THE BOTTOM LINE:
As I anticipated last week, we got a re-test of the prior lows and the S&P and the Dow held those prior lows either approximately or exactly, setting up possible double bottoms. While sellers may not try to push the major indexes to new lows, it takes real buying to then mount a sustained rally.
All the indexes are still at oversold extremes on a long-term weekly chart basis but there is yet to be successful tests of the 2002 bear market lows, although the S&P 100 (OEX) has come close to its '02 lows at 385. Whether these various lows will be reached is an open question. I've started making a note of these areas (or the top of these price zones) on my daily charts.
In terms of trading, it's possible that basis the lead S&P 500 (SPX) index, we're in a 800/820 to 1000 trading range for awhile. The recession is getting bad no doubt, but there's also hope for change ahead too.
This past week as I wrote in my Thursday Trader's Corner article, I was willing to step up the plate and buy some OEX calls when the index hit the 400 area again and also got into DJX calls when the index again reached 80. The next day (Friday) saw renewed sell pressure and I exited, becoming a short-term trader inadvertently not by intention. Hey, you take what the market gives you, especially in this hyper volatility period!
I mostly am on the sidelines as it's getting tougher to find a compelling trade. I don't assign a high probability yet to a new down leg, nor does it look like we'll see enough volume coming in to push a sustained rally. Selling premium can work but those strategies are not my usual game.
There are two slight bullish chart interpretations. One is that the S&P and Dow are experiencing longer term sideways basing action. The other is that the Nasdaq decline is starting to look overdone and the Composite (COMP) and Nas 100 (NDX) are tracing out bullish falling wedge patterns.
Ever thought about what books you would take to a dessert island if it could only be 1-2 items? I am 'marooned' near my old coastal haunts in California on a consulting project. Since I didn't really know if my stay would be weeks or months, I only took 2 market analysis books: my own (it's a good general technical reference) and Thomas Bulkowski's "Encyclopedia of Chart Patterns". This later allows a good read on the historical tendency for the outcome of wedge type patterns and most every other predictive type chart formation. I'll get into this with the Nasdaq charts.
I anticipate some further attempts to rally given the bearish sentiment extremes seen recently and figure lows may be in place on a short-term basis; but, as noted, I'm not betting on anything much. Too tough to call the trend ahead. Tough market, tough economy!
And, having grown up in Michigan, it's hard to believe how far the mighty auto companies have fallen. They were as short sighted as the banks, but spent longer lacking foresight.
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart continues bearish and this last retreat wasn't even from the down trendline intersecting around 950 and didn't either quite reach near resistance at the 21-day moving average. Near resistance implied by the average is at 925. The most significant area of potential selling interest remains the 1000 area.
Support is in the 850 to 835 zone, then at 820, with longer-term support from the '02 bottom beginning in the 800 area.
No suggestions. Selling rallies is obviously still working but I question still how much downside potential there is. How times have changed, when buying puts for a possible 100 point decline is not something I would be jumping into.
S&P 100 (OEX) INDEX; DAILY CHART
The chart pattern for the S&P 100 (OEX) remains similar to that of the 500 in its bearish aspects. I wrote last week that key resistance should be found around 450. That's still the case, with next resistance in the 480-485 area.
I've pegged initial support at 400 area, extending down to 385. OK, I'd probably bite on another call buy if 385 was seen. Ever the contrarian! It's maybe too easy to just short rallies?
SENTIMENT: sentiment extremes suggested by dips below the 1.1 level of my equities call/put indicator noted per the line above as suggesting an oversold-extreme bearishness market outlook have me at least not shorting this market currently.
It may be just that it's been awhile since I've been trading in a full-blown bear market, but there is this tendency for some quite sharp rebounds once traders get so predominately bearish as suggested by a low CPRATIO reading.
The Dow 30 Average (INDU) found good technical support once INDU got back to the 8000 area a second time, if only on short covering and the lifting of put hedges. However, the sharp rally from intraday lows around 8000 all the way back up to the 8900 area in INDU fell apart on the following day (Friday) this past week. The 21-day average was a key stopper.
Resistance is at 8875, then at 9200. A close above 9200, not reversed (back to the downside) the next day is needed to suggest a chart breakout.
I've noted a 'first' support on the chart below for the 8000 area, but initial support is in the 8200 area. Major support begins at 7500. If 75 was reached in the Dow Index (DJX) it would be a place to take profits on DJX puts; calls bought in that area could have reward potential back up to 80, risking to 73 as an exiting stop.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) rally begin from the area of the lower down trendline at 1429 and was short-lived; good day-trade in calls no doubt. Near resistance is in the 1640 area, then up around the prior 1876 high.
I noted the falling wedge pattern which has often proven to be a bullish chart pattern, suggesting potential for an eventual upside breakout. The 'appearance' of a falling wedge is a downward price trend bounded by two intersecting, down-sloping, trendlines. The history of such patterns in stocks has been for a rise of between 20 and 30 percent once there is a decisive upside penetration of the upper trendline. There should be several alternating 'touches' to each trendline which we have in COMP.
Best COMP support should be found back in the low-1400, although I'd also note potential near support around 1500. Major support begins in the 1250 area.
NASDAQ 100 (NDX) DAILY CHART:
The rising wedge pattern with it's potential for a good-sized rally ahead is duplicated in the Nas 100 (NDX) as noted on the chart below. Chart patterns can 'fail' to lead to the expected outcome of course and the timing of when a rally might develop if it does, can't be closely predicted.
Technical resistance is noted at 1269 at the current (Monday) level of the 21-day average, with next resistance assumed to lie at the prior 1383 high.
Very near support (not noted on the chart) is at 1150, then is noted on the chart at the lower trendline, currently intersecting in the 1100 area. I've gone back to the top end of the 2002-2003 support zone (not shown) to note the start of major long-term support as beginning around 950.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near resistance in QQQQ has moved down to the 31.2 area. Pivotal resistance implied by the prior upswing high is at 34.
Close by technical support begins in the 28.0 area and is assumed to extend to the prior recent low at 27.3 or to 27 even. Major long-term support is some distance lower and begins around 23.5. If a new down leg developed, this would be an initial objective.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) remains bearish in its pattern. I've suggested a possible outline of a current/future downtrend channel with support in the 400 area. Near support is assumed to lie at the recent 433 low, maybe a bit above such as 442.
Near resistance is at 500, in the 530 area and next around 550.
I haven't been wild to trade this index as it bounces back and forth on its overall downward slide, but if I owned them would cover puts (and probably buy some calls) if RUT got down to the 400 area, as from this area if reached, there's potential for a rebound of 125-150 points.
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.