THE BOTTOM LINE:
While technically the market looks to me like it is in recovery mode, an 'irregular' downside correction with one more down leg, can't be ruled out just yet. The pattern to date fulfills what is usually the case with corrections within an overall (major) uptrend: that of a decline, a rebound, followed by an even sharper decline that may or may not fall as far (from peak to trough) as the first sell off.
In rarer instances there is a THIRD downswing, making the correction a more 'complex' one than the 'simple' and more common a-b-c (down-up-down) pattern. The complex pattern is that of an irregular a-b-c-d-e correction. I don't mean to make this an alphabet soup of complexity and go too deeply into wave analysis, but corrections do tend to follow key wave pattern.
I'll mostly make a case that recent major index lows have completed a bearish correction and that the major up trend will slowly reassert itself. The possibility of another sell off that takes out the lows of the last decline isn't major in my mind. However, when looking at key stocks, it is still a mixed bag in terms of the numbers that appear to be in recovery mode. So, how will we know that bullish strategies are looking 'safer'?
In an uptrend, whether that trend is re-emerging or ongoing, the quality of the advance and clues to the strength of upside momentum is gauged not only by the rallies, but what happens on the declines. If a next decline only retraces a shallow amount of this first rebound from the 2/5 lows and a subsequent rally after that has more stocks participating on the upside, I'd say that the bulls are back in business.
If there's a decline back to the (2/5) lows, followed by a recovery and setting up a double bottom, this is a strong buy. If the (2/5) lows are pierced, then wait for a next buying opportunity. I'd rather buy pullbacks then short rallies at this point. The strongest recovery action so far is with the big cap tech stocks as reflected in the Nasdaq 100 (NDX) Index. The Russell 2000 is also seeing some decent buying in its stocks.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart pattern hasn't yet quite completed a bullish turnaround, although SPX has had a decent rebound from its 1044 low. A move above 1100 is needed to suggest that the Index is back on a bullish track. This is not to suggest that a bottom is not already in place (I think it most likely is), but to say that there is not yet sufficient upside progress to turn the intermediate-term trend back up.
The drop in bullish sentiment and the oversold readings in at least the 13-day Relative Strength Index (RSI) also suggest that the technical background is favorable for continued upside progress and at least a test of resistance in the 1100 area, once SPX first clears near resistance at 1080.
Near support comes in around 1060, with pivotal support at the recent 1044 low; if this level is pierced on another sell off, my long-standing target is to around 1030, maybe a bit lower and closer to 1000. I see little risk of a decisive downside penetration of 1000 on a closing basis.
Bullish sentiment as seen above in my indicator has continued in the past week to reflect a more cautious market outlook, unlike the prior situation of high CPRATIO readings reflecting an over-optimistic view of market prospects. The Relative Strength Index (RSI), on a daily chart basis, also suggests rally potential with the RSI having fallen recently into definite oversold territory.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is still somewhat mixed. While a bottom to the recent decline is probably in place, a rebound to back above 505 is needed to suggest renewed upside momentum on an intermediate-term basis and consistent with the still long-term uptrend in the Market.
I wrote last week that OEX (and the other major indices) appeared to have completed the pattern or 'structure' of a "typical bearish correction, within an overall uptrend... (a) 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." There's nothing to change my mind about yet in this regard.
Near support is at 488, then at the prior low in the 482 area. Near resistance was apparent this past week in the 496-497 area. More 'pivotal' resistance then comes in around 505, extending to 508. 505 looks like it is a potential supply overhang. A move above 500-505, with an ability to stay above 500, is what's needed to suggest the downside correction of mid-Jan to early-Feb has run its course.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average has cleared minor resistance at 10000-10018. Only the media talking heads place huge importance on 10000 although it is a very identifiable price with some history. As far as the risk of another downswing and challenge to the prior 9835 low, I'm not ruling it out as a possibility but it doesn't look likely to me today.
As to the downside risk of say, being long DJX calls, I'd just note again per my last week's commentary, that "While its possible that INDU might, in some further weakness, test support in the 9700-9680 area, doing so runs counter to some encouragingly signs" (of a bottom).
Very near support is in the 9980 area, with next and key support suggested by the prior 9835 low, with major support at 9700-9680.
I didn't note it on my INDU daily chart here, but near resistance is at 10140-10160, extending up to 10200. A pivotal resistance then is suggested by the prior rally high at 10315, with fairly major resistance beginning around 10400.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart would present an evolving or strengthening bullish pattern if the Index next clears 2200-2225. Right now the chart is encouraging for a bottom. If prices continue to work higher in tech, it will look like a V-bottom has formed.
Near resistance as noted comes in around 2200, extending to 2227. Fairly major resistance begins at 2270, then reaching 2325.
Near support in COMP is seen around 2130, then down to 2100, with major support beginning in the area of the early-November low at 2024.
Sentiment readings have moderated from the 'overbought' high bullish figures seen in early to mid-January and as recently as early-February which is a bullish plus in a 'contrary opinion' sense.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) is maintaining a bullish recovery after completing a 2/3rds, 66%, retracement of the late-October to mid-January run up. A retracement of this amount (66%) is within what I consider to be the 'normal' retracement parameters of a prior uptrend. No reversal (of the dominant trend) was/is suggested.
Moreover, a prior important upside chart gap got 'filled in' once NDX hit 1734 and that also suggested an area of support was reached. I don't anticipate lower lows than seen already at 1712 (intraday). That dip was of course a bit under the 1734 level that was an exact 66% retracement. I tend to 'throw out' such anomalies; a result of a final bout of panic-selling.
Near support is at 1734, then around 1712, with fairly major support suggested by the important 1652 low of late-October, which came at the end of another a-b-c correction.
Near resistance comes in around 1788, with next resistance in the 1818 to 1826 area. A move back above the 50-day average would be a bullish plus, as already seen with a few key tech stocks; e.g., Intel (INTC), with CSCO (Cisco Systems) and AAPL (Apple) also hovering around this key moving average as of this past week.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) looks to have formed a V-shaped bottom, with a next key test of this bullish pattern coming in at 44.0 resistance. A next key resistance then is seen around 44.8.
Near support is in the 42.75 area, then at the prior 42.1 intraday low.
The volume pattern, as suggested by the upward trending On Balance Volume (OBV) line, continues to suggest that there's accumulation of the stock of late and supports the case for higher prices ahead for the current recovery rally. The jumps in daily trading volume as prices went into free fall in late-January into early-February looks like it reflects significant 'capitulation' by previously bullish holders of the stock. This is a positive sign for those who bought the last dip.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) Index, after its brief mini waterfall decline to 580, has rebounded strongly along with the Nasdaq. RUT has some way to go to regain the rate of trendline ascent it had until the sell off and trendline break of late-January. Nevertheless, the Index has some decent current upside momentum.
Next resistance is coming up at 616, extending to around 620. Tougher resistance comes in at 633 and then at the previously broken up trendline, currently intersecting at 647, which is also near the prior 649 high.
Near support is at 600, then around 580 and next at 568, support implied by the late-November intraday low.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
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.