THE BOTTOM LINE:
Try to take a vacation when the market is making a big move and suffer the consequences of neglecting those who tune into this space. Nevertheless I myself survived in coastal California for the time I missed from daily tracking of the market. Nice to know that the recent bear move followed a predictable bear correction pattern of a long fall, a short rebound of that first fall, followed by another decline of equal or greater length than the first. Bottom line was that there were for a change in past months, TWO substantial sell offs with big put potential for both trading swings.
I wrote about aspects of measuring a completed correction in the week past on Wednesday in our Trader's Corner column but am just stepping back into my index column until now. If you want to peruse my most recent (8/22) Trader's Corner column, "Completing a Correction: Ways to Measure", you can click here.
In the aforementioned article I used the following chart markings to illustrate technical patterns in the lead S&P 500 Index, showing the basic equality of the two big downswings. A typical bear correction will have down, then up, then down (again) segments or Down-Up-Down and also called an A-B-C bear correction in Wave terms.
Typically the shorter rebound (B,'up') of an ABC downside correction won't retrace more than 62 percent or so of the first sell off, before a second, sometimes bigger, decline sets. If the two down legs are approximately equal, such a move is sometimes said to have fulfilled a 'measured move' objective; Jack Schwager especially used the terminology of price swings that fulfilled 'measured move' objectives if two down (or, up) legs were equal.
If the second downswing ('C') is not EQUAL to the first but exceeds it, it's common for down leg C to be from 1.25 to 1.62 longer than the first decline (A). Elliott said that the 'classic' price distance carried by the 2nd downswing of an ABC pattern is for it to be a fibonacci 1.62 times longer than the first down leg.
Thumbing its nose at expectations, either fundamental or technical, the Dow and Nasdaq fell a distance from the last rebound high (peak) to the recent low (trough) such that the second price decline was 1.26 times longer than the first. Focusing on the SPX index that had been leading the market higher and noting when/where the second decline equaled the first, can be a 'signal' to consider exiting at least most of my index puts given this completion of a second EQUAL (measured) move.
Another distinguishing technical feature of this recent strong rebound is that it came after the S&P 500 Index (SPX) weekly low touched pretty major support at 1370 implied by the intersection of SPX's weekly chart up trendline below.
A widely noticed trendline is something that surfaces sometimes among professional index traders and those that talk to them. The strong rebound that developed after the index fell all the way to the trendline at 1370, also placed this recent key upside reversal not far above the 1364 low of March '07 making for an approximate double bottom.
There is another chart, that of the Dow Transports (TRAN), that should be watched as to the down-the-road outlook investors are seeing for the market and for expected earnings' trends. The Transportation Average, according to Charles Dow (and still true today), is often the first index to react to economic slowdowns.
This tends to be so because actual shipping of goods slows first (whereas manufacturers may still be cranking out product) and close followers of those companies mark down prices for the 20 transportation stocks in that average, hence TRAN may weaken ahead of the Dow (Industrials) and break technical support first. Bearish TRAN price action can be an early warning signal for a bear market ahead.
4735 is key weekly chart support for the Dow Transport average. There was a dip that occurred the week before last to well below its long-term weekly up trendline, but TRAN weekly Closes have to date held at or above support suggested by the trendline.
MARKET NEWS and INFLUENCES:
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S&P 500 (SPX); DAILY CHART:
Two weeks ago (my last column), re the S&P 500 (SPX) I wrote: ...."I'd say that SPX chops around awhile, but can't pierce or take out resistance at 1500 and heads toward the 1400 area next. A close above 1500, not reversed back down the next day is bullish. A close below 1408 is bearish, and 1400 more so."
About right! SPX rallied to the 1500 area, then headed down sharply and reaching 1370 as an intraday low, but with its lowest Close at 1411. Since the 1370 low was exactly at SPX's long-term weekly chart uptrend line as noted in my initial ('bottom line') commentary, buying calls in that area turned out of course to be quite profitable. The secondary consideration for a bottom was the reversal that came after the second down leg at least equaled the first.
I note potential upside resistance now at 1492 (a familiar number!), at the 66% retracement point and next at 1504, the prior SPX intraday high on the last rally. Major resistance is at the prior high at 1556.
Near support is at 1455, then at 1430.
S&P 100 (OEX), DAILY CHART:
I said last time, 2 weeks back, that: "I would be surprised at this juncture if the decline was over and we didn't see the (S&P 100, OEX) index moving down again and to lower lows, especially after another rally attempt. A new leg down could carry well under support seen at 665 to around 660. A close below 660 suggests potential for a decline to the 640 area next and perhaps over time to a re-test of its 625 March low."
I got that one about right! But, what have I done for you lately!?
Look for significant technical resistance in the 700 area, with major resistance at the last major top that formed in the 720 area. Near support is at 677, then at 660.
700, maybe 705 on the upside and 665, perhaps 660 on the downside may be the maximum OEX trading range for the next 1-2 weeks. I'd be surprised to see a near-term move back up to the old highs at 720, with too much uncertainty for that.
MARKET 'SENTIMENT': I'll make a point here about my sentiment indicator seen above. It's been consistent in recent months that highs at or above 2 are bearish, suggesting a top within 1-5 trading days and lows at or under 1 are bullish; i.e., daily put equities volume (CBOE) is equal to (or more than) that day's call volume.
I would also note that this ratio is something YOU can follow easily yourself toward the end of each trading day, by checking cumulative or final total of the day's equities call volume and dividing that number by that day's total equities put volume on the CBOE.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) rebounded after retracing briefly just over 66% of its March-July advance. I thought two weeks ago that 13,000 would get tested and 12,700 was my objective. I wasn't also anticipating a gang-buster tear-em-up rally, but the correction on the downside was OVERDONE and prices snapped back. As I've often noted, the market swings from one EXTREME to another every so often.
Near resistance begins in the 13,620 area and extends up to the prior recent intraday peak at Dow 13696; basically at 13,700. I don't see INDU closing above the prior high in the near-term.
Near support I'd peg at the 21-day moving average, currently at 13,243. 13160-13150 looks like the next technical support, with pivotal support at 13,000. If not already in calls, I'd not play the further upside potential at current entry levels.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
For two weeks past: "My downside objective for the Nasdaq Composite (COMP) Index is to the 2400 area should the index start falling through 2480. To turn bullish, COMP would need to get above the 21-day average, which has been tough resistance."
Whew, I don't feel so neglectful of my usual writing chores since I covered what has happened pretty much; well, I didn't say to buy calls in the 2400 area but I was thinking it once it happened! [The COMP 2400 area was my potential buy point and around 1825 in the Nasdaq 100 (NDX.] NEXT!
NASDAQ 100 (NDX) DAILY CHART:
Back two weeks ago when I last wrote, I calculated an 1825 downside objective for the Nasdaq 100 Index (NDX) if NDX fell below 1844. Well, not that far off, as the intraday low the week before last turned out to be 1806 but not for LONG!
I think NDX will work somewhat higher still, back up to near resistance in the 1995-2000 area but I don't see the index above that area anytime soon. Near support is at 1930 on down to 1915; a close below 1895, not reversed the next day, would be bearish.
RUSSELL 2000 (RUT) DAILY CHART:
I see a very solid resistance overhang in the Russell 2000 Index (RUT) in the 820 area. This should mark the upper end of the trading range in the next 1-2 weeks if not well past that. The Index may not get this high even as substantial selling pressure has been seen already in the 803-804 area.
Near support is at 775-768, then at 750.
Good Trading Success!
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.