THE BOTTOM LINE:
Technical analysis in a panic free fall situation is not going to be as much help as it can be in 9 out of 10 market cycles. Fundamental analysis is not going to help much either as to suggesting where the bottom will come. Panics are too irrational for such analysis as fear, just like greed, isn't at all rational.
In terms of charts and indicators, there are some things that we should look at and there are some things that I would anticipate as to how and where a next bottom might form:
1.) Almost certainly, trader sentiment is going to get MORE bearish than it is
now in terms of call to put readings; i.e., as a ratio of total daily equities
call volume in relation to total daily put volume.
Those holding index puts are also going to want to assess where a next significant bottom might lie although they for will be able to anticipate that rallies are going to be short-lived in this full-blown bear market. The panic phase is not quite the end of major bear markets. After panic comes a sort of surrender or disinterested phase where investors just don't want to hear about stocks, don't want to look at them; don't want to open their 401k statements. We're seeing some of this now.
SHORT SELLING RESTRICTION GOES AWAY
However, this take on it will be a moot point by mid-week. I didn't mention in my Trader's Corner article that the short-sale restriction was due to be lifted on October 18th OR 3 days after the bail-out bill was passed; i.e., the ban should lift Wednesday. I'm assuming here that the relevant SEC language relates to 3 BUSINESS days, but I'm unsure on this point. Anyway, short selling of stocks will be allowed again shortly.
PARABOLIC ARCS THAT GO 'VERTICAL'
ONE MORE CHART OF GENERAL INTEREST
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
I noted in my initial (bottom line) comments above how the 13-day RSI has not yet gotten fully oversold. It's unusual to see this at or near any kind of major bottom, so I assume we're not there yet. Moreover, SPX hasn't yet tested some prior lows such as in the 1060 area. I've highlighted potential support in the 1080 to 1060 zone. It's a best guess of course based on a prior 2004 low as well as what would be a common 62% retracement as shown on the weekly SPX chart that follows.
Near resistance is in the 1155 to 1167 area, then at 1200, resistance implied by the 21-day moving average as of the close on Friday. This average is falling rapidly, so it should be plotted on a daily basis.
SPX WEEKLY CHART
S&P 100 (OEX) INDEX; DAILY CHART
520, where we've seen recent support in the S&P 100 (OEX) is also the closing weekly low seen in 2004 but it remains to be seen if this area will see strong buying interest again. OEX has already retraced a bit more than a fibonacci 62% of its entire advance from 2002 into October of last year as measured from closing low to closing high.
512, at the low end of the downtrend channel I've highlighted on the daily chart below, also represents a 66% retracement of the 2002-2007 run up. Next support below 520 and 512, if those levels give way, should come in at 500. Below 500, next support based on long-term weekly chart (not shown) considerations comes in at 483.
Near resistance is at 545 and above this resistance implied by the 21-day moving average is at 555 currently.
Bullish sentiment as measured and seen by the 'CPRATIO' indicator graph above still is not at the very low extremes that would suggest that the major market indexes are due for a sustained turnaround, although another short-term (e.g., 2-3 days) rally could come at any time. On a short-term basis at least the Nasdaq is oversold, although the S&P is not quite there yet.
DOW 30 (INDU) AVERAGE; DAILY CHART
Once again the Dow 30 Average (INDU) fell from the area of its 21-day moving average, this time by a lot, with the Dow (this past Monday) having its biggest point loss ever. Not that this is so significant since the only meaningful way to measure these things is on a percentage basis, but the media talking heads were putting this out as the big story. It was more or less sideways in a trading range after Monday, with the Dow having a bearish close below this range and with the average ending up near its weekly lows.
Support implied by the low end of the price channel outlined below suggests potential support in the 10200 area. Lower support perhaps then lies around 10150, then at 10000, as noted in the weekly chart.
Again, I'm struck by the fact that due to the zig-zag nature of this decline, the RSI has not fallen to an oversold extreme on a daily chart basis.
As I noted above, the 2005 weekly chart lows suggest potential support in the 10150 area, then at 10000. 10000 is of major significance in terms of this being a prior important low and even more so of its psychological importance; 10000 is the demarcation line between the Dow being a 5-digit number versus a 4-digit one. 10000, if reached, will be a big deal. Holding this level will be major and breaking it of likely great importance in terms of how it could affect more bearishness and attention by the public.
INDU WEEKLY CHART
On a weekly chart basis above, INDU has fallen to the high end of an oversold zone between 30 and 25 in the 13-week RSI; 13 reflects a quarter of year (52/4=13) and the 25 area is what I consider to be a 'fully' oversold extreme. To put the current reading of 28.5 in perspective, the 2001 and 2002 lows (not shown) saw the 13-week RSI reach levels just under 25, at 22 and 23 respectively.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) is bearish like the other major index charts and looks like it may reach 1900 next. Last week I didn't think there would be "a big further decline". Opps, WRONG! Once COMP broke support at 2100 it was downhill from there.
Major chart support could be found again at 1900-1890, at the 2005 lows. The 1750 area is significantly lower potential support implied by the 2004 bottom. We keep reaching further and further back for possible stopping points. COMP is not yet quite fully oversold in terms of the 13-day RSI, in contrast to the weekly oversold condition as will be seen on the weekly chart coming up after the daily.
Resistance is at 2100, then at 2160, at the 21-day average. A close over 2100, not reversed the next day, followed by a close above the moving average for a couple of days running would be bullish in suggesting shifting momentum.
COMP WEEKLY CHART
The Composite is now quite oversold on a 13-week basis and neither of those two prior lows (2004 and 2005) seen above saw an oversold condition quite the equal of this one. Not surprising no doubt if this financial crisis is the worst in decades. Still, if the bailout starts to see even a glimmer of results, the degree of this oversold condition suggests potential for a significant rebound at some point.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100, by its Friday close at 1470, again reached the low end of the currently projected downtrend channel highlighted on the daily chart below. My thought indicated last week on buying NDX calls if the 1600 area was reached fell apart when the extent of the Monday plunge was seen this past week. NDX is now getting near support implied by the prior 2006 low at 1457 (will be seen on the weekly chart). 1400 is another support suggested by the 2005 lows.
Near resistance is at 1600-1605, then at the 21-day average, which is at 1665 currently and is falling rapidly. A close above 1650 would be bullish and appears as a key 'line' of resistance on the hourly chart.
NDX WEEKLY CHART
As noted already, the prior 1457 low seen next on the weekly chart is a next possible near support if the early part of the coming week doesn't bring some stabilization to prices; 1400 is perhaps an even stronger technical support. 1300 is support suggested by the 2004 low.
On another note, a decline to 1345 would represent a fibonacci 62 percent retracement of the 2002-2007 rally and suggest a possible stopping area to this current plunge; NDX has now fallen below its 50% retracement at 1515, but isn't very far below this level so far.
NDX is the most oversold of all the major indexes at this point. Even going back to the 2002 and 2002 lows didn't bring a more oversold condition than this current one in the Nas 100.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
There may be some support at 36 in the Nasdaq 100 tracking stock (QQQQ). The weekly chart points we could also be looking at for potential support are the 2006 low at 35.5, the 2005 bottom at 34.3 and the 32.3 low seen in 2004. Take your pick! There can of course be a turn anywhere in between, but those are the levels to focus in given a further decline by working back on the longer-term weekly chart (not shown here).
I've noted near resistance at 38-38.2 in QQQQ with resistance implied by the 21-day average currently intersecting at 41, with this moving average falling like a stone along with the current price trend.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) finally broke with the rest of the market and I've noted some of the prior lows that require an look back to 2005 and have been noted on the RUT daily chart below as potential support areas; i.e., first at 615, then at 570.
Time for me to stop predicting possible support like I did last week in suggesting that I'd be a buyer of RUT calls on another decline to the 650 area. Fortunately I got scared to the sidelines and held on to some puts. I don't know where this thing is going and I'm just along for any further ride to the downside.
I highlighted resistance in the 690 area but should also note 660 as near resistance. The 720 level is resistance implied by the moving average I use with RUT at a 55-day 'length' setting. I also make use of a longer length setting at 21 for the RSI indicator, which is showing falling momentum of course but at 37 is not yet at the fully oversold reading that has typically occurred at 30 and below.
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.