THE BOTTOM LINE:

You don't always have two for two. I suggested last week good potential for a short-term rebound, to be FOLLOWED by another substantial downswing, with the second decline slicing through the prior low. I wasn't so prescient as to figure that both events would happen in the SAME week!

While recent lows in the major indexes may still get pierced, even substantially, there are also some reasons to think that this second and most recent decline may have established lows for the overall correction dating from the fall from mid-January highs. This is not to say that there will be an immediate and sustained rally, but that lows for this correction may be in place or mostly so. A choppy most sideways period may be next.

There are more technical reasons to figure that this correction has run its course than not. Such as in terms of how close the S&P got to fulfilling a key downside objective. Most telling is that the S&P 100 (OEX), at its Friday low, was just 3 points away from my 'maximum' downside objective; i.e., a return to the very bottom of the bearish Wedge that began forming mid-October to early-November. Moreover, the Nasdaq held prior support, except for a relatively brief intraday panic and stop-loss selling period which ran its course by the Friday Close.

I also suggested last time that it could be time to "cover short positions and puts", as the market seemed poised for a short-term rally. It was SHORT lived for sure! It doesn't always pay to trade out of puts if you think the ultimate lows haven't been reached! Not all are such nimble traders or can watch the market all day to take advantage of what turned out to be only the 'minimal' type (38%) upside retracement that I guessed at.

About my take that it might be near time to take a flyer on the long side? The one suggested as "a short-term trade only"; it was pretty short! On a longer-term basis, call buyers may have a good position going if they bought the Nas 100 Index (NDX) when it again dipped (briefly) under its prior 1734 low. The NDX 1734 area was support suggested by it being a 66% retracement (of the early-Nov to mid-Jan rally) and where an earlier upside chart gap got 'filled in'. All in all, decent Nasdaq performance in terms of suggesting a possible intermediate-term bottom.

Also noted last time in this space, a possible harbinger of technical support was (and is) highlighted in the S&P 500 weekly chart below. I suggested then that 1065, at this trendline intersection, might prove a key support. The theory here being: a line of resistance (the down trendline), once pierced, 'becoming' an area of support on pullbacks later on.

The theory about weekly trendline support may be proven out over time; right now, it is 'so far'. The rebound from the SPX weekly (1044) low that was under that trendline intraday Friday, but with a Close above it, is bullish and suggests that dips to and under 1060 (this coming week's trendline intersection) may be well supported.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart pattern remains overall bearish, with some signs of bottoming action. Friday's rebound, while not a 1-day key reversal, had action characteristic of bottoming type periods as seen by, among other things, the wide spread between Friday's intraday low and the close. Coupled with the drop in bullish sentiment that I was looking for and the oversold condition suggested by the RSI, I see more upside potential over time, than further downside risk below recent lows.

The pattern I was looking for, the down-up-down or "a-b-c" 3-segmented bearish correction, albeit in a larger bullish trend, has occurred. It wouldn't be 'surprising' for the second down leg 'c' to extend further than it has already. However, going with other key chart considerations, I'd say that lows for this move may already be in place. It depends on whether things slow down, which should happen now that sellers have found buyers. The ability for the market to come out of 'free fall' so to speak is dependent on buying showing up at some level where value is perceived.

Near support is at 1030-1040. Key resistance is still in the 1100 area.

Bullish sentiment has fallen and a very key indicator it is. I was looking for bullish sentiment to fall as a prerequisite to a next rally setting up; OR, at least a period of price stabilization. This, as fear first returned, then abated some, about the downsides that remain in this economy. The Relative Strength Index (RSI) is exhibiting a bottoming type pattern.

S&P 100 (OEX) INDEX; DAILY CHART

A key aspect to technical action in the S&P 100 (OEX) was how the Index fell all the way back basically to the start of the bearish Wedge pattern highlighted and notated on the chart. From this area then, the index rebounded significantly as significant buying started coming in. All of which would be predicted by the rising Wedge pattern when seen in stock charts and by extrapolation, to the stock indexes. Nervous short-covering ahead of the week end was another factor.

In terms of how the second decline unfolded, it now has the structure of the 3-segmented 'typical' bearish correction within an overall uptrend, with the last decline now a clearly delineated second downswing. This second decline tends to bring to a close the a-b-c correction pattern and allow a period of at least sideways movement and price stability if not a definite rally phase.

As well as fulfilling pattern considerations, there is also a factor regarding the length of the two down legs relative to each other. The second down swing is often a greater 'length' than the first; e.g., the second decline is 1.5-1.6 times greater than the first. The second decline is more 'scary' than the first is another observation here. This ring a bell?!

The OEX's recent rally 'failed' at key (507) resistance estimated last week and based on 507 being a 'minimal' retracement distance of 38% that we could expect in a weak recovery rally.

Key downside support noted last week also held up, for the 485 area. I'd peg the only really pivotal support and resistance levels the same as last time with the low-500 area key resistance and the 485-480 zone as key support.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow (INDU) Average chart pattern is bearish, but signs of buying interest/support are also suggested by Friday's intraday rebound.

Thursday's close at 10000 and with its sharp intraday drop under that on Friday, got a lot of media coverage as predicted. Friday's intraday low (at 9835) got quite close to key support at 9800. Not surprisingly, especially in an emotional market with waves of panic type selling and ahead of a weekend, the buying that surfaced on the final dip under 9900 and rapid short-covering was enough to bring INDU back above 10000. Fairly bullish action, at least suggesting the end of the freefall as occurred Thurs-Friday.

While its possible that INDU might, in some further weakness, test support in the 9700-9680 area, doing so runs counter to some encouragingly bullish signs; e.g., with the long-term S&P chart already described and with Nasdaq 'holding' a 66% retracement.

I would continue to peg Dow support as the low-9800 area, with major support around 9700. Resistance is initially the 10043, which is a move back to the prior low and (now) a possible supply overhang. Pivotal resistance continues to be the 10300 area. We should see a period of lower volatility ahead and could also witness a range-bound trade for awhile between a high end around 10200-10220 and low end around 9900.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I envisioned a Nasdaq Composite (COMP) chart pattern where this most recent sell off, while no surprise to my thinking, didn't carry as far lower as I thought it might. Of course, even with the snappy comeback rally (after the brief dip to below COMP support around 2112) on Friday, the jury is out as whether we've seen the lows for this move.

I am more than encouraged however, by the fact that COMP on a closing basis, has held the key 66% retracement test; i.e., a decline of MORE than 2/3rds of a prior move, risks becoming a 100% retracement (to 2024 again).

It shouldn't be a surprise that stocks reached a point where the tech sectors, the great hope of the recovery and with a retracement (at recent peak) of a full 66% of the major 2007-2009 decline, should also find support at a 66% pullback of the strong up leg from early November into mid-January.

The Composite found support at the prior low in the 2113 area and at 2100 even. 2100 may mark the lows and completion of, the a-b-c correction. That second down leg often falls further, from peak to trough, than the first and we can't rule out a decline back to the beginning of the bearish rising Wedge around 2024, but that pattern has already been 'done' so to speak, given S&P 100 chart action.

Support looks solid at 2100 for now, with major support in the low-2000 area. The key overhead resistance remains 2200.

I wrote last week, regarding the RSI indicator, that "I'm looking for a bounce as the Index nears an oversold level. A bit lower from here may set that up." I don't know if we can count a move to 2100 as a 'bit' lower than the prior week's 2147 close. I suppose we could say it was a bit lower in point terms, but it didn't seem just a 'bit' lower on Friday afternoon around 2pm at the NYSE; not after coming down from near 2200 on Wednesday.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX), on a second and expected sell off, held up quite well on the dip below 1740 support on Friday with an intraday low at 1712. Some buying was related to short-covering ahead of a weekend. Prior lows around 1774 held for the most part, except for the brief culmination of a final selling wave. With a weekend at hand, short-covering buying came in fast and furiously after 1pm and after the 1712 low for the day had been seen with no further big bouts of selling coming in as the index neared 1700. All quiet was sounded on the western front.

I wrote last time that "there's some likelihood of a rally attempt and I've started to put some money to work based on this speculative assumption." Well, it was 'Jack be Nimble, Jack be Quick', to realize the profits from that short-lived shot up to the 1788 area, before it all came apart with a major Thursday sell off.

Unlike the S&P, the rebound to the 1788 area didn't even make back 38% of the prior decline. Prices just stalled out Wednesday and then broke sharply on Thursday. The second down leg (and often sharply lower) was quite predictable, harder is to predict how far an expected weak recovery bounce will carry.

I did write on my last Saturday, that "...of course there may be a further dip to expected support around 1700 or even back to the 1650 area" ...and if so "I would be a further buyer on a successful retest of the prior 1652 low." Well, another print at 1652 or close by might have been the IDEAL buy point, but near-1700 was close enough!

Near resistance is at 1775-1785, with pivotal resistance at 1820-1825. Very near support is at 1739-1740, with increasing buying interest down toward 1700. Major support is in the 1650 region.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 tracking stock (QQQQ), while overall bearish in its price, but not volume, pattern has the same signs as NDX regarding a short-term bottom. A key Volume consideration, evident with the On Balance Volume (OBV) indicator, is suggesting upside accumulation on balance currently.

I don't think I made heaviest emphasis last time on support in the 42.6 area, the prior low and a representing a pivotal 66% retracement. My bad! I'm impressed with the action with the stock holding mostly at its prior lows and key retracement and anticipate some further upside ahead.

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

RUSSELL 2000 (RUT) DAILY CHART:

I noted last time how the Russell 2000 (RUT) Index had fallen less far than the major Nasdaq and S&P indices. I also thought there would be stronger support in the 600 area, but when RUT sliced through 600, it was a mini-waterfall decline to near 580.

My key take on the charts is notice that RUT has held the key 66% retracement level. Friday's intraday rebound was pretty robust also and RUT's current short-term momentum could easily carry the index to the 600 level and recent 'break-down' point and a key resistance. Next resistance is 611-615, then 620.

I was looking for support (last week) in RUT in the 585 area and the 66% retracement support point. It looked favorable to be buying the dip under 585, with the Friday close near 593. I find it a good omen to be above break-even at the end of the day of a trade.

I also wrote last time that "The Index is now about as oversold at it tends to get without at least a minor bounce happening." We got it (the bounce), but with a sharp break after. I look for more upside attempts in RUT than further breaks, from here forward. To see a less choppy but basically sideways trend ahead near-term, with lowered volatility, would be consistent with a bottom that's probably at least temporarily in place but not yet with more full-blown buying interest. That's the meaning of waiting to buy ahead of seeing a 'basing' pattern on the charts.

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.