THE BOTTOM LINE:
We can anticipated that the next tradable bottom is LESS likely to consist of sharp a downward price 'spike(s)' followed by a strong rebound; a perfect example of a spike low came with the August 16th bottom when the S&P 500 (SPX) fell to as low as 1370 but closed at 1411. This kind of pattern contrasts with the more 'normal' pattern of bullish 'basing' action suggested by repeated lows in the same area; such as the 3 days of recent lows around 1420 in SPX.
As an aside, it's a bit nonsensical for me to talk about 'the' market here as there is a strong current divergence between the tech stocks, and a few stellar performers especially, in the big cap Nasdaq 100 (NDX). I favor buying weakness in the strength sectors and segments.
I was gauging my call favorites in buying, by action in the Nas 100, wanting especially to purchase NDX calls in the 1950-1970 area. And, of course my 'ideal' entry didn't happen yet! The Nasdaq Composite did complete a retracement of 66% of its mid-August to October 11th run up and then rallied strongly on Friday so I took as a bullish positive. The intermediate-term trend in my mind really turns south if SPX closes under, the 1407 August intraday low in the index, especially if it was for TWO days running.
My key Nasdaq volume measure HAS seen the 'contraction' that I spoke about last time as typical in some of the best trading bottoms but the indicator line is still falling; when this indicator turns up (Nasdaq up volume starts EXPANDING on a 10-day average basis) then 1 (of 3) of my top timing indicators says buy.
The second of my three key indicators is measuring an area where this is increasing potential for a good-sized rebound, as seen in the 13-week RSI. This is especially apparent in the S&P 100 and the same indicator is about as oversold as it gets in terms of the S&P 500 (SPX). Again, bear market concerns in the air can mean that this indicator also shows an oversold 'extreme' for significantly longer than has been the case over the past year.
My third key bottom signal is given typically by my call to put technical model; its recent 'oversold' extreme reading as I noted last week, could have of course been skewed by it occurring on an index options expiration (11/16). The idea of whether this quite bullish reading could be fully 'trusted' was raised more when I saw Monday's Call to Put sentiment indicator jump to 1.5 on Monday. By week's end, with the Friday rally, the CPRATIO was 1.8: call volume was 1.8 times total equities daily put volume. If traders were turning really bearish, I would have anticipated that it would have shown up in my indicator more than it did last week or AFTER any distorting effect of expiration.
We'll see on how all this plays out: JUST going by my CPRATIO indicator (disregarding possible 'skewing') the Wednesday bottom bullishly came 3 days after a day when total equities put volume was about equal to CBOE call volume. We get into contrarian buy heaven when total daily put volume starts exceeding total call volume; just measured in equities, NOT in the index options, where there's so much hedging.
The Dow (INDU) HAS closed below its prior closing weekly low of 13079 for the week ending 8/17 and in terms of Dow theory starts suggesting a possible bear market ahead; the Dow had one such lower close already but rebounded the following week. The S&P 500, SPX, has also fallen below its 1446 low of Mid-August given its 11/23 weekly Close at 1441. I'll give more credence to a possible intermediate trend reversal if SPX winds up at the end of the coming week again below 1446.
The Russell 2000 (RUT) fell finally two days running all the way back to its intraday low of mid-August at 736 but a 2-day bottoming process in this area was followed by a strong RUT rally on Friday.
There are early signs of a tradable rally shaping up and I'm ready to pull the trigger, even without a further fall into my ideal/most favored call buy zone (1970 or better) in NDX given that there has been strong buying interest shown on several instances where the index fell to the 2000 area. However, I want to see some further instances ahead showing favorable price, volume and sentiment action to commit.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) Index looks like it may have bottomed or is bottoming in the 1420 area, without necessarily making a 100 percent retracement back to the area of its mid-August closing low of 1407. Near support looks to be 1407-1415 and I'd be a buyer in this zone and further down if there was a fall to the 1400 area. As long as there is not a new low Close below 1407 and for more than a single day, SPX's intermediate trend remains up in my assessment.
Key overhead SPX resistance is at 1480. A close above 1480-1482, not reversed the next day, would suggest that there was upside potential to resistance in the 1520 area. I wouldn't be surprised to see a further short term rebound in the S&P, such as to 1460-1465 followed by perhaps another period of weakness, before the index was set for what I think will be at least one substantial December rally.
There is a mildly bullish price/RSI divergence that has developed in SPX as prices bottomed on rising 'relative strength' as seen above; i.e., a rising RSI line when prices trended lower. We saw this type bullish divergence set up in August. This isn't to say that the recent low is a 'final' one for the time being, but such divergences do point to bullish bottoming potential. However, price action ahead is the next and determinant factor on whether SPX has turned the corner.
S&P 100 (OEX) INDEX; DAILY CHART:
I anticipated that the S&P 100 (OEX) would find good support in the 670-676 area but OEX got almost to 660 before rebounding on Friday. As with the S&P 500, I am focused on a close below the August closing daily low (656 in OEX) as suggesting that the intermediate-term up trend was reversing. As always and especially in an oversold market, the key test of market weakness would then be if there were back to back closes below this prior low close.
OEX could of course dip to the 640 area again, to re-test its intraday low of August, but there is probably enough buying interest at 650 and above to keep the index buoyant and maintaining closes above the prior (656) low close, especially at the end of day ('moment of truth') Close, as is well-known in Candlestick charting in mostly disregarding intraday price swings.
As I discussed earlier on, I've wondered if I can trust the 'extreme' bearishness implied by the dip in my 'sentiment' indicator seen above with a fall into my 'oversold'/extreme bearishness territory (occurring 11/16) as suggested by the 1-day reading below the lower (green) level line; my doubt stems from the effect of possible expiration-day distortions.
We tend to see many price and volume distortions on many, not all, expirations. I don't have a rule saying to 'throw out' bullish or bearish extremes in my sentiment indicator when such readings are isolated events occurring on a monthly expiration, but I do take the circumstances into account. Mechanical uses of technical indicators can work for 'mechanical' trading SYSTEMS, but isn't what I do.
DOW 30 (INDU) AVERAGE; DAILY CHART:
I said last week regarding the Dow (INDU) Average that "Key support below 13000 is at 12,850 to 12,800. If there was a shot down into this area, I'd buy this dip by purchasing DJX January calls, with a stop or exit point in terms of the underlying INDU at 12,750 and with a trade objective to 13600 or higher."
I'm in this trade, not at a maximum level but in the game here and suggest adhering in the coming week to my originally suggested exit/stop point at 12750 (this past week's low: 12786). I'll update on this trade and other key technical aspects in my usual Wednesday 'Trader's Corner' article.
Key near INDU technical support: 12800-12780, with major support in the 12520-12600 zone.
Near resistance is in the 13200 area, at 13365 and with pivotal technical resistance at 13362-13400. 'Pivotal' in the sense of trend direction, as a close above 13400 and ability to hold this area subsequently, would point toward a further advance such as up to the 13800 area or higher.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index fulfilled my expectation of holding at or near a 66 percent retracement (unlike SPX!), which is that little more slippage that often occurs by an index or stock exceeding a fibonacci 62% (.618) retracement. Retracements of less than 2/3rds suggests that an index or stock is only retracing a part of its prior run up BEFORE resuming its prior trend.
The partial retracement pattern is one possibility versus a complete or FULL retracement back to the starting point for the last prior run up and what happens in this area could set up a possible double bottom or not. The 'not' would be, instead, a retreat to a new daily chart downswing low, which implies a reversal in the intermediate-term trend.
I wrote last week that a "a retreat (in COMP) to the 2550-2545 zone is my lowest expectation for COMP and I rate the likelihood of a big new leg down, such as back to the 2400 area again, as low." I still rate the possibility of a drop again to major COMP support, anticipated in the 2400 area, as 'low'.
Near resistance looks like 2640, at 2680 and with pivotal next resistance in the Composite at 2700-2707.
NASDAQ 100 (NDX) DAILY CHART:
I thought we'd see a dip in the Nasdaq 100 (NDX) Index to further below 2000 than has been the case so far. Enough stocks in NDX have been digging into support and finding enough buying interest to keep the index mostly above 2000. The exception being the 11/12 Close at 1982, but that was the only 1-day close below 2000. If there is another decline that takes the index to a lower low for this move, I have continued buying interest in NDX calls if there was a decline to the 1970-1950 zone. I may need to revise my buy point upward and will assess this in the coming week.
We could see NDX continuing to trade basically sideways awhile longer as traders assess whether strong electronic sales continue in the lead up to the major end-of-year holiday season. A lengthily sideways move, after a steep pullback and in an oversold market, usually suggests support and sufficient buying interest to fuel a good-sized rally at some point.
I'll repeat that 1970 is potential technical support equaling a Fibonacci 62% retracement; 1950 is anticipated support implied by a 66 percent (2/3rds) correction of the rally from the mid-August low up to the October high. Major support levels are at 1900, then down in the low-1800 area.
Not much has changed from last week in that key resistance looks to be in the 2090 area, then around 2113 at the 21-day moving average. A rally above 2090 and a subsequent close above the 21-day moving average would be bullish, suggesting upside potential back to 2180, the area of the original NDX 'breakdown' point from earlier this month.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nas 100 tracking stock (QQQQ) has been finding support on dips under 49.0. The chart pattern is bullish if the sideways trend now represents 'basing' type action. If so, a rally should lie ahead such as back up to near resistance in the 51.0 area and then maybe on to test 52.
I favor buying QQQQ in the 48-48.5 area if reached. The Q's of course may not dip this low as so far the stock seems well supported around 49.
A close below 48 could be part and parcel of what would turn trader sentiment quite bearish and preface or 'set up' a next rally. Major support begins at 47 and extends down to 45.6 to around 45.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) found what may be 'final' support for this recent downswing, at the prior 736 intraday low from this summer. Two days last week with lows in this area was a pretty good tip off that the index wasn't going to get pushed lower and would snap back from an oversold condition as may have begun with the Friday rebound. If they can't take em down or have taken them down until selling dries up, the stocks will snap back some. How much remains to be seen!
RUT will reach initial technical resistance at the (steeper) down trendline around 765-766 early in the coming week, with next resistance most likely to be found around 790-794 and with major resistance in the 800-803 area.
The RUT chart pattern looks right now like a picture perfect 'double bottom' in terms of the absolute lows for the period shown; assuming 736 is a key support, it will be better known after any possible further volatile trade ahead. A close below the 736 intraday lows seen to date would be bearish unless it was a sole 1-day affair. Since this chart doesn't go back that far, major support should be noted for the 680 to 670 area, where RUT bottomed over June-July 2006.
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.