THE BOTTOM LINE:
The above is the way it happened. The S&P 500 (SPX) and the Dow 30 (INDU) retraced one-half of the mid-December high to recent low (1/22-1/23) and then started falling again this past week. The S&P 100 (OEX) wasn't so picture perfect in its retracement as it fell shy of 50% before it reversed. In S&P chart analysis, I usually focus on SPX as it sets the pace and tone most often.
Both the Nasdaq Composite (COMP) and Nas 100 (NDX) retraced an almost exact fibonacci 38% retracement and then started falling after that.
I also noted last Saturday that in terms of my indicator, "Sentiment has gotten 'too' bullish in my estimation too soon, so this pattern also fits with high potential for a near-term correction." This was not something that I could quantify exactly, unlike the overbought or oversold extremes, it's just that bullish sentiment ran up substantially on the recent rally.
Many traders appeared (coming into this past week) to be looking for a resumption of the prior bull trend, where I was viewing the rally as an 'oversold' rebound only that was unlikely to go very far (38 to 50 percent retracements) before selling pressures came in again. As I've often said, look at the OVERALL trend and anticipate what would be a counter-trend move. When an upside retracement goes beyond 50%, then beyond 62-66%, anticipate a potential move back to the prior high, but otherwise be ready to sell the 38 and 50 retracement levels.
There are a number of key stocks that are at or near multiyear bottoms and the indexes could hold the area of this past week's lows and NOT re-test prior intraday lows. If these prior lows hold on a retest of them, there's of course potential for double bottoms, which would be a trading opportunity again in calls.
My sentiment indicator registered one 'oversold' extreme this past week, which is somewhat encouraging for an attempt for stocks to dig in here. Not that there need be a lot of buyers rushing in, it's rather a question of whether there is going to be that much more selling with stocks at or near lows going back to early last year.
I do have two charts I suggest watching and you may recall me anticipating some potential for an oversold rebound when INDU and NDX first got to the low end of their long-term weekly chart up trendlines. Well, INDU and NDX are back or close to being at these major support trendlines again as highlighted on my first two charts.
With the Dow, I would anticipate possible further basing action if INDU maintains a weekly close at or above 12613 in the coming week. Working off a close-only weekly LINE chart means waiting for some days to see what's what with its trendline (i.e., seeing where the index is on the Friday close), but the daily INDU chart further on will give additional clues on support, resistance and its intermediate trend.
Use of the NDX weekly BAR chart will pin down more precisely during this coming week when/if the index's long-term up trendline has been pierced; this trendline currently intersects in the 1714 area, which makes the key support area this past week's 1715 low, down to 1711, which was the weekly low for two week's running at the March bottom a year ago.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) hit a wall of selling when it retraced half of its December-January decline, as measured from intraday high to intraday low. Some support has developed on the absence of further heavy selling, in the 1320-1322 area recently. It's a bit of guess to peg lower support but I would anticipate buying interest surfacing around 1300 in SPX. 1270, at the prior low, is a definite area where substantial buying could come in again.
Currently, I don't look for prices to get back into the 1270 area in the days ahead, but the index may drift down there again over the course of this month; if so, I anticipate it more likely to see a gradual decline and drift lower, not the sharp sell seen recently.
Near resistance is in the 1360 area and then at 1400 again. 1426 is resistance implied by it representing a 62% retracement but in the event of a move to this area, SPX could also get up to 1430-1435 before turning down again.
I have no trading suggestions. If in puts, keep them to see how the next 1-2 weeks shape up, but on a close back above the 21-day average, I'd exit at least most of them. In bear markets, in terms of long calls at least, I wait until the index is at a deeply oversold extreme.
S&P 100 (OEX) INDEX; DAILY CHART:
The triggering signal for the S&P 100 (OEX) Index to exit calls and buy puts was based on SPX's upside retracement of 50 percent. You couldn't get the same 'signal' in OEX, but there were 4 days when the index was forming a top in the 645-648 area, a good indication that the index was struggling to go higher and couldn't.
With topping patterns that form a 'line' of resistance, setting an exit point in a put trade just above that 'line' suggests a decent risk to reward potential; e.g., an exiting stop on puts at 650, looking for a minimum downside target back to 620 or lower; recent lows around 612-613 represent a percentage retracement of the last run up that's in the 62-66% zone.
Near resistance is at the 21-day average, which is currently at 633.6 and a close above it, not reversed the next day, would be an initial bullish development; next resistance is in the 648 to 653 area, with further resistance then at 664-668.
As in SPX, I have no specific trade recommendations. I covered puts that I held as the index stabilized at the end of the week and where it didn't look like OEX was going to get pushed much lower, especially as bearish sentiment reached readings suggesting an 'oversold' extreme on at least two days this past week.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU), which as I've found over and over to trade pretty 'technically', reversed after reaching (but didn't hold) a level just over what was a 50 percent retracement. Support now appears to be coming in around recent lows in the 12115 area.
The Dow, like the other indexes, has just barely climbed above its oversold zone, which argues against the potential for another sharp decline. There could be a drift lower of course, one that would test the prior lows in the 11635 area, but my gut instinct suggests to me that there is not going to be such an 'obvious' area to buy Dow Index calls.
Look for support around 12000 if prices continue to drift lower, then at the prior 11635 low, but that's a lot of ground in between those two levels. I see more potential to rally 200-300 points from Friday's (12103) low or from the 12000 area, than to fall the same distance.
Initial resistance on a rebound may be found around 12400 with next resistance at 12705-12765. A close over 12700, not reversed the next day would suggest upside potential to 12960-13000.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
As could be anticipated in an index (or a stock) that was being dumped in droves and fell the furthest relative to other indexes (or others in the same stock sector), the Nasdaq Composite (COMP) Index, only managed a 'minimal' 38% fibonacci retracement before selling resumed again. Now however it looks like enough tech stocks may be in areas of support for COMP to hold 2250-2265 and not necessarily fall back to the 2200 area again in the near-term at least. If COMP did fall to around 2200 again, it could represent a trading opportunity in calls in some of the Nasdaq bellwether stocks (e.g., MSFT, AAPL, maybe INTC) or in the Nasdaq 100 index (NDX).
Near resistance is anticipated in the 2360 area and then around 2405-2420. A close above 2400 that wasn't reversed the next day, with support in the 2400 continuing to be found on dips, would be a bullish pattern and suggest further upside potential to the 2465-2470 area.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) Index came close to forming a double bottom at its recent (1715) intraday low and when looking at the hourly chart (not shown), there is a potential bottoming formation seen in its successively higher relative lows. The question reminds of course as to whether there will be another shot down, such as might set up a double bottom; or, in falling through the prior 1693 intraday low.
If I look at what would constitute an initial upside breakout, a move above 1790-1793 could be suggesting some further rally potential ahead. Conversely, a fall back to the 1700-1693 area looks like a place to cover puts and perhaps do some buying of calls given what I see now as a favorable risk to reward potential; assuming an exiting stop at 1690 and projecting a move back up to 1825. Stay tuned on that.
Near resistance is 1790-1793, then in the 1813-1828 area, with pivotal resistance at 1864-1866. A rally to a close over 1866, that wasn't reversed by the close on the following trading day, would suggest upside potential to 1920.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Resistance in QQQQ is at 45.3, then in the 46.0 area.
Support levels are at 42.75, 42.15, and at 42-41.6.
The Q's look like a buy at some point ahead but perhaps an optimal buy for a trade came already on Thursday's opening dip to the 42.15 area. Right now, the Q's don't look like they are going to sink to 42 again. Stay tuned on this! I'm inclined to buy dips to the 42.0 area if they do materialize, risking to 41.5, with an upside objective to 44.75, even though its possible that the stock might climb to around 46 again.
RUSSELL 2000 (RUT) DAILY CHART:
I thought last week that the Russell 2000 Index (RUT) had potential back up the 742 area, but I was off by a bit. The Index is holding up pretty well, and could get to the 740 area yet.
There's apparent support in the 680-686 area, but main support has to assumed to lie back in the 660-650 area.
My only trade advice is wait to see if RUT again dips to the 680 area again or lower; at that point I would exit any puts on a scale down basis; i.e., some around 680, some more on any dips under 660.
I liked the long side of RUT around 650-660 for a trade, where my exit point was for (at most) a level that would equal a 50% retracement, which it managed to achieve and exceeded a bit. I liked the trade not so much because I had a particular price level in mind to buy, but more because the index finally got 'fully' oversold, which is a dip to below 30 on the 13-day RSI.
I happened to be watching the RSI during the day when RUT was putting in a 'final' low and the RSI got to well under 30 as the indicator is re-computed on each 'last' trade. (Also, the 21-hour RSI was making higher relative highs by 1/23 compared to earlier in the month, which was a bullish divergence from price action, but that's another story!)
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.