THE BOTTOM LINE:
The Nasdaq indexes continue to show the best relative strength, as the Composite (COMP) and Nas 100 Index (NDX) haven't yet tested their 2008 lows. This contrasts to the S&P and Dow, which are now nearing their 2006 lows. I discuss potential areas of support in the major indexes in my individual commentaries below.
The market is getting quite 'oversold' of course, but this condition doesn't signal a bottom, just the POTENTIAL to rebound substantially on bullishly construed news. I've gone to '21', or the next higher fibonacci number above 13, as the 'length' setting on the daily Relative Strength Index (RSI) indicator I use. While I continue to apply a 13 setting on weekly charts, measuring 'oversold' on a quarter-year basis (13 X 4 = 52), the 21-day RSI becomes more pertinent in such a full-blown bear market.
The S&P 500 (SPX) is finally well under it's 2002-2008 weekly up trendline. Only the Nasdaq is holding above long-term up trendlines still, but COMP is nearing trendline support in the low-2200 area and NDX at 1780. Of the two, a weekly close below 1780 in NDX would be the most significant in suggesting that its long-term tech uptrend was 'broken'.
One of the most telling technical signs that the market was due for a sharp correction, is also one of the oldest bellwethers, that of divergence of the two Dow Averages. The Dow Transportation Average (TRAN) had a very strong rally from January to early-June; so strong of an advance in fact that TRAN traced out a 'parabolic arc' per my first chart below and went to a new ALL-TIME high.
During this TRAN push to a new all-time high, in very divergent action, the Dow 30 Average (INDU), which peaked in mid-May, only retraced a bit more than half of its prior downswing. When advances like TRAN get to the 'straight up' part of such an (parabolic) arc, what we can expect next is a collapse in prices.
As to when there may be an end of this decline and enough of a rebound to cause an exit out of puts, and perhaps a trade in calls, 'sell the rumor, buy the fact' applies. That is, the expectations (the 'rumor') of dismal earnings ahead, can change when some actual Q2 earnings come out that are better than expected, especially in tech.
As far as the S&P, some stocks are getting near to being at bargain basement prices AND the oil stocks look like could be getting near to where there will be buying interest again and that would be a significant market influence; e.g., in term of the CBOE Oil Index (OIX), in the 900 area.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
Wow, a prior low that hasn't been pierced, at least not yet. 1250 may be finally an area of technical support in the S&P 500 (SPX) that could hold up, even if the index just goes more sideways more than up much. Of course, for holders of puts, a sideways move is also bad news. SPX is certainly oversold enough, in terms of the 21-day RSI, to stand its ground and maybe rally some. In terms of the weekly oscillators, the index would have to fall more to equal the extent of the oversold condition seen around mid-January.
Near resistance is at 1290-1292, at 1315, with 'pivotal' resistance, especially on a closing basis, at the 21-day average at 1325.
Near SPX support is at 1258-1260, at the low end of its hourly downtrend channel (not shown), with major support anticipated in the 1223 area, the area of lows seen in June-July of 2006 as noted on the chart.
If there was a decline to the low-1200 area, followed by signs of support and a rebound, it would be prudent to protect profits on puts and maybe risk a little in some light buying of calls, looking for a rebound back to the 1300-1325 area.
S&P 100 (OEX) INDEX; DAILY CHART:
As I noted last week, I didn't think that the S&P 100 (OEX) Index wouldn't get pushed much under 580 and it hasn't so far. I calculate perhaps better technical support closer to 560, an area that is both the low end of its downtrend channel AND an important prior 2006 low.
Near support is at 567, the low end of the current hourly downtrend channel (not shown) and which also happens to be the weekly closing low of mid-July 2006. Next support is anticipated around 560, then at 542-543, the area of a major double bottom low of March and October 2005.
Near resistance is at 587, then at 592. 603 is resistance implied by the 21-day average and there's also resistance in the 608 area.
Before a significant market bottom develops, given the magnitude of this decline and how bearish INVESTOR sentiment is becoming, I would anticipate at least 1-2 days where my CPRATIO line (reflecting TRADER activity in equity options) dips to at or below the line indicating 'oversold/extreme bearishness'.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) appears like it may be headed toward the low end of its (highlighted) downtrend price channel around 10700, which was also an area of support seen at its 2006 bottom. Near support begins around 11080 and extends to 11000.
The average duration of a bear market is 14 months and the market discounts about 6 months ahead and this correction, from the October INDU high, has gone on 9 months. Assuming a recession began December-January and lasts until early Q2 next year (2009), a back of the cocktail napkin calculation is for the bear market lasting into October, which also tends to be a seasonal time for major lows.
Near resistance is at 11400-11435, then in the 11700-11725 area, with pivotal resistance at the 21-day moving average currently intersecting in the 11890 area.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
I suggested last week the Nasdaq Composite (COMP) Index could next test support in the 2261-2266 area and it slide past this level, but by week's end seemed to have been finding support around 2230, even if mostly short-covering type buying ahead of a long holiday weekend. Major support looks like it begins in the 2200 area and extends down to 2155-2169.
COMP finally is getting to an oversold area in terms of the 21-day RSI per the lower portion of the COMP daily chart below. However, on a weekly chart basis, the index is not yet as oversold as it was at the weekly closing low of mid-March (week ending 3/14).
Near resistance is estimated this week at 2295-2305, 2325, 2350, with key technical overhead resistance at 2395, at the current 21-day average. A close above 2350, then above 2395, would reverse short-term downside momentum, assuming this was not just a 1-2 day event.
NASDAQ 100 (NDX) DAILY CHART:
Per my comments of last week, some support/buying interest developed in the 1800 area in the Nasdaq 100 (NDX) Index and the level represents the important 66% retracement level of the mid-March to early-June advance. However, if NDX next closes below 1800, it could signal a next decline back to 1750, then perhaps to a re-test of the March lows in the 1669-1673 area.
I suggested last week to take profits on puts in the 1800 to 1775 area. On Friday NDX got to 1801, so it was a hair's breadth from this objective. I don't think there's any big hurry to exit the short side of this market, but in the 1800 to 1750 area, it gets tempting after how far the decline has carried in the past month.
This market segment has held up relatively well and has the potential for at least a few Q2 earnings positives for some big tech companies. I figure that earnings simply in line with lowered estimates could bring in some short covering and bargain hunting buying in relief that it wasn't worst.
Near resistance is at 1863-1875, next in the 1900 area, then at 1925. A close above 1900 would be a bullish plus, above 1925 more so, assuming the index can thereafter hold mostly above its key 21-day average.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) at its most recent low held minor support implied by the low end of its mid-April chart gap, but the stock may still be headed down to test potential support around 43.7. Next lower support could come at 43.3. Major support is substantially lower still, at 41.
Near resistance is in the 45.7-46 area, then at 46.7, with next key technical resistance at 47.35. As with the major indexes, a close above what I consider as pivotal QQQQ resistance at the 21-day average, would be at least a short-term bullish reversal or break of what has been strong downside momentum.
There's not a lot in the QQQQ volume pattern that's noteworthy, just that volume has tended to expand on the declines, consistent with a downtrend. A break of the prior lows might bring a volume climax. We did see a major such jump in volume at the January-February lows and then again at the March bottom. We haven't yet seen the same kind of volume 'climax' pattern, one that could reinforce the idea of a possible turnaround in the bearish trend.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 Index (RUT) continued its fall along with the other major stock indexes, kind of putting the nail in the coffin to the significant small cap stocks advance dating from the March RUT low.
The index is nearing its prior lows in the 650 to 644 area. Support could develop prior to re-testing those lows of course, such as in the 660 area, but I can't see much incentive for most would be buyers absent some 'proof' of a support floor.
Resistance now comes in at 692, then in the 700 area, and lastly, at 720-724. I can't see any reason for bottom fishing in this index; unlike say the SPX, which is in the area of a major prior low, there is even less to base any such speculation on. Well, there's 'gambling', but its more fun to go to Las Vegas!
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.