week to the 625 area where I could see technical support, as it was also accompanied by oversold readings on a 21-hour, 13-day and 8-week RSI. But, I'm keeping my commitments relatively light and/or will be quick to exit if the recent rally runs of steam. What has been seen so far suggests that the buyers are not swooping back in. It's understandable that participants are being cautious and select in buying.
Two possibilities exist: 1.) a bottom is forming and that can take some time, especially after such a sharp break as has was recently seen and 2.) this consolidation around current levels is a pause on the way to still lower levels. Time will tell on this. March often has many crosscurrents and it could be an informative next 1-2 weeks in terms of the outlook for April.
MARKET NEWS and INFLUENCES:
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S&P 500 (SPX); DAILY CHART:
Another low was established in the S&P 500 (SPX) this past week and this time the Index hit the area of the prior low Close on the last price dip of consequence before SPX took off on another leg up into the February top. SPX fell this past week a bit further under the 38 percent retracement level but rebounded strongly by day's end. The rally that followed has been underwhelming so far. It seems that there are areas where the shorts and traders will come in and buy, but there aren't yet enough new buyers to keep this thing going.
The chart we are left with remains mixed to bearish in its pattern given the lower lows being seen on declines and on rally attempts. One question in my mind is whether we will begin to see a declining pattern of lows hugging the lower (3%) envelope line. Just as we saw such a prolonged period when SPX followed the upper envelope line higher, it wouldn't be surprising to see a period when prices fall further but only slowly sinking lower, being pulled over time toward the 1340 area.
Near support is 1375; then around 10 points lower at 1365-1364 and finally at 1342-1340. Near resistance is at 1395, then at 1407-1410 on up to 1412. A daily close above 1410-1412 and not reversed the next day, would be a bullish development. Next resistance would then look to be in the 1430 area, with major resistance at 1444-1447.
The S&P 100 (OEX) found support right at the intersection of the steep down trendline intersecting at midweek at 625 as drawn last time. The high level of bearish sentiment indicated the day BEFORE this, along with the oversold readings on the 21-hour, 13-day and even the 8-week RSI suggested that buying calls in this area at least offered relatively low risk. How much upside beyond the 18-point run made from that low to date remains to be seen.
625 is pivotal near support, then down at 620-618. Near resistance is at 638, with pivotal resistance coming in at 645. A daily close over 645, not reversed the next day, would suggest that a bottom for this recent correction was in place.
I can't say that the chart isn't still bearish in its pattern. What has to be reversed is pattern of lower highs being seen on each rally attempt; this hasn't happened yet of course. It's very common that after a sharp break, especially after such a long period of advance, that's the market is not just up, up and away/straight away. However, this recent spike low could be a V-bottom formation if the Index starts working higher from Friday's levels or from the low-630 area.
So it goes with the theory of contrarian opinion; a certain critical mass of traders or investors believing the market is going in one direction is often near reversal points when the market heads in a direction contrary to the majority opinion. Tricky, some say perverse, is the market!
This second (bearish sentiment) reading may end up associated with a final bottom for the current correction. The spike low in prices (a possible 'bear trap' reversal), as it was followed by such a strong rebound, could be the start of a sustaining rally over time. Such reversals are at least often seen in conjunction with 1-2 bearish extremes in market sentiment as measured by my indicator.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Support in the Dow 30 (INDU) is pretty clear cut right now at 12,050 to 12,000 and just under, at 11,940-11,950. As with the S&P, prices dipped this past week to the area of the early-November (down) swing low. A Close below 12,000 going forward, and not reversed the next day, would suggest downside potential to as low as 11,735 or a move equal to a 50 percent retracement of the July to February run up. That would be a sizable retracement. In a strong bull market trend, we won't usually see the Indexes retrace more than about 38%. Stay tuned on that.
As I said last week I anticipated the 12,000 area to be "tested next as support" and the Average wasn't found wanting as far as buying interest on the dip below 12k.
On the upside, some resistance levels have been established: first, at 12,300-12,325; then pivotal resistance around 12,337, which is also a prior cluster of lows of some technical importance. A close above this line of resistance would be bullish provided INDU held at or above this level on the next day's close.
Near term direction is important. The Dow Average, like the other major indexes, has established a possible low for the current correction, but hasn't been able to rally on to and through the prior rebound high.
Just as with the Dow 30, the Nasdaq Composite (COMP) has established a range between support and resistance that we can use to gauge where COMP goes from here.
Resistance and selling has come in the low-2400 area, at 2402-2404 specifically. A close over this line of prior support in the low-2400 area, which now appears to have 'become' resistance, is key to further bullish potential. Two consecutive day's closes above 2400 would be bullish and suggest that COMP could move up to the 2440 area or perhaps back up to the gap area beginning at 2470, which extends up to 2490; a move up to and above 2470 should prove offer some strong resistance and selling pressures.
Support has come in right at the 38 percent retracement level, at 2333. Well the low was just a scant 2 points under, at 2331. Look for support in the low-2330 area, with next support likely if prices sank to around 2318-2315.
COMP finally got 'oversold' as defined by the RSI seen above dipping under 30. If the market is finally undergoing a substantial correction, there won't be just one dip in this indicator into oversold territory.
NASDAQ 100 (NDX) DAILY CHART:
I've put moving average envelopes back on the daily chart of the Nasdaq 100 Index (NDX) now that the downside volatility appears to be over. A line of lower envelope support points down toward the 1700 area in the next week or so, with support also suggested by the prior lows in the 1693-1690 area; this same area is support implied by the level of the 38 percent retracement as highlighted on the daily NDX chart below.
Resistance is at 1757-1760; if this area is pierced I look for the next zone of resistance/selling interest to come in at 1770 to 1775. A daily close above 1775 that held up the next day would suggest that the bullish long-term trend was re-asserting itself.
Key support in the Nasdaq 100 tracking stock (QQQQ) is highlighted at the green up arrows; from the 4180 area down to 41.60 at the prior lows. A close under 41.6 would suggest the possibility that another down 'leg' was beginning with potential to 40.5 to as low as 39.35.
Upside resistance and selling interest has been seen in the 43.20-43.25 area; next resistance begins at 44.0 and extends up to 44.5, which, if reached, could see substantial selling pressure develop.
In terms of the 13-day Money Flow indicator, the stock hasn't quite reached what is usually thought of an oversold 'extreme'. Volume has been relatively low of late. There was not as much volume that came into the stock on this rally as from the same area previously.
On balance, I anticipate the Q's to hold at or above the 42 level with some attempt to rally back up toward the $44 area. A close under 42.0 however, unless reversed back to the upside the next day, would suggest a more bearish picture than the one I'm suggesting here.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) has at least for now established a tight trading range between 790 on the upside and 761-760 on the downside. A decisive penetration either to the upside or downside of these levels, could carry to 810 or 750-746, respectively. The other possibility of course is that RUT settles into a tight trading range awhile longer.
I am not in any hurry to jump into this market in terms of taking an outright position and bet on trend direction for the next 2-3 weeks. Doubtful that anything will be missed trading wise by seeing how price action develops over the balance of this month. As I noted before, March often is associated with an uncertain outlook and many cross currents.
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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.