THE BOTTOM LINE:

The major indices have fallen far enough (around 2/3rds of the last run up) and are oversold enough to 'set up' a rally. Longer-term I find the lack of any sizable build up of bearish sentiment to suggest that, after a rally, another downswing would likely follow that WILL put downside concerns or fear into more traders. My assessment is that this correction won't be over with as quickly as we've gotten used to seeing.

Such a view would also fit with what is a more common corrective pattern of an initial decline, a recovery rally, followed by another downswing. Such a second decline, could hold at recent lows (IF these turn out to be the lows for a while) OR go on to test the area where the bearish Wedge pattern began. The levels involved will be highlighted on my charts.

I have often written about and it's not an original or novel idea, that retracements of prior moves (in this case the major 2007-2009 bear market decline) will tend to pause or stop at or near one of the Fibonacci retracement levels. If that retracement is a weak recovery rally, trough to peak levels might only retrace 25 to 38% of the prior decline. If a medium strength rally, expect a 50% retracement and if it is a powerful recovery rally, we often see a 62 to 66% recovery. (If the retracement goes beyond the 2-3rds/66% area, the odds of a 'round trip' recovery of 100% of the prior decline increases greatly.)

The S&P indices and the Dow retracements (of the 2007-2009 decline) have so far ranged from 51 to 55% (SPX, 53%, INDU, 55%). The Nasdaq recovered the most lost ground to date, at 66% (COMP) and 71% (NDX). This level of retracements made for somewhat of a 'natural' place for the indices for at least an interim top.

Looking ahead, on the downside there may be similar 'natural' places, in a technical sense, for prices to pause and rebound. If there is a rally, followed by another decline which is my current thought, that sell off should 'build up' greater bearishness (and right now the bulls are pretty complacent). Related questions:

Time to cover short positions and puts? I think so, keeping in mind that I generally like to trade out of puts when momentum is still down and BEFORE the last potential dollar is made from the trade; this presupposes that I got IN 'right'; i.e., before it was apparent to ALL that the market was headed south.

A next trader question is whether to get back into strategies that play the upside? Yes, probably, if it is for a 'trade' only and not necessarily to re-position for resumption of a longer-term advance. While the long-term trend is still up, I don't yet see that this correction, as I said, is going to run its course so quickly this time. If the last sizable correction (mid-June to mid-July) was short and involving a single decline, look for this correction to be more drawn out; rule of alternation.

In my Thursday Trader's Corner article (1/28), I described the 'a-b-c' or down, up, down pattern that is common in a bull market correction. I don't want to go over that ground again and hope you have read this piece or will by clicking to it HERE either now or later. I write em, you read em hopefully. If you don't gain much from what I put out, let me know what you would like to hear about!

As I noted last week, one initial pivotal support in the S&P 500 (SPX) is implied by a pull back to the major down trendline SPX previously broke out above, as seen in the chart below. This trendline intersected this past week around 1070 (SPX low was 107.6) as I noted last Saturday; and intersects this coming week around 1065. What was a line of resistance, once penetrated, often 'becomes' later support.

I'm updating the S&P 500 weekly chart this week as a matter of interest since it highlights the possibility that technical support may be at hand and will 'support' a recovery bounce. A rally that might recover half of the recent decline, then perhaps followed by another pull back to this trendline later on. This outlook would satisfy both the anticipation of trendline support here AND the decline, rally, second decline scenario that would trace out the common a-b-c pattern.

If the Index instead breaks below the trendline, next support implied by a retracement of 25% is at 1029; under this level is possible support around 965, as suggested by a retracement of 38 percent of the March-January advance. I'm not looking for quite this much of a decline currently but it remains a possibility.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) continues to be bearish, reflecting the prediction of substantial distribution, followed by a sharp decline, implied by a major bearish Rising Wedge. I didn't anticipate that the further decline of this past week would propel prices quite as far as occurred (having now all but achieved a full 66% retracement of the last big rally), but the free fall pattern is consistent with what often is seen when prices break below the 'narrowing in' of a big Wedge pattern.

As noted above in my 'bottom line' comments and at the risk of predicting some support where none may exist, I think completion of the 2/3rds retracement, the pullback to possible weekly trendline support and the oversold RSI suggests potential for SPX to rebound. Enough rebound potential exists to suggest taking profits on half or more of put/short positions.

Repeating from last week (1/23), I estimate near support in SPX at 1070, extending down to 1065, with major support beginning around 1040, extending to the prior 1029 low.

Near resistance is noted on the chart (first red down arrow) at 1100, then a bit higher, in the area of the 50-day moving average, currently intersecting at 1113. A Close above the 50-day average that continued into the following day(s) would be bullish and suggest some further upside potential, such as back to the 1140-1150 area.

TRADER SENTIMENT

The recent top was not so hard to figure in terms of extremes in BOTH the Relative Strength Index (RSI) AND my Sentiment indicator as noted by the red down arrows seen above on the SPX daily chart. Does this mean a solid tradable bottom will occur by a similar 'oversold' extreme on the low side? As simple as it sounds, I think so. My current assumption is that it may take a SECOND sell off to put some 'fear' into bullish traders and investors.

Right now, traders are more captivated by the 'greed' side of the 'fear and greed' equation. That is, they keep probing the bottom, looking for the lowest possible prices, from which to profit when prices take off to the upside again.

There's a strong tendency to trade looking in the rear view mirror. Market participants, over time, settle into a mind set that past performance actually WILL reflect the future trend. This is WHY contrary opinion 'works' so to speak. Too much bullishness and the (perverse?) market is going to go the opposite way and vice-versa. The time frames for the contrary to happen of course can stretch out over a lengthily period.

Whether the market just continues to sink back to the prior lows (or beyond), or goes there on a second decline, an 'oversold' bearish extreme, even if just on a single day or two, is due and will occur in my view. Stay tuned on that!

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) continued to sink this past week in a definite follow through to the sharp break of the prior week. OEX has now 'filled in' an upside gap from back in early-November and has completed somewhat more than a 66% retracement. I put some stock in retracements of the 2/3rds variety, but this level is not 'support' in the sense of a prior area where buyers have come in.

Nevertheless, I've started suggesting taking at least partial profits on puts and the like, calculating rally potential ahead; and, that there will be another put or shorting entry at higher levels. Buying further dips in the near-term would be another suggested trade for nimble traders who can watch the market closely.

A next lower potential support that I see is at 485, then around 479, at the early-November low.

On a rebound, resistance is apparent at 507-508, then up around 515. A close over 515, that held (as support) subsequently, is needed to turn at least short-term momentum back up.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average chart pattern remains bearish. I envision near support at 10030 to 10000, with next support pegged around 9935. Major support should be found in the area of the prior intraday low at the early-November 9679 low. We can assume that for all who think that the Dow is the be all end all of the Market (that and the Nasdaq Composite) and that 10000 is a crucial level (not so much), that a Close below 10000 will a lot of attention from the media talking heads.

Conversely, if the Dow stays above 10000, it will embolden the bulls, more than they are already. My view is that a good-sized rebound will be another shorting opportunity or an interim development ahead of a better buying opportunity later on.

I continue to watch the daily CBOE equities call to put volume ratios closely, not as any kind of exact market timing indicator, but as one that suggests the underlying tone and trend assumptions being made. When most get back on the bullish train, I'll likely want off at least for awhile!

I've noted initial resistance in the 10250 area, then next starting around 10400; call it 10400 to 10440 resistance so as to also encompass the current, as of Monday anyway, 50-day moving average. Major resistance begins in the 10600 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) chart, after tracing out its multiweek and multimonth bearish Rising Wedge pattern has fulfilled part of the bearish expectation for the 'result' of this formation. The number one expectation is for a sharp break. Check.

A second expectation, especially when this pattern is seen in individual stock charts, is for a return to the price area at the bottom of the Wedge. This would suggest a possible target in COMP to the 2024 area.

There is potential near-term support in an area between Friday's intraday low at 2140 to 2125. Another potential support is apparent at 2113 as noted on the chart below.

I'm looking for a bounce as the Index nears an oversold level. A bit lower from here may set that up. If Monday was down, look for a rally by Tuesday perhaps. Near resistance begins at 2192-2200, with next resistance around 2226, then beginning at 2275 which should be tougher still in terms of renewed selling pressures.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) index has been something of a free fall mode and bearish. The apparent stabilization in prices on Monday to Wednesday looked like a bear flag pause only before the downtrend resumed in earnest. Something of a tip off was provided by the inability of NDX to pierce its 50-day moving average on Tues-Wed. Fund managers look at the 50 (and 200) day average where they might not have much else in the way of a 'technical' take on things. Certain key averages reflect a change/no change in price momentum in the minds of many observers.

So, where do we go from here? I think there's some likelihood of a rally attempt and I've started to put some money to work based on this speculative assumption. There of course may be a further dip to expected support around 1700 or even back to the 1650 area and no or a only a very limited rally in between. If so, I would be a further buyer on a successful retest of the prior 1652 low.

As to near-term resistance, it was apparent at 1792, then up in the 1823 area. A close over 1823 or at the 50-day average would be bullish on a short-term basis at a minimum, assuming such a close (over the average) was more than a 1-day affair. Even tougher resistance and a likely (stock)supply overhang, begins in the 1854 area, extending to around 1868.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ) is bearish in both its price and volume pattern. The last two down days have occurred with a lot of volume. Whether this comes close to a volume 'climax' is hard to evaluate. It appears to me that the recent 42.6 would have been a good level to pick up some stock for a speculative trade. I put some stock in the fact that the Q's both 'filled in' that prior upside chart gap and retraced a full 66% of the last big advance, in terms of suggesting a spot for at least a short-term turnaround.

It's hard to peg a next downside support before the 41.3 to 40.6 price zone. The 40.6 area should represent some fairly strong support and potential buying interest.

Resistance is at 44 even, extending up to around 44.9.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) Index is bearish in its pattern, along with the rest of the broad indexes, but it has fallen less far in terms of how much RUT has retraced of its last big advance: half of that prior run up versus giving back 2/3rds of it as seen elsewhere. There is definite prior support/buying interest beginning in the 600 area of the Russell.

I've noted next support below 600, as likely around 592, then in the 585 area which then would also bring the Russell to a 66% retracement.

Key near resistance begins at 620, then at 633, at the current intersection of RUT's previously broken up trendline.

The Index is now about as oversold at it tends to get without at least a minor bounce happening. All in all, RUT may be a harbinger of at least a short-term rebound in the overall market. Are we in a (bearish) 'rut' or not is the question!

GOOD TRADING SUCCESS!



NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS

CHART MARKINGS:

1. Technical support or areas of likely buying interest and highlighted with green up arrows.

2. Resistance or areas of likely selling interest and notated by the use of 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 (i.e., the put/call ratio). In my indicator a LOW reading is bullish 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 tend to 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.