THE BOTTOM LINE:
What I'm seeing suggests potential for a rebound and a trading opportunity in calls and selling puts. It doesn't suggest that we've seen a 'final' low on a long-term trend basis. I'll have something to say on the 'December low' indicator further on regarding this.
When I just slightly adjusted the long-term up trendlines on the weekly charts for SPX and COMP, I noticed that their most recent weekly lows have touched, or come within a hair's breath of touching, support implied by the low end of the long-term uptrend channels as you'll see on the following weekly charts. SPX has also reached an oversold area in terms of the 13-week Relative Strength Index or RSI.
The lower up trendline seen on the COMP weekly chart below does slightly cut through a couple of the weekly lows shown (2006), but going back to the 2002 bottom (not shown), the major up trendline is a 'best fit' internal up trendline connecting the MOST number of lows.
On balance, Nasdaq, in terms of Composite, has reached or is close to reaching both potential long-term technical support and is getting near to registering an oversold level in its 13-week RSI. I would also caution that a period of 'basing' or mostly sideways action could follow for 2-3 weeks more. This may be the time to get 'ready' to play the upside but may quite the right time to pull the trade trigger.
COMP is not quite there yet in terms of being oversold but just a sideways move will cause the RSI to drift lower still. I think the Index will get to an even lower Relative Strength Index extreme (e.g., registering in the 20's) before this bear trend has run its course.
In terms of one other of my key longer-term trend indicators, the 10-day average of total Nasdaq up volume shown next below the daily COMP chart, the Index is an area (per this indicator) associated with later turning points or upside reversals. See the notes on the chart below.
At a minimum, the chart and indicator patterns I've described suggest covering puts, or the lion's share of them. In addition to the chart and indicator patterns I'm seeing, the day before this past week's low, we hit an oversold 'bearish extreme' in SENTIMENT; the type of extreme that tends to occur 1-5 days before a bottom. You'll see this indicator with the S&P 100 (OEX) chart in my major index commentaries further on.
Here I also want to distinguish between expectations for a rally ahead this month and whether this outlook ALSO suggests that the market has seen a final low and I doubt that it has.
JANUARY BREAK OF THE DECEMBER LOW: A HISTORY OF FURTHER DECLINES
The Stock Traders Almanac points out a pattern that suggests a negative further outlook for the first quarter of 2008. This relates to the historical record for when the prior December low is pierced in the first 3 months (Q1) of a new year.
When the Dow closes below its December closing low in the first quarter, it is frequently a warning of a substantial further decline to follow. Lucien Hooper, a Forbes columnist and Wall Street analyst, in the 70's originated the 'December Low' indicator. Hooper dismissed the importance of January and January's first week as reliable indicators. He noted that the trend could be random or even manipulated during a holiday-shortened week. Instead, said Hooper, "Pay much more attention to the December low. If that low is violated during the first quarter of the New Year, watch out!"
This is not to say that the market was then in trouble ALL year. In fact, 13 of the 27 occurrences where the December low was pierced were followed by gains for the rest of the year and gains for the full year, after the low for the year was reached. But, Hoopers 'watch out' warning for FURTHER declines was quite correct. All but one of these instances since 1952 saw further sell offs after the first low(s). In terms of the Dow, there was an additional 10.1% decline on average when the prior December low was pierced in Q1. Only 3 significant drops occurred when Decembers low was NOT pierced in Q1 (1974, 1981, and 1987).
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
Given the bearish chart pattern, it wasn't surprising to see the S&P 500 (SPX) break below its November 1406 low, but the August 1370 intraday spike low has not been reached again quite. Given the support being found on dips below 1400, I don't think that sellers are going to be able to push the index as low as 1370 again, at least without an 'oversold' rebound happening first.
Per my initial ('bottom line') commentary above, where I show the SPX long-term weekly chart uptrend channel, significant technical support for now may have been reached around 1380. After a rally, assuming that's next, we'll see!
Key support is in the 1370-1379 area and next in the low-1360 area. I don't currently have lower downside expectations for SPX.
Near resistance is expected in the 1440-1444 area, then at the 21-day average at 1452, especially on a closing basis.
S&P 100 (OEX) INDEX; DAILY CHART:
I was looking for support in the 660-657 area and that was close to the mark for the S&P 100 (OEX) Index, although the low last week was 648. The chart and indicator patterns don't currently suggest that OEX will fall again to 640, but if it did I suggest covering any remaining puts and be steady and ready to pick up some calls, with an objective for a rebound to 672-680; my exiting stop would be 635.
Support I've mentioned already: 648, then 640; below 640, major support should be found in the 625-630 zone.
Near resistance begins around 670-672, with key or pivotal resistance at 680. A close above 680, not reversed the next day, would be bullish and suggest potential to 700 again.
As I noted previously this past week in my Wednesday Trader's Corner article (see the 1/9/08 Option Investor Daily e-mail) and alluded to above, the Tuesday reading for my equities call to put volume indicator was bullish with a price low (to date) occurring the following day, which is not unusual in terms of this indicator. This bullish, in terms of 'contrary opinion', reading could suggest that we get a further bounce now or after a period of a bit more sideways 'basing' type action.
You can check on the CBOE web site around each day's close (or sign up for their trading 'stats' e-mail) and divide total equities call volume BY put volume to determine the daily reading or call to put volume ratio.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) was the one major index (really a price 'average', unlike all the others) to re-test its August intraday low, setting up the potential for a double bottom low. Stay tuned on whether this marks the bottom for a while! Given the oversold condition, a call play with the Dow Index options would have a decent risk to reward ratio; a 'low risk' exit point can be set just under 125.0.
Below 12500, next INDU support looks like 12350, then 12240, with major support in 12050-11940 area.
Near resistance is at 12925, then around 13090, with pivotal resistance in the area of the 21-day Dow average, at 13155 currently.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index could be bottoming with maybe one more shot down to the 2400 area or bit under, such as a retest of its August low at 2387. Below 2400-2387, major support looks to be in the 2330 area.
Near resistance is in the 2500-2503 area, with next key resistance at 2590-2600.
The Composite, as noted last week, has reached an oversold extreme in terms of the 13-day RSI. And also as previously suggested, the second (or third) RSI dip to an oversold level has often been the right timing to indicate a bottom.
NASDAQ 100 (NDX) DAILY CHART:
I suggested last week that the Nasdaq 100 (NDX) Index would find first support around 1950, but failed to mention the other obvious possibility of a move to 1900, which is what happened, with one intraday low at 1890 in NDX.
I also would repeat the idea that an eventual downside target back to the August lows is a definite possibility, now that NDX has retraced more than 2/3rds of its August-October advance. I would however anticipate a rally before the index fell another 100 points, given the oversold condition suggested by the RSI. Stay tuned on that!
NDX could now drift sideways or a bit lower, but perhaps not dramatically so. At some point I anticipate a tradable rally setting up to go into the Fed benevolence (50 basis point rate cut) expected at month end.
Key resistance should be found at 2025-2040. It would take a close above 2040, without a setback the next day, to suggest that there was upside potential to around 2100 again or higher, such as back to the 2140 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near support in the Nasdaq 100 index stock (QQQQ) should be found around the recent 46.5 low. Daily trading volume picked up last week substantially and the OBV (On Balance Volume) line turned up while prices went more or less sideways at least until Friday, but overall offering a minor bullish price/volume divergence this past week.
Major support is suggested by the August low at 44.4, although I think buying interest would be first found in the 46-45.95 area, then stronger interest around 45.0.
The key/pivotal overhead technical resistance is 49.85-50.1. A close above 51.20, provided prices hold up the next day, would suggest upside potential back to the 52.60 to 52.75 area.
RUSSELL 2000 (RUT) DAILY CHART:
I thought last week that major support would be found in the 700 area in the Russell 2000 Index (RUT) and it was, absent a couple of hours that RUT dipped below this level. Where do we go from here? Well, if there's another drop below 700, and the recent 690 low was pierced, good support/buying interest will probably be found again in the 675 to 670 area; as it was back in the June-July period when it made a double bottom.
RUT has touched an oversold reading but it could see a greater oversold a further time or two. I'd favor buying RUT calls at some point for a trade, but am taking a wait and see attitude, namely to see if there's another shot down. Ideally, I'd consider buying RUT calls around 675 if there's a sell off to that area.
Near resistance is at 741-745, then probably at the 55-day average, which is at 768 currently. A close above the average could suggest potential up toward 795-800 again, but I would be ready to exit calls (assuming my 'ideal' purchase price) around 745-750. On the long side I'm a relatively short-term trader in this index.
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.