THE BOTTOM LINE:
Weak rallies tend to retrace from 1/3 to a fibonacci 38%, mid-strength recoveries retrace around one-half and strong recovery moves retrace in the area of 62 to 66% of the prior price swing. I find the 2/3rds retracement to most often be the make or break recovery move; i.e., if the recovery move makes if beyond the 2/3rds mark, the stock or index has a good chance of making a round-trip 100 percent retracement back to the starting point of the decline; or, back to the low in the case of a retracement of an advance.
I turned out to be a good indicator of whether the rally was going to fail or not. When I FINALLY began to assume that the recovery move was going ALL the way, bearish fundamentals be dammed, then the market did finally reverse this past week! This is the way of the market, as it usually confounds the most people for as long as possible.
I've noted before a long-term chart, the multiyear S&P 100 (OEX) weekly, that had a sort of telling pattern: the recent rebound came back up to resistance implied by the previously broken up trendline and then reversed. This is quite the opposite of the S&P 500 (SPX) weekly chart, which remains within its long-term uptrend channel. Take your pick I suppose as to whether you're a bull or bear on the major trend.
There was another very interesting development related to one of the Dow Averages, that is part of the study of Dow Theory. The Dow Transportation Average (TRAN) came roaring back to its prior all-time weekly closing high only to end up forming an apparent major double top as highlighted below. I say 'apparent' as it will only be proven over time whether TRAN won't pierce these prior highs.
But with $133 a barrel oil, or whatever price it gets to next, TRAN seemed likely to start falling again and it did. The resurgence in TRAN, with the Dow 30 Industrials so unlikely to follow along on a move back to the area of ITS prior high, acted as a kind of a 'confirming' general market sell signal.
I noted last week that the market was overbought on a short and intermediate-term basis. What tends to happen in overbought or oversold extremes is that news or backdrop fundamental factors CONTRARY to the most recent trend again starts to affect the major indexes, sometimes with a vengeance.
A question now is whether the market has established the definite high end of trading range and will now work back down to close to, or beyond, the March lows. I'm guessing right now that we will not see anything close to new lows but stay tuned on that! From an index options trading perspective, we don't have to know the answer to such big picture question. How far prices of the individual indexes could fall or not in the next 2-3 weeks is a question I'll look at with the individual stock index charts.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
Obviously, "...an upside penetration of 1435, key near technical resistance..." never occurred in the S&P 500 (SPX) and resistance in this area implied by the 2/3rds or 66% retracement was a key technical factor in understanding the reversal. Some or many, especially those who believe that 'random' news events determine how things play out, will say it was relentlessly increasing oil prices or other bearish economic news that turned the tide. No doubt such events are important, but my take on WHEN bearish news takes precedence is that it does so when certain market cycles run their course.
Another technical pattern seen with this recent reversal, as with many others, is that on the last upswing, the 13-day RSI was not keeping pace, creating a bearish price/RSI divergence. A key thing in trading index options is such predictors, as long entry is most advantageous BEFORE reversals are apparent and well underway.
Near resistance is at prior support at 1384, then at 1403, at the 21-day moving average and next after that at 1422. A close back above 1400, with that area becoming support, would be a bullish plus.
Near support/buying interest is at 1368-1370, then in the 1350 area, extending to the 1335 to 1324 price zone. 1350 would be a 50% retracement of the run up from the March lows; 1327 to 1320 would retrace 62 to 66 percent. A 50% retracement looks one potential downside objective, but not necessarily in a straight line, as SPX is short-term oversold.
S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) Index made a minor double top at its prior 658 high, then reversed lower and took out key near support at its prior 637 low, which now 'becomes' near technical resistance. We could call resistance as 637-645. A close back above the 21-day average, not reversed in the following day or two after that, would keep bullish hopes alive. The chart is bearish in its pattern as it stands now however.
Key technical support looks like it lies at 615 to 610, especially at 610 as the prior downswing low before the most recent run up into the aforementioned double top. I would be surprised if there wasn't a move back down toward the prior 610 low, perhaps to the 600 area as well. Some of this depends on what happens to the big oil stocks, which appear also to have finally begun an 'overdue' correction, as suggested by a pullback from the recent high in the Oil Index (OIX).
A bearish 'signal' would only require a ONE-day reading in the 1.9 area or above. Bear market rallies usually do not produce such 'overbought' bullish extremes and sentiment indicators in a bear market cycle are not as useful as other types of overbought indicators; e.g., RSI.
DOW 30 (INDU) AVERAGE; DAILY CHART:
As is often the case with the Dow 30 (INDU), this average of just 30 stocks, it often produces some of the most obvious technical patterns; e.g., in the recent instance, that of a double top. Several of the recent intraday highs stopped at the 66% retracement level, which often is an indication that a counter-trend intermediate rally has gone as far as it's going to before the primary (down) trend resumes.
On the recent decline support at the prior 12715 swing low was pierced and that level can now be assumed to offer near technical resistance; that and the 21-day average overhead which is at 12860 currently.
I suggested last week that if 12715 was pierced, INDU could fall a further 200-400 points and the average has declined another 236 points so far from that level. Next support is down in the 12270 area. 12100 to 12000 looks like fairly major support in the period ahead; e.g., the next 2-3 weeks.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index reversed from key technical resistance at the 66% level and the index has fallen back to near support at 2429. The 2352-2387 'gap' area, as highlighted on the COMP daily chart below, is a key next support, with fairly major support coming in at 2300.
I've also noted immediate overhead resistance at the 21-day average, which stands at 2468 currently. Significant resistance lies in the 2500 area and it would take a close over 2500, with subsequent support developing in this area after that, to suggest that COMP was regaining its upside momentum.
So far the sell off from recent highs as been fairly minor so the chart remains in a still bullish overall pattern. Technically, it would take a close below 2352 to suggest a shift in momentum from up to down.
NASDAQ 100 (NDX) DAILY CHART:
I wrote last week that, while I was beginning to doubt that the Nasdaq 100 (NDX) index was going to reverse lower, it would be normal for a setback to occur after the index had retraced 2/3rds of the entire decline from October into March; especially so given the overbought extreme seen with the 13-day RSI. I couldn't say that I had a strong conviction that there was finally going to be much of a pullback, but the increasing probabilities that there would a correction, held true.
The chart remains bullish in its pattern if NDX can hold the 1950 area, which would make for a fairly shallow correction. Near resistance is assumed now to come in around 1974, at the 21-day moving average. Next resistance is at 2000, extending up to 2015. (Note: a move up to the 2000 area, followed by a decline to below 1950 would set up a head & shoulders top.)
Near support is in the 1950 area, with next support in the 1913 area, extending down to 1887. Fairly major support/buying interest should develop if there was an eventual decline to the prior (upside) gap area, at 1868 down to 1850.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) finally reversed after retracing fully 2/3rds of the entire decline from the October high, which was a very strong rebound. The decline so far hasn't damaged the overall bullish chart pattern, especially if the Q's can hold the 48 area. Next support below 48 is not seen until around 46 to 45.7.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) was consistent with SPX and COMP in retracing 66% of its last major downswing and then hitting significant selling. Key resistance comes in around 747 and key support at 707, making the numbers sound like two Boeing airplane models.
I don't have a strong feeling about what comes next in RUT looking at the daily chart, but examining the hourly price pattern (hourly chart, not shown) over recent weeks, it looks like there could be lower prices ahead, especially if there's a decline below 715 next. Support should be found in the 700 area, then at 685.
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.