THE BOTTOM LINE:

There was a bearish scenario AND a bullish one (just barely) before this past week's debacle as I wrote last week. I also pointed out that lower prices were the path of least resistance. I thought a sinking spell would be to 50 points lower once the S&P 500 (SPX) fell below 1080/1085. This was a mild understatement(!), although the potential under right conditions (illiquid) for wrecks caused by the large current percent of average daily volume accounted for by high-velocity computerized trading is unprecedented; figures at around 60-66 percent of total daily trading volume. Pretty amazing, all this money sloshing around and moving fast!

SPX only showed about 6 minutes when it's 'price' was under 1100 on Thursday and I was watching. On a closing basis, at Friday's 1110 Close, SPX has fallen 70 points so far since 1180 was breached. This was not far out of line with my 50 point downside expectation, which of course assumed a more 'orderly' market.

IT'S A MYSTERY!

Latest press I see late Friday indicates: "Through the day and into the evening, officials from the SEC and other federal agencies hunted for clues amid a tangle of electronic trading records from the nation’s increasingly high-tech exchanges. But, maddeningly, the cause or causes of the market’s wild swing remained elusive, leaving what amounts to a $1 trillion question mark hanging over the world’s largest, and most celebrated, stock market."

The only technical indicator that pointed to the potential for a wicked sell off was the extremely high bullish sentiment figures I'd been highlighting for some time. It drives me crazy, because no matter how tempered I get at such extremes, these kind of crazy periods usually go on for long periods and as a timing model, such spikes in sentiment are tricky to cash in on. It will often be after the 2nd or 3rd spike up on my (CPRATIO) graph to above some extreme (call volume well over 2 times puts) before the market caves finally. Use of the CPRATIO 5-day average helps some; it peaked at 2.5, its highest high, on 4/15. The second single-day peak (2.4) on 4/26 occurred on the day SPX hit 1220.

If I were 110% disciplined I suppose I would just accumulate puts given extremes that were getting crazy and hang in. As it was I exited SPX 1200 puts, only to go back in on the dip below 1180 and buy that strike. Fortunately, and the only thing I found fortunate about giving up puts bought on prior rallies above 1200, SPX consolidated in a minor bear flag type pattern between about 1176 and 1170 for a few hours on Tuesday. It gave some time to think about strategy for more than a few minutes. I wouldn't have needed to watch intraday price action so much if I had just kept what I had and sat tight. As Jesse Livermore said, "I always made more money by 'sitting tight' than not".

Low-volume trades resulting from low-volume crosses off the (NYSE) floor on PG and MMM and a few others knocked as much as 400 points off the Dow 30 (INDU) at the 5/6 intraday low. The lows in the Dow are computed based on the lowest intraday lows reported for the 30 stocks that day. All trades reported onto the NYSE ticker also include new type electronic exchanges that trade lightening fast with each other.

I adjusted my daily and hourly Dow charts to a 10241 low for Thursday, not the exchange reported 9869.6 low. In the arithmetic INDU, as few as two stocks can have a huge effect. You only have to cross a trade of a block (10,000 shares or more) to distort the whole market. I adjusted my charts to a low for the week of Dow 10241 as it's important to me to have charts that reflect what I consider to be 'real' trading and volume. Unfortunately the S&P and Nasdaq are too big to estimate a closer to 'real' low. So it goes. Most chartists aren’t so picky but as they say about data: "garbage in, garbage OUT"!

WHAT'S THE TECHNICAL DAMAGE?

Not so much in terms of dipping under the early-February lows, which would be the biggest technical damage so to speak. Prices did fall below their long-term up trendlines with the dips under 1144 in SPX, below 525 in OEX, under 10700 in INDU, below 2325 in the Nasdaq Composite (COMP), under 1900 in the Nas 100 (NDX) and not at all in the Russell 2000 (RUT).

An aside on RUT: the Index held the low end of its multimonth up trendline in the 647 area on Thurs. (with minor slippage under this line intraday) and Friday, where it held its up trendline dating from March '09. If there was anything you felt compelled to buy, buy RUT. It's 'fully' oversold again too which we haven't seen since its last (early-Feb.) low in the 580 area.

Technical damage also isn't yet done by closes under the 200-day moving average, a key indicator for portfolio/fund managers.

I'm cautious about how long it might take for the indexes to ready for another rally attempt. How I see the charts now to not expect a lot more downside but also just floundering for a while, with meager rally attempts. This sort of wide-ranging trading range is part of 'basing' activity in stocks, which I expect over time. It is still a primary bull market. One now in a short-term and intermediate-term downtrend.

It didn't surprise the faithful that an extreme sell off came, not the way it did (it never quite does) given that the recent tidal wave was the FIRST correction of over 4% in a 14-month rally. I anticipate that, after a period of chopping around, a not surprising guess with the CBOE Volatility Index (VIX) above 40 (levels not seen since before the major bottom of 2009), prices will find stability at or near recent closing lows. For example, SPX should find some support on dips at or not too far below 1180-1100, Nasdaq at or near 2200 and so on. More on the individual charts below.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) has turned bearish (duh!) but there was warning for those that heeded them. I've felt a little like chicken little saying the sky was falling, the sky was falling, during the period highlighted in the yellow circle below during raging/rampant bullish fever. The market then made a V-top. The tip off of WHEN to sell most safely, or when the trend had definitely tipped, was the break of the key trendlines at 1180-1185. After that break and a look at the hourly chart, there was an apparent 'bear' flag that formed; seen above. This occurred over a few hours: a time window in which to to buy puts. I recall the Monday after a bad currency weekend (black Monday) in 1987 when I was visiting at the CBOE. That Monday opening was still in 'time' to make a good deal by buying puts and more by shorting the wild and wooly index futures on the opening.

I said last week that: "Working against the idea of merely a shallow or sideways correction at this juncture is the rampant bullish sentiment figures occurring before this recent volatility. The fire of such bullish sentiment extremes often are dampened by LOWER prices for a while."

SPX is back down to key support in the 1100 area. We've been in this area before and stocks have found buying interest. 1100 is also the current intersection of SPX's 200-day moving average. I also see support down a bit, around 1080. If it hadn't been for the trading of the e-exchange networks in trade crossing (only then routing the trade to the NYSE ticker, practically instantaneous today), the S&P wouldn't have dipped under 1100. Maybe there's a touch to the 1060 area, where I'd be a buyer.

Pivotal resistance now looks like 1140, then 1180 prior support, with major resistance at 1200.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart did stay bullish for a day this past week, by opening higher and forming a daily low that was ON OEX's up trendline. The next day (Tuesday) came the break and there was time to do some selling in a still mostly orderly market. A nervous market, especially when, for some reason, big downside trading triggers got let go when SPX broke 1150. Rather than at the trendline break at 1180-85; but computers don’t draw trendlines!

The key break at 540 in OEX was the first substantial break of the 21-day moving average. As downside momentum accelerated, OEX piercing the 50-day average then got noticed next. Without the illiquid trade of those few minutes of Thursday afternoon, as we all stood more or less mesmerized by the screens, OEX would have had less of dip under its 200-day moving average. The chart is the chart and I'm not trying to modify this weekly low, just put it in perspective. The off-exchange share of volume and hyper-fast trading run by algorithms may get reined in after this incident where relatively little money pushed the market so low.

Potential 'support' in quotes is most apparent at 500, extending down to the low-480 area. This area could get re-tested again. The likelihood of a big new down leg that takes OEX to a weekly close below 480 doesn't look as likely of an event.

Near resistance, 517, then more pivotal resistance begins in the 530 area, with major resistance around 544-545.

As with SPX, OEX is now 'fully' oversold on a 2-week basis and 2-3 more weeks of lower prices or even sideways action would bring down the 2-month oscillators to an oversold zone as well.

DOW 30 (INDU) AVERAGE; DAILY CHART:

When pierced this last time, breaching 11000 was the beginning of the 'waterfall' decline in the Dow 30 (INDU); the pattern that we almost always see in panic situations that keep buyers frozen in place at a certain spot and when computerized trading then magnifies the downward spiral.

Once 11000 gave I was looking for 10800 on the downside, possibly to 10600. Given that 400-500 points down on the ticker on Thursday for a crazy 6-10 minutes was accounted for by a few sparse flash trades, this estimate wasn't completely crazy.

NOTE: THE INDU CHART BELOW HAS A MODIFIED THURSDAY LOW

A low around 10240 low calculated to take out a few 'official' lows for the most 'artificially' suppressed component stocks based on minuscule trading. This by 'backing out' some crazy key INDU stock lows (e.g., PG, MMM) in order to re-calculate the Dow Thursday low. This lets us see that the low of Thursday was actually nearly identical to Friday's low. I wanted one chart where I could regain some perspective.

Key near support is in the 10200 area, with expected major support at 10000, where the Index 'based' at the last major low, with exceptions of a few intraday or select closing dips in February that carried to the 9900 area or a bit lower (9835) at a final bottom.

Assuming that the recent volatility doesn't go away, practically 'immediate' overhead resistance looks like 10600 currently, with more price discovery coming in this coming week. 10800 looks like pivotal resistance, a bullish game changer if the Dow were to surmount this level. How about flopping around like a wet fish between 10200 (with possible dips to 10000 later) and 10700. This market now needs to see where the buyers will come in over more than in a panic fall. One thing you usually can predict about the length of a first rally attempt: it won't be prolonged. That level of confidence has been shattered.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

Nosedive for the Nasdaq Composite (COMP) Index like all the rest of the market, but COMP clearly held its 200-day moving average (currently, 2204). The next day (Friday) was down on the day, but up from the lows. Not looking like a rout here ahead but the market has been highly bruised.

The 2100-2150 area might remain a key test of support ahead but I don't anticipate a drop below this on a closing basis. I've noted near support on the chart at 2200.

Resistance is easier to calculate; on a rebound first to the 2325 area, with a pivotal next resistance at 2400. A close back above the 50-day moving average would be bullish for the near-term. Right now the short and intermediate-term trends are down, with the major trend still intact. This last statement on trend is providing that the 2141 close in the week ending 2/5 is not pierced. A close at or near that level keeps the major trend intact, below it shifts the major trend down as I figure it.

Trader sentiment is falling and should slide further since the bulls will typically get their confidence shaken to the core, after such a period of OVER-confidence for the prolonged period seen with single day and 5-day average upward spikes in late-March to late-April; per my lowermost (CPRATIO) indicator.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has seen a nearly 100 percent retracement of the entire early-February to late-April advance. All in the span of a few days! Old trader saying: "they slide faster than they glide".

Would I step in and buy this index, such as on further dips to 1800 and under? Probably not. It could be too much ping pong match versus long drives on the links. Would I bet on a 'maximum' 1750 to 1950 range for the near future I was asked? Yes. As to whether upside or downside will get pinged first is harder to project. Recoveries off from lows typically happen faster than a major sell off from a prolonged advance.

Another technical factor with the Nasdaq is that, on a weekly chart basis, readings are only about neutral now in the overbought/oversold department. This market had the strongest and longest advance and this market may take longer to 'throw off' its prior overbought extreme. This factor is not apparent on a daily chart indicator like RSI, which is showing its first 'oversold' extremes since the lows seen in November '09 and then repeated in oversold terms at the early-February 2010 bottom.

Some type of rebound seems likely in the coming week; worth playing? Not by my trade strategies, but for those whose efforts benefit from volatility and forecast an expected range, I don't anticipate prices going below or much under 1750 to the low-1700 area or not for long. I'm anticipating that the long-term trend will remain UP by the Index not falling under its February lows. You may recall that April is a good month for stocks; after that, not so much, not for a while. Reminding me of the old saying: "sell in May (I gather ON the start) and go away ".

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

Wow, who would have thought it, a retest so quick of the February low that (if we can believe the prices!) followed by a decent sized rebound from those lows. I wonder how much of the Nas 100 (tracking) stock got bought at $42. I can guarantee not by me! Of course, although the Q's will normally track the NDX, as with the stock index futures, at times they deviate from 'fair value'.

So, QQQQ got stretched to the downside, but would I be a buyer or seller or not either? I wait. Buying around the 200-day moving average is tempting. Our recovery is still ongoing and only a crack has appeared in the Euro zone. These things get turned into bigger stories than they are when the market gets overvalued and ahead of its fundamentals. Stock prices tend to seesaw between an over-optimistic expectation for earnings and a more pessimistic estimate for the same.

I said last week that "If prices slid under 49-49.2, I anticipate selling to pick up as it would suggest to many a break in the advance going into the past 7-10 days of more volatile action." I didn't expect the market to get driven off a bit of a cliff. Just that shorts could be put on when prices broke below 49. A refreshing thing about trading single stocks is to forget time premiums, strikes, expirations, etc.

Big volume came out on the two days when the most damage was done, on Thursday and Friday. The dip to 42 may have fulfilled the bears blood lust for QQQQ. Near support is 44, key near resistance at 48.

RUSSELL 2000 (RUT) DAILY CHART:

As mentioned in my initial 'bottom line' commentary aside relative to the Russell 2000 (RUT), it gave ground grudgingly. The only Index so far that seemed to find support at its long-term up trendline; a 14-month up trendline in the case of RUT. We'll see... If the Index starts slipping below 648 to 638, a possible next support comes in around 620, or even at the February lows in the 600-580 price zone.

Near resistance may come in on rallies back to the 675-680 area. 705-700 was a key 'breakdown' point initially on the sell off so makes for my 'pivotal' resistance reference.

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.