THE BOTTOM LINE:
A possible double top on both a short and long-term basis in the S&P 500 (SPX) is suggested if SPX now penetrates it's last downswing low at 1490. Since the end of May, SPX has made a run twice to the 1540 area and reversed. This sets up a possible double top. A 'confirming' indication ahead for a double top would be a drop below the prior bottom in the 1490 area. I said back when that last low was made that the typical corrective pattern would be for a rally, a rally failure, then a move to new low. This may be underway. Short-term the market is oversold and I look for a minor rally to develop soon.
I discussed in my midweek TRADER'S CORNER column the bullish 'extreme' reading seen on my sentiment indicator just prior to this latest correction. Sentiment over the course of this past week's correction has stayed fairly bullish. Traders are now habituated to buying dips. This suggests that the bulls are over-confident, which is usually the case at either an interim peak or a 'final' intermediate to long-term top.
I also discussed the fact that the prior closing high in SPX back in March 2000 forms a potential MAJOR double top relative to the recent peak in the Index. My study and experience with the indexes suggest that major tops are often separated by many months or a number of years. More time will confirm this, or not. Certainly the more time that has passed since a prior major peak, the more potent it is in terms of that price area being either a significant double top OR being an area, once pierced, that 'signals' the start of a major new up 'leg' carrying prices well above the old high. We saw this in a relatively minor way in the Dow 30 (INDU) and in a major way in the New York Composite Index when it took out it's 2000 high in late-2004; the NYA Index then went from 7,000 to 10,000.
If you want to peruse my Wednesday Trader's Corner column you may click here.
The S&P would be significantly lower than it is if the big oil stocks had also nosedived. However, technical considerations suggest that in terms of the (CBOE) oil index (OIX), recent highs may be it for a while and a correction is due. OIX has had a strong tendency to work back and forth or up and down within a broad weekly uptrend channel. As my first chart shows, OEX is up to the top end again of this trend channel; in fact, it popped up a bit above the upper end of its price channel as highlighted on the OIX weekly chart. Past performance as they say in every prospectus on earth is no guarantee of future performance; on the other hand the indexes can be very consistent in their patterns.
Another striking thing I noticed in the charts currently after this past week's decline is that, on an hourly basis, the Russell 2000 (RUT) looks like it's formed a Head & Shoulder's top. If and when there's decisive downside penetration of the 'neckline', at 830 currently, a significant further decline is suggested. While the RUT is not the overall market, the small to mid-cap theme has been a significant one in this last rally cycle, which is also evident in the standout performance of the NYSE Composite Index (NYA). When major investment themes fall out of favor, there are often also significant changes in trend.
By the way, 10,000 in the NYA, which has been reached, could be a major resistance area, just as 1,000 was in the Dow was for many years way back when. If you think I'm a bear, well it's more that I'm a natural contrarian. And I look at certain numbers as significant.
MARKET NEWS and INFLUENCES:
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S&P 500 (SPX); DAILY CHART:
The chart of the S&P 500 (SPX) is mixed in its pattern, with a double top formation 'confirmation' suggested if SPX now falls under its last downswing low at 1490. If there was a fall below 1492, the level of the lower Bollinger Band (not shown), this would also be suggesting weakening upside momentum.
Near resistance is in the 1520 area, with major resistance suggested at 1540.
I've noted before that top formations taking the form of a mostly sideways trend in the major indexes, often occur with a corresponding pattern of DECLINING relative strength. This is highlighted above with the down sloping trendlines on the Relative Strength Index (RSI) chart. This pattern of declining relative strength is a further supportive clue for a move ahead that could take SPX below 1490.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) fell to under 700 or below its 21-day moving average in this past week, which is bearish. When prices keep slipping below this key trading average, its usually an indication that prices will break further at some point.
The recent rally high at 707 forms a potential double top in OEX. A 'confirming' indication of a double top would be if and when there's a close below the prior 685 low that was not reversed soon thereafter. 685 is near support, with next support at 680, with a then next lower downside target to around 674 at the lower (3%) envelope line.
Near resistance is at 700-702, then at 707, with major resistance approaching 720. A short-term rebound looks due, maybe by Tuesday; the close near Friday's low was a weak one and there may be some further selling on Monday.
Given what I see as a fairly bearish chart, with a strong potential for a double top in the S&P indices, trader sentiment didn't get all that bearish as seen in my "CPRATIO" graph under the OEX chart above.
Such a moderate reaction by traders to this recent rally failure at a key prior top, adds to a bearish outlook (in a contrarian sense) and suggests downside potential to the low end of the trading range OEX has been in since early-May, at 680.
When you've seen such a strong advance, it's hard to think it's going to change; when it does, you wonder how you didn't see it coming!
DOW 30 (INDU) AVERAGE; DAILY CHART:
An exact double top (in the 13,690 area) is most apparent in the Dow 30 (INDU) chart and it's often the case that INDU acts the most 'technically' in the way of tracing out classic patterns; double tops, double bottoms, etc.
Near resistance at the 21-day moving average is at 13,517 currently, then at the aforementioned top in the 13,690 area. Major resistance has long been noted at 14,000.
Near support is at the area of the prior 13,250 low, then in the 13,050 area. The close on the low on Friday is bearish on the face of it, but we've seen immediate upside reversals in this market many times also.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index held up better, declined less on a percentage basis, than the S&P and Dow, but it also lagged on the last advance. COMP has a less bearish pattern than the S&P as it's absent the double top seen in those indices. If COMP maintains itself above its up trendline, currently intersecting at 2575, the Index will look bullish technically. If COMP breaks 2575, a re-test of the prior 2535 low would be suggested.
Resistance is 2635, support at 2535. It's looks like COMP could stay in this trading range. A close below 2535 would be mildly bearish, but further support is likely not too much lower, at 2520, then to 2510.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 Index (NDX) is resisting the sell off being seen in the other major indexes and is holding, so far anyway, support implied by its 21-day moving average in the 1920 area.
If NDX closes below 1920, a drop to support at the prior low around 1875 is suggested. Below, 1875-1870, a next lower price objective I would have is to around 1850.
Resistance is anticipated at the recent 1948 high, then in the 1960 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Price action mirrors NDX of course in the Nasdaq 100 tracking stock (QQQQ) and the stock is maintaining itself in its uptrend channel.
Support is at 47.15, then at 46.75, at the low end of the aforementioned price channel as seen on the Q's daily chart below. Next support outside and below the trend channel, is 46.15. Major support looks to be around 45.5.
Resistance is at 47.9 on up to 48.15 or so.
Volume has been picking up on the QQQQ declines, which is not great 'confirming' action relative to the bullish uptrend. An important aspect technically is the ability of QQQQ to stay in this pattern of rising relative highs AND lows; i.e., each low has been above the prior low(s). When this pattern changes, the chart would start to look more bearish.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) has formed a bearish looking Head & Shoulder's (H&S) top pattern and is especially apparent on the hourly charts, as seen in my 'bottom line' commentary at the beginning of this column. A confirming 'neckline' break of 830 in RUT, not reversed soon thereafter, would suggest a downside objective was in play to at least 800. However, there are layers of support suggested by prior lows; first at 820, then at 810.
Resistance in the Russell is at 850 to 855. If RUT managed to rally back to a close at 850 or higher, the interpretation for a H&S top is in question. Key or pivotal resistance is at 855-856, with major resistance at 870-875.
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.