THE BOTTOM LINE:
On schedule, the market topped out a few days after hitting an overbought-high bullish extreme on my sentiment indicator and within the post 1-5 day window for reversals. Moreover, highs in the major indexes this past Tues-Wed now defines down trendlines and technical resistance; or, helps define where an upside breakout might be seen.
Only the S&P 100 (OEX)and Dow 30 (INDU) retraced even a minimal 38% fibonacci retracement of the last big downswing. OEX hit the retracement within a few points (483 versus 477) and INDU overshot this initial percent retracement a bit, but then hit resistance implied by the aforementioned down trendline.
The recent sell off doesn't necessarily suggest to me that the major indexes will break below their prior lows. From a trading perspective, you need to be nimble on outright buys of calls or puts. It's going to be important to take profits after minimal upside objectives are achieved.
If you bought calls down near the lows and there were signs of bottoming action (e.g., in the 410 area in OEX or around 8175 in INDU) to suggest such a trade, it was important to take profits after rallies got to or near the first key (38%) retracement levels; and/or, after it became clear that the market was hitting trendline resistance. You don't get long to decide on trades.
I suspect we'll see more sideways action, perhaps where prices work back down toward the prior lows. Near-term, after a sharp decline in bullish sentiment (see the OEX chart), the indices may rally some. One chart/technical aspect I'll be watching is whether the major indexes can get back above their 21-day moving averages, such as the Dow almost did on its Friday close.
S&P 500 (SPX); DAILY CHART: The S&P 500 (SPX) chart remains bearish in its pattern as the highs brought more points and better definition to a September-November down trendline, as highlighted on the SPX daily chart below.
I wrote last week that the key resistance would be at between 985 and the 1000-1020 price zone. You may have felt that the 1000 area would be a key area also and it was. So, key initial resistance (at 1000-1020) comes into even better focus. Next resistance is 1044-1050.
Initial support developed in the 900 area; I thought it would be 925, then 850. The 850 area is still important but 900 is a near pivotal support, again proving the relative importance at times of those round-100 levels in SPX.
S&P 100 (OEX) INDEX; DAILY CHART
The chart pattern for the S&P 100 (OEX) remains quite similar to that of the 500 in all its bearish aspects.
Very near-term resistance at 450 is implied by the recently penetrated 21-day moving average. Key trendline and retracement resistance in OEX remains as the 480 area, with next important resistance at 495-505.
OEX broke under what I suggested last week as initial support around 445, but the index managed to hold this level by the end of this past week. Support is at 430, then 410, with fairly major support at 400.
SENTIMENT: Not surprisingly, Friday's rally set up after the oversold-extreme bearishness suggested by the Thursday reading in my call to put volume ratio for CBOE equities' options as seen above. I don't anticipate that the sharp retreat in bullish conviction means that there will be another sustained advance but the 21-day moving average and possibly also, down trendline resistance, could get challenged.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Average (INDU) has recently had a rally failure that's below the prior upswing, keeping its bearish chart pattern intact. Key near resistance now is at 9500 and then in the 9800 to 10000 price zone; I assume that 10000 is going to be very tough resistance for some time.
Near support has to be assumed at the prior low around 8600, with next technical and even more pivotal support at the line of prior lows around 8175.
I noted last week that I'd favor buying puts on a further rally but didn't say where. As far as chart resistance implied by the down trendline, it took until the Tues-Wed highs formed to draw it with some confidence. I suggested already an exit on calls when INDU hit 9400.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) rally failed this past week not far over the prior line or cluster of prior highs at 1782. Key resistance is at 1782-1796; judging by the down trendline, first resistance looks to be in the 1705 near-term. Major resistance begins around 1870 and extends to 1900, the low end of the downside price gap from early-October.
Initial COMP support has moved from the 1650 area to 1600 even. Major support in the Composite begins at 1500-1495.
NASDAQ 100 (NDX) DAILY CHART:
The recent rally in the Nasdaq 100 (NDX) failed very close to prior resistance in the 1380 area as seen on the chart. Tough technical resistance then comes at 1470 area, extending to 1500.
Support was seen on the recent decline to the 1240 area. I've noted next support at 1170, at a cluster of prior hourly and daily lows.
The Nasdaq stocks have fallen out of favor and I'd wait for further basing type action in NDX to initiate bullish trades even for a short-term pop. I favor buying puts if NDX manages to get back up to the 1470 area. Best upside potential I see currently is for the index to retrace around half of its August-October decline or to around 1550-1565.
Worst downside case is significantly lower, even below 1000, based on the long-term chart (not shown) considerations.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near resistance in QQQQ is in the 34 area, with even tougher resistance at 36.0.
Near technical support is at 30.2-30.0, with potentially stronger support at 28.0. Buying the stock in the 28 area, if seen, may be a fairly low risk trade, assuming the use of a stop at 27.0.
Shorting QQQQ at 38 also looks to be a low risk trade assuming a buy stop at 38.6. I'd also note that right now potential to above 36, a 38% retracement of the last major downswing, seems iffy.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart remains bearish. Resistance is apparent in the 550 area, then around 580-585.
Support begins at 470 and extends to the 440 area.
The likely outlook looks to be for a trading range, between 580-600 on the upside at a maximum and 450, perhaps to as low as 400, on the downside.
1. Technical support/areas of likely buying interest are highlighted with green up arrows. 2. Resistance/areas of likely selling interest: red down arrows. [Gray up/down arrows: support/resistance levels that got pierced]
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (the put/call ratio). In my indicator a LOW reading is bearish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
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 favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.