THE BOTTOM LINE:
The intermediate-term trend has now turned down on even the Dow 30 (INDU), given its close below its June 13,251-13,259 lows. INDU thereby joins all the other major indexes in similar type declines to below summer lows, except for the Nasdaq 100 (NDX). If NDX closed below 1882, its intermediate trend would shift to down as well, which would also be just a bit beyond a 50% retracement (at 1885) of its March-April advance. If NDX had basic industry stocks and the oils, it would have had a decline closer to the others.
We got the short-term bounce I was looking in the early part of the week but it only took the S&P 100 (OEX) from 670 support up to resistance at 685-690, the area that had previously offered support and the low end of its multiweek trading range; what was support had 'become' resistance indicating selling pressures were still dominant.
In terms of defining the major trend which I wrote about in my Wednesday Trader's Corner article, a major trend reversal would happen by an index or stock exceeding its last major weekly downswing low and is what turns a long-term trend down. I tend to look for a close below the prior weekly low to suggest this degree of trend change, whereas some will look for where the prior weekly Close is exceeded. (If smarter media heads, analysts and investors had focused more closely on the prior weekly S&P 500 1553 HIGH they would have been more cautious when SPX stalled precisely in this area recently). On the basis of the long-term charts, the major indices still remain in long-term uptrends as long as they don't pierce their March lows. Stay tuned on that!
Not that all this matters much in terms of index options trading strategy. What does give some trading help is the rule of thumb that each retracement level exceeded, of the major fibonacci 38, 50 and 62% levels, suggests potential for that Index to go to the NEXT lower retracement. With the lead S&P 500 (SPX) Index, a decline below 1428 suggests potential to eventually fall to the area of the aforementioned March low, or 1363.9 intraday and 1374 on a Close-only basis. When retracements get to the 62% level, I allow leeway to 66% as the level, when pierced, that suggests that a stock or index has gone BEYOND a 'normal' retracement of the EXISTING trend and now has some likelihood of a round-trip return to test the prior low.
For example, SPX has been in an uptrend since making its early March intraday Low at 1363.9. From its 1556 High, SPX has had a deep pullback exceeding the 38 and 50% retracement levels and now (on Friday) to below a fibonacci 62% retracement. However, at this level of retracement (62%) it's a good idea to also plot the level for a 66% retracement, which is 1428 and often is the last line of 'support'. If prices stabilize at or above 1428, especially on a closing basis, there remains some potential still for a resumption of the prior (up) trend; or, at least an 'oversold' rebound.
If a decline continues beyond 2/3rds or 66% of the prior advance, I anticipate typically a move back to the starting point of the prior rally. A round-trip return to a major prior low then sets up the potential for a double bottom; OR, if the Index takes out that low, a bear market on a major/long-term trend basis begins, as defined by usual technical analysis yardsticks.
I'll continue with my recent bottom line intro practice of evaluating the S&P weekly charts.
S&P 500 (SPX) WEEKLY:
The S&P 500 (SPX) has slowed its rate of descent but continues the quite bearish pattern of Weekly Closes that also equals the Weekly Low. (In Candlestick charting terms, there is no 'tail' when the Close is equal to the Low and it's a bearish candle pattern also.) The major or long-term trend would shift to down on a weekly close below 1387 or if the prior Low at 1364 was pierced. I tend to focus more on closes and lows holding above 1364; support implied by the long-term up trendline comes in at 1369-1370.
SPX, along with the Russell 2000 (RUT), which have been the most profitable put plays on this decline, were the two major indexes that both had the clearest and highest potential reversal pattern, that of a double top. In the case of SPX the prior high in question was made years ago and from just weeks prior in the case of RUT. Hey, a double top is a double top! Watch out for them!!
S&P 100 (OEX) WEEKLY:
I jiggered the lower trendline of the weekly uptrend channel in the S&P 100 (OEX) weekly chart below to see what a conventional ('external') up trendline drawn through the lowest lows only would look like and where support would be suggested ahead. The re-drawn lower trendline, discarding the best fit 'internal' trendline connecting the most number of lows, has moved potential technical support somewhat lower in OEX from where I suggested last week; from 670 to 663.
A decline to 663 would pierce the up trendline and suggest potential for a re-test of the 625 low; only a fall below 625 would suggest that the long-term trend had shifted to down or bearish.
The other thing I would note with the OOEX weekly chart above is the approaching weekly 'oversold' condition implied by the 8-week RSI; similar low readings around or just under 35 in the Relative Strength Index were seen prior to the start of prior rallies for the period shown on this chart. History may not repeat itself as far a specific degree of oversold; depends on how much the bear gets a grip ahead.
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S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) didn't fall as much this past week, but the same quite bearish pattern of a close on the weekly low occurred due to a wave of selling Friday afternoon. The further retreat of this past week now takes SPX under a 62% retracement of the March-July advance. If a further decline pulls the index below 1428 which is a 2/3rds (66%) retracement, then it will look increasingly like the S&P could wind up testing the March low at 1364 at some point. Whether there is support around 1409, at the bottom of the prior minor dip after the first leg higher in March is another question.
Beside these larger questions and targets, it looks to me that, like last week, another short-term rally is due; especially so if the index finds support at and above the 1428 area. Whether SPX will maintain its overall an uptrend is the big question; a retracement beyond 62-66 percent stops looking like a 'retracement' of the prior advance. But, until that point, stabilization and some 'base building' is possible and shouldn't be ruled out.
Bottom line, another down leg can't be ruled out but don't rule out that the first phase of a decline may be close to over also. I've covered put positions that I had in SPX simply because I couldn't assess whether the further downside potential was significantly more than the upside possibilities on a rebound and I don't like even odds. A successful trader I knew used to say that a way he would decide if he wanted to stay in a position was to ask himself if he would go back in to the same position as a NEW trade. It's a thought to consider.
I said last week that: SPX ... "doesn't look likely to see more than a short-term rebound, possibly a rally back up to the 1485-1490 area. I anticipate 1490 on the upside, to 1430-1437 on the downside, will be the likely trading range for SPX in the near-term." What I said before may still unfold although I'd lower upside potential to 1485, with 1428-1425, perhaps 1415-1410, as the low end of trade ahead.
A potentially bullish divergence may be setting up, as the RSI has not 'confirmed' the new recent S&P low by also falling to a new relative low itself. SPX is not yet as oversold as it can get, but it's getting close.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) has become more bearish in its pattern with another very weak close on Friday. It looks like the index could retreat to the 660 area next. Resistance/selling pressure has been showing up around 685, at the line of prior lows and that continues to be the key overhanging resistance.
Support/buying interest may show up around 665, extending down to 656. However, a close below 656 may suggest a possible further free fall or that we were already in one, which has not happened in the 100 index to the extend of the broader 500 S&P index.
I said last week that "If OEX retreated to the 660 area, I anticipate a close look at buying OEX calls for a bounce, such as for a move back up to 685. I'd only want to risk 5 points on entry at 660 or under." I'm still looking at that possibility although it's a very speculative play. The key is identifying support developing and setting a very tight stop. Timing is everything of course!
If there was a further jump in put volume one day(s) ahead, such that my sentiment indicator fell further (to 1.1 or less), dipping into an extreme bearish alert as it did in March, this would suggest that an upside reversal might set up within 1-5 trading days. Sometimes, there are two such readings showing extremes in bearishness as a contrary (bottom) indicator; a second such extreme reading often turns out to be a strong 'signal' for an upside reversal ahead.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) is bearish in its chart but is holding up the best of the major indexes. This is not to say that INDU doesn't also have a pattern consistent with another downswing ahead, it just looks like it may continue to give less ground.
Resistance is at 13,500, then up around 13,600 or just above at 13,645, which is level of the current 21-day moving average.
Near support is at 13,175, with next support at or just under 13,100, followed by key support in the 13,000 area. 12,972 represents a 50 percent retracement and 12,725, a 62 percent retracement, of the March-July advance. I anticipate that 13,000 will be an area of good support if there is a further dip and I would look for some rebound from there.
I noted last week: "If long DJX puts, I'd look at taking profits on a decline to the low 13,000 area." Still the idea I have for the week ahead.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index has fallen further in line with how it looked last week when COMP fell through support implied by the last swing low at 2560. The index is now under the lows made since May and its chart looking more bearish than a week ago for sure.
I said last week that "Resistance can be expected on a move back up to 2630..." Well, somewhat close, as the high was made on Tuesday's opening around 2606. I would now peg overhead resistance at 2580, then even stronger resistance at 2595-2600.
Potential support suggested by the patterns traced out on my extended (4-month) hourly chart (not shown) begins around 2509 and extends down to the 2450 area. I'm also focused on 2480, to around 2462, as the 62 to 66 percent retracement levels, as downside objectives on a further decline.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 Index (NDX) as I noted in my introductory comments, while bearish in its pattern, is not falling as far and fast as the other major indexes. Seems that there is not as much liquidation of the big-cap tech stocks, at least not yet. Stay tuned on that!
Last week's rally attempt failed to get back above 1992, let alone resistance at 2000. Very near resistance is at 1970, extending up to 1980.
I've had a downside target for NDX to the 1900 area, and if this level gets pierced on further weakness, 1885 is an objective that would retrace half of the prior major advance (March-July). The 1850 to 1844 area is a next lower price target zone.
So far, NDX has not retreated to below the low end of its 1860 to 2060 trading range of the past few months, but its prior upside momentum and the patter of higher highs and higher pullback lows has definitely been arrested. If the chart pattern develops symmetry ahead relative to what happened in prior months, the index will work sideways to lower for some weeks, heading eventually back to the 1850 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Trading out of the stock I was long in the Nasdaq 100 (QQQQ) on the run up above 50 was a satisfying and profitable trade, but I could wish for also being short the same amount of stock as the Q's seem likely to work lower still. So far however, QQQQ has not had more than a 'minimal' 38% retracement (on a closing basis) of the major run up from the March low to the recent peak.
The pattern being traced out in the stock suggests more downside ahead and my best current guess of that is to the 46.50 to 46.35 area; next lower technical support looks like 46.0
Overhead resistance is 48.40, then 49-49.05. A close above the 21-day moving average, with the ability to hold this level on subsequent pullbacks, is needed to reverse the current bearish pattern.
Now the volume is 'coming out' so to speak, that is a big increase in average daily volume seen on the decline. The volume pattern is consistent with the prospect for some further weakness ahead.
RUSSELL 2000 (RUT) DAILY CHART:
How low can it go? This one looks more a commodities chart. The double top as a major reversal point in the Russell 2000 Index (RUT) was 'confirmed' by the decline to below the 820 level of the June-July lows.
778 was my 'minimum' downside measured-move objective, with a next target to support I had anticipated around 760. RUT sliced through this level at the Friday close and my next downside objective potentially is to 740, representing a 62% retracement of the past year's run up from July last year to July '07, when the second high of the Index's 856 double top was seen.
785 is near resistance, then at 790-795, with fairly major resistance expected at 820.
I don't show it on the daily RUT chart here but the 13-day RSI is down to a quite 'oversold' reading at 24, which is the lowest the 13-day RSI has registered in several years. But of course, RUT had an incredible run up from the 350 area in April 2003! Well more than a doubling of the index in 4 years, making RUT 'due' for a major correction.
The straight down waterfall type decline is what has caused a very oversold daily reading in the RSI; on a weekly chart basis, it's now at an oversold extreme also. Time for a rebound soon! I would take most if not all of the profits in puts and run; take a vacation. If you shorted that double top you deserve it; and a gold star in technical analysis!
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.