THE BOTTOM LINE:
As discussed last week, I'm focused on whether the current recovery rally hits the 'fibonacci' 38, 50 or 62 (or 66) percent retracement levels in the major indexes. My expectations were that the S&P and Dow indexes especially would at least retrace a 'minimal' 38 percent of the August-October decline.
Looking for at least a 38% retracement potential was suggested by the deeply oversold condition according to the RSI indicators AND the extreme bearish sentiment that built up from 10/9 to 10/24.
The extremely oversold Dow 30 (INDU) is now the first and sole (to date) major index to recover at least 38% of its August-October downswing as measured from intraday top to intraday low. By way of comparison, the Nasdaq Composite (COMP) has so far retraced 25% of its Aug to October decline.
You know how in news reports of serious crimes there might be a report that someone is a "person of interest"? That in a way is how I feel about 'fibonacci' percentage retracements. Whether prices make it TO, or BEYOND the 'minimal' 38% retracement, the 'common/normal' 50% retracement or the more extreme 62-66% retracement levels, is a matter of definite trading interest. This, in terms of providing a sense of how weak, average or strong is a counter-trend retracement move.
In a pronounced bear market trend, the major market indexes or a particular stock will often see only a weak recovery type move, and that rebound often doesn't carry beyond a third to around 38 percent of the prior major downswing. If a rebound doesn't exceed 38 percent, the dominant trend remains quite bearish.
If a retracement move equals or comes close to a one-half 50% retracement, such a move is showing a bit more relative strength. It may also suggest that the index or stock got VERY oversold and the larger snap back rally is what it takes to 'throw off' the oversold extreme before the bear trend resumes. A recovery move equal to half of the prior decline, puts me on alert to exit calls and look again at the potential in puts.
A recovery rally equal to 62 to 66 percent of the prior decline can suggests not only that the recovery move is regaining some equilibrium after a decline that was way overdone so to speak AND to be on alert for a resumption of the prior decline, BUT ALSO to be aware of the possibility and potential for a round-trip 100% retracement back to a prior top. This might be the prior all-time high or only the top of the last down 'leg'.
I've again this week noted the common fib retracement levels as 'resistance'. They are not however potential resistance levels in the more precise way that a prior prominent high or a 'line' or cluster of prior highs may prove to be. Retracement levels, if they act as a form of resistance, are more approximate. A retracement in an index or stock of approximately half of its previous decline is getting into an area where selling interest may naturally tend to pick up; and buying interest starts to wane as bargain hunting tends to slack off.
If (instead) buying interest picks up after an index has retraced 38 percent of its prior decline, it provides an implied next upside objective equal to a price approximating one-half of the prior decline. If the recovery rally goes beyond the 50% retracement level, I take as a next potential target a move equal to a fibonacci 61.8 (rounded to 62) percent or a 'little bit more', which often works out to a 66% retracement.
Following this progression, a retracement of MORE THAN 2/3rds of a prior decline suggests the real possibility that the recovery move is going to re-test the area of its prior highs or a 100 percent retracement. This is how double tops come about.
These guidelines don't of course always work out precisely or even close to it, but they do often enough to have made fib retracements a useful guideline in my trading considerations.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart has had a decent trading bounce off its recent lows and has closed above its 21-day moving average, which is a minor bullish positive. SPX has also now throw off its oversold condition seen when a bullish price/RSI divergence set up.
The key near-term question is whether SPX stalls at resistance at 985 as noted on the daily chart below. If the index can churn 985, next resistance is not too far overhead, at 1000-1020. Next resistance is then assumed for 1044, the top of a 3-day rally high into mid-October.
Initial support is in the 925 area, then around 850.
I'll be evaluating buying puts should SPX make it into the 1050 to 1075 price zone. Currently, I'd be surprised if the index could get back to its 'breakdown' point at 1100.
S&P 100 (OEX) INDEX; DAILY CHART:
The chart pattern for the S&P 100 (OEX) is similar to that of the 500, with the key question as to whether OEX may stall around Friday's high. If the rally continues and nothing raises hopes like interest rate cuts, next resistance is at 480, then at 495, extending to the 500-505 area.
Heavier selling interest may come in on a climb above 500, particularly starting around 520-525. My expectation is that OEX could get back to the 500 area, but not close above it for more than a day. I stand corrected if the index not only makes that climb but keeps going.
The recent strong rebound in bullish sentiment as noted on the chart above, looks like too much too soon and makes me think that the recent rally is not going to be a sustained one, at least not above 500. Stay tuned on that.
DOW 30 (INDU) AVERAGE; DAILY CHART:
An oversold Dow 30 Average (INDU) has managed to climb back to the first fibonacci retracement level at 38 percent noted below at 9375. INDU's recent rebound has throw off its oversold condition at least on a daily chart basis; not yet on a longer term weekly chart basis.
The key or pivotal area or resistance next lies in the 9795 to 9875 area. 10000 if approached or reached, is going to offer intense media interest; I doubt that INDU will climb above 10000.
Initial support is noted below 9000, which had been resistance. I didn't mark 8500 support, but that's a key level; 8135 should offer solid technical support and is noted per the lowermost green up arrow.
I'd rather sell an extension of this rally than buy into it now. I liked calls when the Dow bottomed around 8200 as was apparent on the hourly chart (not shown) but when INDU reached the 9400 area and a fibonacci 38 percent retracement it also hit my profit objective.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) has had a more anemic rally than the S&P, but it also had resisted selling off as hope sprang eternal for the tech sectors. Initial resistance is 1770. Next is resistance implied by the 38% retracement at 1867; call it resistance at 1867-1900 as 1900 is the beginning of the downside price gap and the 'breakdown' point.
Initial COMP support is in the 1650 area, then probably pretty solid chart support at recent 1500 low. I talked about support at 1500 last week and how it looked like the next area to be tested. At this recent low, like the other major indexes, a bullish price/RSI divergence is noted on the respective charts.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart has rebounded to its first technical resistance in the 1350 area. It may churn through this area and hold support at 1300. If NDX works higher, look for pivotal resistance in the 1470 area. I'm interested in put purchases if there's a move into the 1470-1500 price zone.
Initial chart or technical support is in the 1300 area. Next support isn't readily apparent before the 1170 area. Major support in NDX begins around 1000 if we go back to the 2003 lows. (The 2002 bottom came at 780.)
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) rebounded from the 450 area and caught fire on Friday. Its 38 percent retracement, which has been my technical target de jour, lies at 566 and is noted as possible 'resistance' on the RUT daily chart below. The next, even more pivotal resistance for the index is in the 600 area.
Initial support lies at 500, then around 450.
As far as trading thoughts, I'd favor puts if 600 is seen again. If in calls from the dip to the 450 area, a 200 profit objective is what I'd be hoping for and happy to get.
GOOD TRADING SUCCESS!