THE BOTTOM LINE:
Contrary to my expectations, sellers not only pulled the major indexes down to new lows for the current move, but they also took the S&P 500 and 100 to below their 2002 lows. This hasn't yet occurred in the Dow, the Nasdaq Composite, Nas 100 and the Russell 2000; time to look at the monthly charts for some long-term perspective.
I don't usually look at the monthly charts, but when I want to take a long look back on relatively small charts that show up on your screen, they are useful. Useful to in terms of seeing just how oversold this market is relative to that prior major market bottom. It may also stand to reason that if this recession is going to be much worst than the last one, can we simply HOLD the last recessionary market lows?
As I pointed out in my Thursday's (11/20) Trader's Corner article and so easy to find now on our new re-designed web site that I will omit the link to it here, we have to go all the way back to the '73-'74 bear market to see a loss comparable to our current situation. In the 70's period, SPX sold off 47 percent from its highs before it reached bottom.
Compared to the Thursday low, the S&P 500 (SPX) was off 52.5 percent relative to its October high of last year. If we compare levels of 'oversold' to the '73-'74 period in terms of the 13-month Relative Strength Index (RSI) which you'll see next, SPX then got to 17.4 on the monthly RSI. Assuming this month's close is at or below this past week's close, the monthly RSI will at least be at 18.7. (Indicator readings are usually AS OF the close of the day, week or month and we got 4 trading days before we see how Nov. winds up.)
You'll see on my first chart the slippage below those prior lows. The 2002 weekly close in SPX however was equal to this past week (800.6 then versus 800.03 on Fri.); the prior low monthly close was 815 and of course we don't yet know where November will close. There is some potential yet for this market to form an approximate double bottom. Traders are now getting VERY bearish, but the charts don't yet confirm that the major indexes will go a lot lower or have a new down leg, especially being that they are so oversold.
You may recall that I thought we might be in a 800 to 1000 trading range in the lead SPX index. Stay tuned on that! No doubt the recession is getting quite bad, but the hope for some new directions was seen in Friday's rally on the strength of who the new Treasury Secretary will be.
Taking a look at the Dow 30 (INDU) long-term monthly chart for another comparison to the 2002-2003 bottom, INDU is so far holding about its prior lows. We could of course test the 7200-7400 area, even 7000, but I don't see a meltdown below that. It would be contrary to my experience to see a major new down leg given how oversold this market is, as was the case in the analogous 1973-1974 bear market, which was also very severe as noted.
One more long-term chart look back in the Nasdaq 100 (NDX) monthly chart. Does the 1000 area get tested again, even 800? A possible test of 1000 is not far away. 800? I lean to the view that that there will NOT be a decisive downside penetration of 1000 in NDX in the near to intermediate-term; i.e., the next 2-3 days to 2-3 weeks.
MAJOR STOCK INDEX TECHNICAL COMMENTARIESS&P 500 (SPX); DAILY CHART:
Use of an internal down trendline (one connecting the most number of lows, the S&P 500 (SPX) is tracking down along that line. This suggests possible near support around 737; next support is at 700.
The chart continues bearish of course. What would turn the chart around a little would a move above 900 resistance. 860 is resistance ahead of 900.
As I noted last week: "Selling rallies is obviously still working..."; I didn't think however that there was huge downside potential left. WRONG! There was enough more to hold on to puts into this past week, especially into Thursday. Does SPX fall to 700 next? Good question but my crystal ball is cloudy on that prospect.
A bullish (chart) pattern possibility is still seen in the falling wedge formation which can suggest potential for an upside breakout move ahead, especially as prices near the apex of that falling wedge-type triangle. I'm not suggesting we would see a major turnaround, just potential ahead for a trading rebound 'signaled' by SPX piercing the upper trendline.
S&P 100 (OEX) INDEX; DAILY CHART
What keeps me off the short side overly much at this point is suggested by the extreme bearishness suggested by my call/put indicator as seen in conjunction with the S&P 100 (OEX) daily chart below; more on this below the chart.
First, I'd note that the OEX is declining along that same type internal trendline seen with the SPX chart. If OEX will continue to find support near this line, 350 is the next area of technical support. If the external trendline (connecting the lowest lows) comes into play, next potential support is closer to 300 in OEX.
Immediate resistance is at 400, then 420 and next at 440-445, which is the pivotal level to watch in terms of a potential (bullish) upside chart breakout.
As I noted also in my Thursday Trader's Corner piece, going back to the 2002 bottom in terms of how extreme bearish sentiment got then (not shown on chart), my call to put daily volume ratio (CPRATIO) indicator, on a 5-day moving average basis, got to a low then of .93, versus the close on Friday where it stood at .98.
Bearishness is building up substantially and is now seen even on rally days. Traders in mass have finally gone over to the idea of shorting every rally. Bearish sentiment may get more extreme yet, but my indicator is at least in an area where I'm cautious about over-staying in long puts or being 100% committed to other bearish strategies.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Average (INDU) has support around 7500, then at 7400, with major support closer to 7200. I favored covering Dow Index (DJX)puts when DJX got to 80 and made some profit on a call buy there too on the second dip to this area.
I noted last week that I thought that 'major' support was at 75 in terms of DJX and I covered some remaining DJX puts there and again took a small plunge into Dow Index calls on that dip to just under 7500 in INDU; I had an alert set at 7500. Stay tuned on this trade! I wasn't anticipating a major rebound when I did this trade and would be happy to see 8500 again to exit some or all of the aforementioned calls. I'll also exit if the market starts to look ugly again.
Resistance is at 8500-8580, then in the 8900 area, on up to around 9000.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) has potential technical support in the 1300 area, then at 1200.
Resistance is most apparent around 1500, which extends to 1570. Next major resistance is at 1700.
We see a further development of the falling wedge pattern which I talked about recently as one that often sets up ahead of a rebound in a bearish decline. Stay tuned on this!
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 already; and may see again if there's a move to the 1500 area, followed by another decline back toward 1300 for example.
NASDAQ 100 (NDX) DAILY CHART:
The bullish falling wedge pattern with its potential for a rally ahead at some point is duplicated in the Nasdaq 100 (NDX) chart. I don't want to read too much into this, but am struck by the pattern. In the past the same pattern has suggested winding up some put positions at a minimum and saved some profits.
Technical resistance is seen at 1180, then around 1240, with fairly major resistance on an approach back to the prior (up) swing high in the 1380 area.
Support/buying interest may develop on any further decline to the low-1000 area; next 'support' looks like it could come in around 960-950, with major support suggested at the 2002 bottom in the low-800 area as seen in the monthly NDX chart shown above.
I wanted to buy some NDX calls on a decline in the Index to 1000, but my entry price on some at the money calls was too low to get done. I liked the risk to reward; e.g., buy at 1000, exit on a fall below 970, looking for a rebound to 1170. I did cover some remaining shorts in QQQQ however as it got to 25 which triggered a buy at market, also putting me net long a little. Hey, I'm often early to get in and somewhat early to get out!
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Near resistance in QQQQ looks like 28 now, down from the 31 area where I projected it last week. Pivotal resistance now looks to be in the 30 area.
Technical support is apparent once again at the lower trendline, at 25. Next support I've projected for the 23.5 area.
A close above 30, not reversed the next day would be bullish.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) remains bearish in its pattern but is kind of an extreme example now of a falling wedge type pattern. Maybe its been 'overdone' on the downside! Do you think?
Resistance is in the 450 area, then at 500.
Support is in the 370 area, then what may be fairly major support comes in around 300.
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.