THE BOTTOM LINE:
Congratulations if you used technical/chart analysis to short the S&P, especially if long puts near resistance! The strategy of put entry at or near what the charts are showing as a repeated/reoccurring resistance is a good one, because you have an obvious risk point; i.e., an exit points can be set just above that line of resistance.
The Nasdaq, both in the Composite (COMP) and the 100 (NDX) didn't form as broad a potential top as the S&P but it hit roughly the same highs over 5-6 trading sessions, was at my upper envelope 'resistance' lines (seen on the charts below) and reached 'overbought' RSI readings by 8/14. The only thing that I didn't see build up to typical extremes at that time was bullish sentiment. But, it's a bear, not bull, market so I've gone back to the drawing board and revised what I consider to be an 'overbought bullish-sentiment' extreme in a bear market cycle; this analysis appears after my OEX comments below.
My goal has always been that others who read my work use technical analysis effectively with each and every trading opportunity. No doubt the qualifier 'every' is unrealistic but a track record can get better and better by learning from every big opportunity that was not exploited.
In terms of my key market timing indicators, only 1 (volume contraction) of my 3 are at or near the type extremes I associate with high-potential bottoms. I think that we'll see the major indexes with such oversold extremes and with greater bearish sentiment than exists currently. The fact that bearishness hasn't built up to such extremes suggest that the market has further to go on downside. Given the short-term oversold condition however, I'd look for a bounce first.
FUNDAMENTAL MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I thought last week that the S&P 500 (SPX) would stay in trading range or sideways trend, between 1300 on the upside and 1260 on the downside. However, once support at 1260 was penetrated and decisively at that, a further sharp sell off, 40 points in this case, wasn't surprising.
I've highlighted on the SPX daily chart below support now in the 1220 to 1234 range, with major support at 1200. The place to have bought puts was on the repeated rallies to the 1300 area, not on the plunge through 1260 as the put premiums, as always, inflated faster than airbags!
First anticipated technical resistance is at 1260, at the recent 'breakdown' point (support, once broken, 'becoming' resistance later on) and above this level resistance should lie in 1280 area; major resistance begins at 1300.
I have no trading suggestions. While a bottom may be in place already and there's no breakdown below long-term support at 1200, I don't see this as the time to bet on the upside, as rallies may be short-lived. On the other hand downside may be limited, without even a re-test of 1200 and more chopping around. The chart most suggests a trading range market still, only now between the low-1200 area and 1300 on the upside.
S&P 100 (OEX) INDEX; DAILY CHART:
The S&P 100 (OEX) held up bit better on the sell off compared to the larger 500 Index. I've noted new near-term resistance at 580, or at prior support, with major resistance still beginning at 600 still.
OEX may extend its trading range somewhat on the downside, to 560 or a bit lower, especially if the Index re-tested 550, its prior intraday low for this move. However, 567 still looks like strong support on a daily and weekly closing basis.
I wrote last week: "Sooner or later the odds favor a breakout above or below this congestion or this trading range market." and "Seems that support in the 580 area could be re-tested again." I thought that 580 would see stronger support than it did once more bearish news came into play. Given the nature of trends, you know, 'a trend in motion tends to stay in motion', I suppose it was not surprising that further economic negatives have became apparent.
No new trading suggestions. If you were in puts with some profit, it seems prudent to exit on a close back above 580 in the coming week. If you bought puts on the plunge through 580, profits may prove elusive; a break-even money stop is attractive in this situation.
Given the bear market backdrop, BULLISH sentiment in recent months has not built up to anywhere near the extremes associated with a TOP in the past. I'm reminded now that in a bear market cycle, readings at or above 1.7 can suggest a close by top, per the revised chart markings above; readings at 2.0 or above being bearish in the EXTREME, as more commonly seen in a bull cycle or trend.
Using THIS 'scale' of overbought readings, I'd note that the last bearish call/put reading seen above occurred on 8/5, four trading days before the last top, within my expectations of a top occurring within 1 to 5 trading days AFTER sentiment extremes; especially so if other price and indicator readings are consistent with this interpretations. We'll see how this revision of 'overbought' works going forward.
DOW 30 (INDU) AVERAGE; DAILY CHART
The trading range apparent in the Dow 30 (INDU) before this past week is basically unchanged at approximately 11730 on the upside and in the 11100 area on the downside. The difference now is that the prior late-July intraday lows at 11125 have been re-tested this past week and, while exceeded somewhat (to an intraday low at 11037), this area has held on a Closing basis initially.
Near resistance on the INDU daily chart below is indicated at the 21-day average, at 11510 currently. Resistance implied by the top end of the multimonth trading range is at 11730 to around 11860. Near support is at 11125-11037, with major support still suggested as being in the 10800 area.
The Dow can slip further and re-test longer-range support in the 10800 region of course, but this outcome can't be projected in terms of the daily charts. Many of the 30 Dow stocks are quite oversold on a long-term basis; while a re-test of the 10800 area could happen, next major support isn't much lower, at 10700. Should there be a weekly close below 10700, a next predicted major support is down at 10200-10000.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Major support begins at 2225 and extends down to the double bottom low in the 2165 area. Near resistance now looks to be at 2285, with pivotal resistance at 2350 at the prior 'breakdown' point.
On a short-term (2-3 day) basis, COMP is probably too oversold to fall much further as is apparent in the short-covering effect of the intraday rebound from Friday's low. Past the immediate period ahead, the Index could fall lower than last week of course but I don't look for any significant new down 'leg' to develop; e.g., back to the 2000-1900 area. At most I think COMP could retest the March 2155 low.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 Index (NDX) has turned bearish in its intermediate-term pattern given last week's break below the cluster of lows seen in July. I've highlighted near support this week at 1750, with major support probably coming in at the March lows in the 1670-1680 area. Does the bearish action of last week mean that NDX will retest its March lows? Maybe. For now, I anticipate some attempt to rally and work off an extreme short-term oversold condition. If the slide starts right up again, well that's another story.
Near resistance is in the 1800-1805 area, with a next key resistance at 1873-1875, with an even more pivotal resistance then coming in at 1900 since a close over 1900 not reversed the next day, would suggest to me that the chart pattern had reversed again to potentially bullish. Absent that, look for NDX having trouble mounting a sustained rally.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
A 'minor' revision in near support (not!) as it moves this week nearly 46 in the Nasdaq 100 tracking stock (QQQQ) down to the 43.0 area. It appears that rallies on LOW volume is bearish after all, which was the axiom in the past about most markets. Volume really jumped on the sharp sell off of last week, so it also remains true that volume expands mostly (or only) in the direction of the dominant trend.
While some buying interest, at least on a short-covering basis, developed in the 43 area, major support is down closer to 41. Near resistance is at 45-45.25, next at 46 and then at pivotal resistance at 46.6, at the level of the current 21-day moving average.
I suggested last week that I'd be a buyer of the Q's if they fell back to 44. Better to have guessed at 43 as a possible support, but any stock bought in the 44 to 43 area zone, should be protected by a exiting (sell) stop at 42.50, looking for a rebound to the 46 area.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) Index is holding up pretty well relative to the rest of the market. Its ability to stay above a key chart support at 700 should be encouraging to the bulls. RUT's Friday close was above the pivotal 55-day average at 712; I take this average to also be somewhat pivotal. A close below the 55-day average or to below 700 would begin to suggest a tip in momentum to lower. If so, RUT would no longer appear to be the exception to the current rout in stocks.
I noted last time that "...puts are the tempting play if I was to trade RUT options, looking for a retest of the 700 area again at a minimum." 700 is an important technical area, with next support beginning at 680 and extending down to major support around 650.
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.