THE BOTTOM LINE:
I've been thinking, without enough conviction to commit much money on this opinion, that the major indexes are in a bottoming process and that they won't see a new down 'leg' near-term. A leg being MORE than a dip; this is the difference between the S&P 500 (SPX) falling to 850 again, versus dropping 50-75 points back to 800-775 where SPX bottomed in 2002-2003. If our, and the world, economy is going into a more severe recession than seen after 9/11, it seems logical we'll re-test (at least) 2002 lows.
From a trading standpoint, my thought has been that we'd get a bounce before any such retest. That pattern occurred in the bottoming process of 2002-2003 when SPX rebounded 150 points on the first dips to its bear market lows. But, again using SPX as an example, such rebounds (2) were from 775-800. If the recession we're galloping into looks worst than then, it seems hard to believe that we won't at least re-test our 2002 lows.
The major market indices were not as oversold THEN, according to oversold/overbought indicators like the Relative Strength Index (RSI) and sentiment didn't get as bearish as it has recently. But, such indicators are only rough measures of the POTENTIAL to rally. Is this all by way of saying, "who the heck knows!"
If recent lows do hold (and the Nas 100/NDX has gone to a slight new low for this move and the major indexes went to NEW WEEKLY closing lows this past week), upside potential is probably for a week rebound only. A typical weak bear market rally would not usually retrace more than 38, or at most, 50 percent of the last downswing. I've noted the 38, 50 and for comparison, the 62 percent retracement levels below to illustrate upside potential.
Last but not least: there's not a lot technically that can suggest if prior major lows WILL get re-tested. I've noted major prior lows on the daily charts. They are not all that far away. There IS the old charting adage that retracements that are greater than 2/3rds or 3/4th's of a prior move will often complete at least a 100% retracement back to major prior lows. If prior lows do get re-tested, I'll be looking at some new trades; e.g., selling puts and buying some more distant calls, especially if sentiment continues to be super bearish.
In this type market, I also find myself drawn to possible trades in individual stock options, rather than just in index options, since at major market bottoms there are stocks that bottom first and outperform on the upside. I'm spending more time that usual looking at a broad array of weekly stock charts.
MARKET NEWS and INFLUENCES:
** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is bearish, but prices haven't yet broken down below the low end of the recent price range, so some upside potential can be assumed to exist (hope springs eternal!), especially given how oversold this market remains. Support has been seen in the 850 area and just a bit under. Major support begins at 800 and extends to 775.
Near resistance is at 985, extending to 1005, at the 21-day moving average. If a rally got going and last week's low was not exceeded, resistance implied by a 38 percent (fibonacci) retracement is at 1020 currently. A close above 1000, a key psychological level, with a subsequent ability to hold this area, should turn traders bullish and lead to follow through buying in the S&P stocks.
S&P 100 (OEX) INDEX; DAILY CHART
The chart pattern suggests that a bottom could be forming, but a close under 400 would make that interpretation look iffy in the big cap S&P 100 (OEX). Besides a continued sideways move with its potential to suggest at least an interim bottom, the most bullish indicator aspect is seen with my 'sentiment' indicator, which has had its THIRD bullish ('oversold') daily extreme since October began.
October tends to be a bearish period also on a seasonal basis, with lots of cross currents. This October is proving true to its pre-Halloween form. This is not to say that there's just some seasonal 'cycle' at play, but there have been many October bottoms made.
Support is noted at 400, then at 385. Near resistance is at 475-480, and then comes in next around 495-505.
DOW 30 (INDU) AVERAGE; DAILY CHART
The Dow 30 Average (INDU) has support in the 8000 area, then at 7500, with key resistance at 9000, then in 9500 area. Where to from here? The chart can be read either as potential bottoming action or a consolidation prior to another downswing that carries to lower lows.
I've been thinking that a rally is due/overdue, but will be watching price action if there is another retreat to the Dow 8000 area. There is a lot of distressed liquidation going with hedge funds and we could still go over another cliff but don't see what near-term news will come that is more bearish than what is already built into the market. I'm talking about economic news of course, not an unexpected political meltdown somewhere or the like.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) chart remains bearish, especially given the decline to a new closing low. I've measured the key retracements based on the low to date, which provides an idea of upside potential for a more sustained rally.
Initial COMP chart resistance is noted at 1700, then at 1770, at the 'line' of recent highs and finally around 1890, as implied by a fibonacci 38 percent retracement. Upside retracement possibilities, especially for a 'minimal' 38 percent rally, will need re-drawing if COMP sinks to a lower low ahead.
I've noted initial support at 1500, down from 1600 last week, but the 1500 level hasn't been tested much yet. Stay tuned on where COMP will finally see buyers rush in, if only for the purposes of short-covering.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bearish and the index could be heading lower again as suggested by technical signs of renewed downside momentum. The RSI is also a 'momentum' type indicator. The dip under 1200 and new low close show a still bearish chart.
The 1200 area is hanging in as potential support but just by a thread. I owned some NDX calls, with a break-even exit point at 1200, but I was gone after a third successive top formed just over 1350. Three strikes and you're out applies!
1352 is noted as a first resistance per the red down arrow below with next resistance noted at the prior 1470 rally high, which also corresponds to resistance implied by a 38 percent retracement; as measured from Friday's low up to the August high. Current retracements assume that this most recent low is not exceeded and measures from that low. Retracement calculations give an ongoing estimate of rebound potential.
Key chart/technical support now looks to be in the 1100 area. If 1100 is pierced, major next support implied by the early-2003 lows (not shown), is in the 960 area. 1000 seems like a 'natural' support but if NDX gets there, traders may try to press it under.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Showing up my fruitless attempt to pick a possible low this past week, the Nas 100 tracking stock (QQQQ) fell below 30. If we go back now to the Q's early-2003 low, potential buying interest lies significantly lower still, in the 23.5 area.
I discussed last week that any long positions should have been jettisoned, at the lowest on a sell stop at 30 even. I thought there might be a rally attempt this past week, such as back up to 36 even, but the 2nd and 3rd days'(Monday and Tuesday) rally attempts that formed intraday highs at 33.5 was the tip off to the still bearish chart pattern for QQQQ.
I've noted first resistance at 33.5. If 28 should turn out to the low for a while and the stock can pierce 33.5 this time, 36 becomes resistance implied by a fibonacci 38 percent retracement.
The 24-23.5 area may be a downside target if a new down leg develops on a decisive downside penetration of 28.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is back down to the low end of its recent range; actually, RUT penetrated its prior 468 low slightly, but overall, buying interest has been coming in at 469-470. I've noted major support in the 400 area.
Resistance begins around 550, and then is noted on the chart at 570. Assuming the recent low is it for a while and that remains to be seen, 576 is resistance implied by a 38 percent retracement from Friday's low relative to the mid-August price peak.
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.