THE BOTTOM LINE : In a major decline a retracement as scant as 25% of the last major downswing in the S&P 500 (SPX) can suggest that a rally is done for and it's time to sell again. However, I was also seeing some bullish potential in the chart patterns and given how the market is holding up lately, there could be more upside ahead.
The lead SPX index hasn't yet retraced more of its August to November decline that it did coming into this past week but SPX didn't pierce the prior weekly low either. What else can a 'good technician' think but to be impressed that relentless bad news on the economy has NOT beaten stocks down again in a major way. Is there something else going on here?
What that 'something' is I'm not sure. Some savvy investors are seeing that things aren’t as bad as they could be? The market is too 'oversold' to bring in many more sellers? It doesn't take much buying to lift the major market indexes when sellers have unloaded most or much of what they want to around current levels. It may take higher prices to induce more selling.
My market 'sentiment' indicator is showing an upturn in bullishness as more calls are getting bought in individual equities relative to puts; most put 'hedges' may have been done already by those wanting to hold stock AND have some downside protection. I like to see extreme bearishness continue to hold much in the way of index calls as a contrarian, which I tend to be. Nevertheless, I see the indexes showing a little bullish 'leg' on the charts.
Upside momentum is enough to have gotten the major indexes above their 21-day moving averages although this can reverse like it did on the last instance of it. I also put some stock in prices being above the down trendline that defines the upper line of the declining wedge patterns. A pattern that's rare but a bullish harbinger when seen in stocks as suggesting potential for further gains after a penetration of the upper trendline.
The fact that Nasdaq is doing better technically may be of some cheer to the beaten down bulls. Continuing rebounds above multimonth down trendlines can be seen effectively in longer-term hourly charts of SPX and in NDX.
In the SPX hourly chart seen below it's a bullish plus to see the last pullback low at support implied by the previously broken up trendline as highlighted by the green up arrow. It's all well and good to have some hope that your stocks might rebound a bit more but, if so, SPX still has a 'moment of truth' ahead with key resistance at 900. Stay tuned on that! It would take a further move higher, to around 960, for SPX to achieve a 'minimal' fibonacci 38% percent retracement of the August-November decline.
On the (close-only) hourly line chart below of the Nasdaq 100 (NDX), support held in the 1100 area on the recent pullback and the Friday close saw NDX pushed above its recently hourly highs and as well, above the hourly down trendline of the past few months.
If prices continue higher, a pivotal overhead resistance is not far overhead at 1185-1192 in NDX. A daily close above 1200, especially one not reversed the next day, would suggest further upside potential such as back to prior (up) swing highs in the 1378-1383 area.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:Key near resistance in the S&P 500 (SPX) remains 900, extending to 915-917 with pivotal resistance at the prior highs in the 1000-1007 area. Showing some resilience like last week, SPX has again managed to close the week above its 21-day moving average.
Key near support remains at the low-800/800 area and next is at the prior 741 low. Major support begins in the 700 area.
As I discuss in my initial 'bottom line' commentary, bullish potential is seen in prices staying above the top of the falling wedge formation; i.e., that upper line of the triangle highlighted on the daily chart below.
We'll see won't we, but I won't be surprised by some further rises in the major indexes, especially since so many expect that the cratering economy must mean ever lower stock prices. Except when it doesn't with some investors buying selectively, anticipating some economic improvement by June-July.
S&P 100 (OEX) INDEX; DAILY CHART
On a long-term weekly chart basis (not shown), the S&P 100 (OEX) like the other major indices, remains at an oversold extreme. OEX's 13-week RSI fell to a new low reading at 21; this past Friday was a slightly lower weekly close. Also given a long-term weekly/monthly chart view there remains potential of a major 2002-2008 double bottom in the 385 area.
Relevant to index option traders and the daily OEX chart below, although there was a lower close on the week, the chart is mixed to having a slight bullish bias near-term. Short-term bullish actuality depends on the index piercing near resistance in the 433 to 450 area. Next resistance is in the 480-483 area, then at 495-500. A move to 455 would retrace 38% and to 485, 50% percent, of the Aug-Nov decline.
Key near support is in the 400 area, with major support beginning in the 360-350 price zone.
SENTIMENT: Relative to my sentiment indicator seen above, the current buoyancy in my call to put (CPRATIO) model injects a cautionary note in banking on much of a move higher, irrespective of the charts suggesting some bullish potential. I would have a more bullish overall view if my sentiment indicator stayed closer to 1 rather than popping back up just because the market hasn't continued to tank.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Key support and resistance areas and levels in the Dow 30 Average (INDU) remain unchanged from last week.
Resistances: in the 8830 area, then at 9000, the 9160 area with major resistance beginning at 9500 and extending to 9615-9630. A move to 9127 would be a fibonacci 38% retracement and back up to the 9600 area (9652) a 50% retracement, of the Aug-Nov downswing.
I'm still long some Dow Index (DJX) calls bought in the 75 area (Dow 7500) and would exit on a current 88ntrade objective. No further trade suggestions. I'd like to have a shot of buying puts on a move up to the 9600 area again; and would have a lot of company in that wish no doubt!
Support is at 8170-8200, then at 7760, with fairly major support at 7450-7500.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite Index (COMP) is showing the potential of breaking out above the upper boundary of the falling price wedge, a pattern having further bullish implications after prices pierce the upper line of the descending triangle. You may notice how Friday's fall seemed to find buying interest on a pullback to support implied by what previously was resistance implied by the down trendline.
COMP finally also managed to pierce and close above its 21-day average; at 1496 currently. Next resistances are in the 1530 area, then 1590-1610, with fairly major resistance at 1770-1785.
Support levels and areas remain mostly unchanged: at 1400, then at 1300, with major support beginning at 1200, extending to 1160.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) is following the same pattern of a potential bullish 'breakout' above resistance implied by its down trendline and 21-day average. A key near resistance, especially on a closing basis, is at 1200; further or next resistance is apparent at 1300, then at 1370-1383, extending on up to 1470.
Two noteworthy retracements: a move in NDX to 1384 represents a 38% retracement of the Aug-Nov decline and to 1497, a 1/2 or 50% recovery of the last big decline. In a major decline, a 50% retracement is a bit of a 'stretch' and unusual.
Technical support remains about the same as discussed last time: at 1090, 1020, with major support beginning at 940 and extending to the 830-800 area. I own some of the NDX tracking stock bought on the NDX dip to near 1000 (QQQQ to 25) and is a trade where I'm unconcerned with call premium erosion occurring in a sideways drift; but without the leverage of options of course!
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 QQQQ tracking stock cleared near resistance at its 21-day moving average. Further overhead resistance is in the 29-29.4 area, then at 32 and finally at a pivotal level at 34 as the last significant rally high.
Technical support is at 26.8, next at 25 and lastly in the 24 area.
I'd continue to say that a close above 30 not reversed the next day, is bullish for a move to 32.
RUSSELL 2000 (RUT) DAILY CHART:
The chart picture for the Russell 2000 (RUT) is unchanged as RUT remains within a bearish downtrend channel, with key overhead resistance implied by the upper channel line at 487 currently. Next resistance then is at the 55-day average, currently at 529.
Support is at 416, then at 375-370, then at 350.
The low and mid-cap stocks, as a 'size' sector has fallen out of favor as the individual investor has become an endangered species. RUT may be a lagging index for some time to come as RUT stocks lag in institutional 'bottom fishing' interest mostly.
1. Technical support or areas of likely buying interest that are highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by red down arrows.
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.