THE BOTTOM LINE:
Of course additional 'reasons' always comes out providing a fuller explanation for the first sharp decline, such as was seen this past week in the further bearish housing figures and especially the actual negative number in the non-farm payroll creation. Retracements of such prior steep sell offs often can't recover more than 2/3rds of the first price decline before selling sets in again. The reason being that the market was 'sensing', in the first big equities price correction, problems that werent going to be minor or over so quickly.
The other thing I would estimate here is that a further decline won't be dramatic and steep, as the major indexes are not falling from an overbought extreme. There will be an expectation that Fed action on a rate cut at mid-month will provide a floor under prices. But, over the next few weeks, Fed action alone will not likely be enough to totally buoy stocks as it takes some time to turn economic trends around.
If a further decline is gradual and slow, it will not be the easiest market to make money by being long puts. It is not my kind of trading situation since I like to buy and sell extremes. We're some distance from an extreme in bearish sentiment. My sentiment indicator is not showing a large movement into puts for example. All in all, I would say that prices will work lower still over time but it may also be choppy and slow in that decline.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) Index has resumed its bearish pattern. However so far the most recent (Friday) close has held a first level of support implied by the 21-day moving average; at 1454, as seen in the chart. Next lower implied support is at 1432 at the prior downswing lows. There's potential over time for SPX to work back down to the 1400 area again, likely major support at the low end of the broad weekly chart uptrend channel (not shown) by month end.
To regain a bullish footing, prices need to rebound back above 1495-1500, with
1480 becoming as a new support after that.
S&P 100 (OEX), DAILY CHART:
The S&P 100 (OEX) index managed one close above resistance implied by the 66% retracement level around 693(on its way seemingly to major resistance at 700) but that was it, before OEX fell to near support at the 21-day moving average (677.7 currently). 669-670 is the next area of expected technical support with 645 to 640 as the intermediate-term support zone at this juncture; long-term technical support is at 625.
It was take an eventual recovery rally that pierced 700 and held above this level to suggest that there might be a challenge to the summer rally peak at 720.
Hopefully, not many of you overstayed if you were in S&P calls. Last week I noted that: "I don't want to stick around myself (in calls) and see if the market is going to have a second up leg equal to the first. I don't usually anticipate that a market that has had a major correction such as the one we've seen with its high volatility, will resume the prior trend all that easily or quickly."
I didn't suggest jumping into puts; this was tempting given 'defined' risk (stop out) point at just over 700 and an objective back to the 670 area. But, it also looked like there could be a choppy period ahead. I don't like congestion areas in which to trade index options, although these periods of course can work for you when the strategy involves prices remaining within a defined price range.
Traders, in terms of how they're predicting the market ahead, tend to lag any new change in trend direction; this kind of rear view mirror view doesn't anticipate a change in price direction very quickly. By the time most get bearish and pick up their activity in puts substantially, the market is often nearing an upside reversal of some potential.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) took the biggest tumble this past week after retracing just over (a fibonacci) 62% but not quite 66% of the last big decline. INDU fell below its 21-day average, which suggests to me that the Average is going lower still. The key near-term test for the bulls is to defend (buy at) the recent 13,035 downswing low; below this level there's just air so to speak between the 13000 area down to about 12600.
It's hard to pinpoint areas of buying interest between about 13,000 to around 12,600 or so as the recent sharp decline didn't pause at stair-step intervals as is more often the case. Instead we saw a PLUNGE on this last sell off with little concerted buying along the way. Assuming INDU doesn't find support around 13000 and continues to weaken, I estimate pivotal technical support at 12885-12850. Pivotal in that a close below 12,850 could point toward an eventual retest of 12,518, at the mid-August spike low. Lows often seem to be made to be tested or broken later on, becoming a 'benchmark' in that respect.
Near resistance is at 13,200; above this level key resistance lies comes in around 13,500.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index has also resumed a bearish pattern, with resistance now in a zone from 2640 to 2620. Now prices appear headed back to toward its 21-day average again at 2550. As I noted last week that: "...unlike the narrower gauge big-cap Nas 100 (COMP) looks like it may start to struggle now that it has retraced a fibonacci 62% of the July-August decline." The index did clear resistance anticipated at 2610, but only briefly above "more pivotal resistance at the prior high at 2628". Now what? If 2550 is pierced, the next lower and 'logical' downside target is to the prior pullback low in the 2500 area. If only the market would always do the 'expected' thing!
Pivotal or key technical support implied by COMP's prior upside reversal is at 2500. If this level gives way the chart picture turns more bearish than what I anticipate currently for a broad sideways trend ahead. Next lower support comes in at 2455-2465.
On the upside, if COMP was to regain the 2620 area and start trading above 2620-2600 after that, the index could work back up to resistance beginning at 2675 and extending to 2705 and above; my least likely projected outcome.
NASDAQ 100 (NDX) DAILY CHART:
In a surprising reversal in sector leadership, the Nasdaq 100 Index (NDX) was leading the market higher on this last rally, but upside momentum faltered after NDX reached my upper trading band (4% above the pivotal 21-day moving average).
There are two key Nas 100 bellwether stocks that have key resistances that should help predict whether NDX can get again challenge its summer high in the 2060 area: Cisco Systems (CSCO) has made an apparent double top at 32.47-32.5 (Friday close: 31.52) but hasn't completely fallen out of bed; also, Intel (INTC) has topped twice now in the 26.43-26.52 area (Friday close: 25.47) and bears watching as to the future direction of NDX.
The index did pierce the prior peak at 1995, but wasn't able to hold this level. Look for the first area of key overhead resistance at the downside gap area at 1984-1975. Next resistance is at 1995-2000.
I'm watching what happens in terms of the 21-day average, currently at 1936. A close below this level not reversed the next day would suggest that the Nas 100 would work lower still. The next level of significant technical support comes in at 1900, at the prior recent low. A close below 1900 would suggest a next objective over time to the 1850 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
As I noted last week about the QQQQ Nasdaq 100 Index tracking stock, the daily volume levels on the last upswing were not 'impressive' or suggestive of the kind of powerhouse move or buying power necessary for the Q's to take out the prior 50.66 high. Recent action has turned the chart pattern at least near-term bearish as suggested by the lower price peak made on this last advance, followed by the gap lower.
Initial resistance and selling pressures should come on a rebound to the downside gap that formed between 48.81 and 48.6. The next resistance is at 49 to 49.35. A close above 48.8 not reversed the next day, would turn the chart picture bullish again.
Initial support comes into play in the 47.60 area and next at 46.7 the recent pullback low as noted on the chart. 45.5 is
RUSSELL 2000 (RUT) DAILY CHART:
As predicted last week, the Russell 2000 Index (RUT) the 800-803 area again turned out to be the upper end of its price range. Not much more to add from last time also in that it would take a close above 800, with this becoming subsequent support, to create a bullish chart (upside) breakout.
Near support at 780 gave way, so look for next potential support to develop in the 767-770 area. As I noted last time also it wouldn't be surprising if RUT again got back to the 750 to perhaps 743 at some point ahead. Stay tuned on that!
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.