THE BOTTOM LINE:
The other 'usual' technical indicators such as how oversold the indexes were even a week ago, plus high bearish sentiment (I couldn't get Friday's call/put volume numbers from the CBOE as their web site was down), would normally come ahead of at least a tradable rally. Did I say 'NORMAL'? This action we've been seeing IS normal for the 2nd phase of a bear market decline: PANIC SELLING. You just don't see these big bear waterfall declines all that often however. The bear is fierce when charging!
I noted in my Trader's Corner article this past week, which slipped past my usual mid-week Wednesday write, to appear in the OI Daily on Thursday (1/17) some historical stats relating to the 'December Low' indicator, which is when the market in Jan-Mch takes out the December low. The results after this triggering event have been:
Although in 13 of the 27 occurrences where the December low was pierced since 1952 gains were seen for the rest of the year, in all but one of these instances since 1952 there was an ADDED 10.1% decline on average in terms of the Dow, before a final bottom was reached. (Only 3 significant drops occurred when Decembers low was NOT pierced in Jan-Mch; i.e., 1974, 1981, and 1987.)
Hey, we've almost seen that 10% further average drop already!
Friday's close in the Dow was 12099 and the December closing low was 13167, so INDU has already fallen an additional 1068 points or 8 percent. If the Dow falls another 262 points to a closing low at 11837, then it will already have equaled the average historical decline. Of course some of those declines were more, some less. This is one way of looking at the downside potential.
There's another way also to figure downside potential. Now that the SPX, OEX and COMP have fallen below their long-term uptrends, there is the possibility that ultimate downside objectives are to retests of 1219 in SPX (Fri close: 1325), 559 in OEX (Fri close: 620), and 2013 in COMP (Fri close: 2340). What I'm pointing to is the lows of June-July 2006. The Russell 2000 (RUT) this past week already fell back to its July '06 low at 669 and managed to hold above this prior bottom with its 673 weekly close.
As I said, both the Dow and the Nasdaq 100 (NDX) are presenting somewhat different pictures than the other major indexes in terms of not yet having had downside penetrations of their long-term up trendlines, per the charts below.
INDU may find support around lows seen on Friday, which was also the area of a cluster of lows back in March; if however the Average starts falling below 12070 in the coming week and the Dow ends up well under its weekly up trendline, this could be the signal that its heading for a re-test of ITS July '06 low around 10683.
NDX is a special case as it led on the last big market advance and has held up the best in terms of how far its fallen relative to the low end of its broad uptrend channel as outlined below. The Index has not pierced its last downswing low yet either at 1805. The Nas 100 could fall as far as to the 1700 area (not farther) and still maintain its long-term uptrend; NDX Fri close: 1844.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
If I thought the S&P 500 (SPX) was oversold last week, it's recent Friday low was fully 7 and a half percent below its 21-day moving average, which hasn't been seen since the lows of July '02 and at a slightly lower low made in October '02. This is bear market stuff for sure, if you have to so back to big bear bottom of 2002 to see this kind of extension on the downside.
If I thought a rally was due last week, its OVERDUE in this coming week.
Next support is probably 1300. For an estimate of potential major support, we need to look back to the June-July '06 bottom where buying interest developed in the 1235-1220 area. SPX will turn around from wherever selling dries up and some buyers step in. I can better estimate time, rather than price, as I believe an oversold rally should develop soon.
Near resistance looks like 1370, with pivotal resistance in the area of the 21-day average currently at 1428.
S&P 100 (OEX) INDEX; DAILY CHART:
As with big brother S&P 500, the S&P 100 (OEX) Index is equally as far extended on the downside at its Friday low.
Near resistance: 640, with key resistance coming at 668. OEX looks to have potential for a rebound finally and soon. I may have said that last week and been WRONG! Bear market waterfall type declines tend to go further than we expect, or at least me, but the law of averages does catch up sooner or later. I'd like to see traders with substantial profits in puts get to keep most of the loot. When shorts start covering, prices could snap back quickly and you know how puts can get marked down faster than a speeding bullet!
Support can be anticipated around 600. Major support is down in the 565-560 area.
Bearish sentiment has finally taken over so to speak and there have now been multiple days in a compact period when my call/put indicator seen above has fallen into 'overbought-extreme bearishness' territory. NOTE: the 'CPRATIO' chart above does NOT reflect Friday, as I didn't get my usual daily stats e-mail from the CBOE and their web site has been out of commission for a couple of days now. (If I wasn't in a remote place this weekend I could have gotten the Journal today and presumably gotten Friday's CBOE total equities call and put volumes.)
Anyway the point to make here is that this build up in bearish sentiment has been of the type and duration that suggests good potential for an oversold rebound soon. The timing of this can be a bit tricky of course as I thought we were close to that point last week to the extent that I was thinking of covering puts. Now I'm not only REALLY thinking about it but got out of most of the index options I had by Friday.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) as I noted in my initial ('bottom line') comments regarding INDU weekly chart considerations, could dig in around recent lows, which is nearing an even-1000 point as the average gets (got) close to 12000.
Over the weekend, some investors will have time to think about getting the HECK out of some more of their stocks in a continuation of the panic type selling we've been seeing. We sure could see a further dip on Monday but I think the Dow could make a stand around 12000; this was also the area where the March bottom formed (not shown below on the daily chart, but seen above on the Weekly Dow chart).
Near resistance is at 12400, then in the 12600 to 12700 area. 12929 is the pivotal resistance implied by the 21-day moving average. Trade above the average tends to present a bullish near to intermediate-term picture; trade below the average suggests that downside momentum is predominating.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index at recent lows has reached finally the low end of downtrend line on the daily chart which could suggest that the index has reached minor technical support or the decline will slow down some. 2300 should be a 'natural' support area if prices keep falling.
Recent lows are not far from where prices bottomed in March, so COMP may see some buying interest surface again. Major support, as suggested by where the last big bottom was made in July '06 is a lot lower, in the 2025-2015 area. Not very helpful for trying to figure where a rebound may develop from near term.
Near resistance is highlighted on the chart at the prior low at 2387. I would say 2387-2400 is key near resistance. Next resistance is 2500, then around 2550.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) Index keeps sliding with all the rest, but unlike the Composite, it has not re-tested or pierced its August intraday low at 1805. My guess is that it may not get quite that low either before a rally develops.
Certainly if the Nas 100 dips to the low-1800 area and buyers step in to purchase key big-cap Nasdaq stocks, there will be scramble of short-covering that could lift NDX such as back up to the 1950 area or a bit higher.
1900 is near resistance, then 1950, with pivotal resistance at 2000.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
As with the underlying NDX index, key support in the tracking stock (QQQQ) is at 44.4 at its August low. As with NDX the Q's may not get that low, it being too 'obvious' a target and what too many might be waiting for to cover shorts. Stay tuned on that!
Near resistance is at 46.15 to 46.35, then around 47.75-48.00, with pivotal resistance in and just over the 49 level.
A lot of volume has come in on this recent decline and enough 'capitulation' may have occurred to set up some upside potential as there won't be so much of an overhanging supply or stock for sale at least back up to around 49.
RUSSELL 2000 (RUT) DAILY CHART:
Well, I'll be darned, the Russell 2000 Index (RUT) has gotten all the way back to its next major milestone low of July 2006. And RUT has finally gotten 'fully' oversold, which it doesn't tend to do all that often. It can get more oversold of course. Price is the key, more than any indicator. If some bargain hunting buying surfaces around 670, then the index could rebound back to the 720 area or to even more pivotal resistance around 740.
Next major support comes in around 615.
Speaking of 'oversold', RUT hasn't approached this level of oversold on a 13-week basis (not shown) since its 2001-2002 major bottoms. This reinforces some likelihood that RUT could stop falling here and rebound a bit.
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.