THE BOTTOM LINE:
This past week saw a sobering up for the bulls. They were excessively bullish before this recent wild correction and almost immediately expected that the strong bull market would resume like before. Wrong!
It should be expected that after such a collapse as occurred recently, it would take time for damage 'repair'. Part of such repair is that the prior lows are often retested or exceeded. Sometimes, the second down leg doesn't carry as low as the first of course, but often it carries further.
To keep things in perspective as to how far the market fell relative to what came before and how this bearish correction might play out, some insight may be gained in my first chart. In terms of the S&P 500 (SPX), recent lows came close to retracing 100% of the February-April run up and got to between a Fibonacci 38 and 50% retracement of the July '09 - April 2010 advance. A sharp correction can almost be EXPECTED at some point after so many up months with only very minor pullbacks. Excess breeds excess so to speak.
Another common aspect to the pattern of a downside correction in general is to have two down legs relative to one upswing; i.e., a sell off, followed by a rebound, followed by another decline, tracing out an a-b-c corrective pattern. The 'c' leg down can be shorter than 'a', the same as 'a' (a potential double bottom), or longer than the first (a) down leg. What is common?
Most common is for a second downswing to carry further than the first. The second most common pattern is for a second down leg to re-test the prior low and form a double bottom. Both of these common historical outcomes should be measured against the fact that the recent low was partly a result of an extreme temporary loss of liquidity due to fast market conditions and sell programs, making it a low that may not be equaled again. Stay tuned on how this plays out!
The technical indicator I'm especially keeping track of is my 'sentiment' model which is based on daily stock options volume totals. At midweek this past week (5/12), CBOE equities option call volume was almost double that of put volume. This does NOT reflect caution about jumping back into the market on the long side and suggested to me that caution was just the thing that SHOULD have been the order of the day.
Tech stocks continue to hold up the best. Well, outside of the small and mid cap stocks represented in the Russell 2000 (RUT).
Last week, I didn't anticipate such a quick strong rebound, but was correct in expecting the market to flounder around for a while; part of a "...wide-ranging trading range and 'basing' activity in stocks..." I anticipate some further bouts of sell pressures and choppy price action ahead. For the second week, the S&P and Dow have closed below their long-term weekly chart up trendlines. The Nasdaq Composite held its weekly up trendline.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) rally this past week stopped just at resistance implied by its 50-day moving average, then tanked on Friday and its chart remains mixed. I noted last week important resistance for the 1180 area and that continues; i.e., as the low end of the prior trading range and top, we can assume there's substantial supply (of stock) beginning in the 1180 area.
SPX may end up retesting support in the 1100 area. The index could also drop below this key level for a time, but I would be surprised to see more than a quick retest of prior lows in the 1060-1055 area. 1040 is a previous key low and potential support seen on the weekly chart (not shown).
SPX is just up from an oversold level in terms of the daily chart, but not yet oversold on the longer-term weekly chart. Bearish sentiment has increased but isn't yet down to a level where I'd feel confident that a major bottom is in place. The seasonal tendency in May doesn't have a strong bullish bias, unlike the tendency for April.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) saw resistance/selling interest come in around 533 and if they can't take em up, they'll take em down which they did with a vengeance on Friday. Oh Greece, small country you are, why do you vex us so? There are of course other factors at play here. When the market gets focused on bearish concerns, it can find lots of things to be distraught over.
Key resistance is at 532/533, extending to 537. Pivotal support is in the low-500 area.
I anticipate a drift lower again, but with prices holding the 500 area on balance; support extends from 500 to 490-480.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart didn't quite regain its bullish footing and the recent rally, while covering a lot of lost ground, couldn't make sustained headway above resistance in the 10900 area. The key resistance zone extends from around 10900 to 11000. A couple of consecutive closes above 11000 are needed to suggest that the intermediate trend had turned bullish again.
On the sharp Friday sell off, support developed in the 10600 area where I anticipated some resistance coming into the week. But INDU rallied through that initial resistance, with this same area (from 10600, extending to 10530) finding interested buyers or at least short-covering type buying at the end of the week. A next pivotal support comes in around 10400. 10000 remains expected major support, extending to the low-9800 area.
Of the Dow 30 stocks, I only rate a few (BA, HD, KFT, MCD) and half of these are 'consumer defensive' type stocks. Not much leadership there to spearhead a sustained rally anytime soon.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index has had a decent recovery rally, but the rally stopped short in the area of the 50-day average. Key resistance is at 2400-2430.
Near support is in the low-2300 area and then at 2250, extending to the area of the 200-day moving average currently at 2215.
I anticipate continued choppy trade with a 2450-2200 maximum range and I'll stay out of trades that would only profit from a strong directional move.
The longer that a choppy wide-swinging trading range goes on, the more likely we'd see some further dips in bullish sentiment.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart mirrors the Composite as quite mixed. Its tough resistance zone is 1980-2000, which not surprisingly was prior support when NDX was building a top. A close above 2000, followed by an ability to hold this area, would turn the chart bullish again. Right now, only the long-term trend remains up.
Near support/buying interest was seen most recently at 1890-1900. If NDX continues to find support on dips to 1900, its long-term weekly chart (not shown) will maintain a bullish picture, with the sharp decline of week before last appearing to be only a 1-off thing. On a daily chart basis, I've noted support below recent lows, at around 1835, extending to 1800.
I wrote last Saturday that "some type of rebound seems likely in the coming week." That 'some' type of rally was a strong one, but those playing it needed to be nimble and quick to take profits and run. Continued choppy trade may be the norm ahead.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq tracking stock (QQQQ) managed a strong rebound from the $44 area, getting almost to 49 before it got whacked again. A nice short-term bounce was had for those who bought into the decline to the area of the Q's 200-day moving average. But, just as the 44 area turned out to be a predictable support, the approach to 49 and the 21-day average, found predictable sellers. The low end of a trading range that formed a top is typically where selling will come in strongly again.
Perhaps QQQQ has found some decent support/buying interest around 46.40 as was the case Friday, but I'm unconvinced that it's solid for long. I've noted what may be a more pivotal support for the 45 area, with next anticipated support at the 200-day average which is at 44.3 currently.
RUSSELL 2000 (RUT) DAILY CHART:
As I noted last week, the Russell 2000 (RUT) is holding up remarkably well in the face of weakness elsewhere. Firstly, RUT 'held' ground at its multimonth up trendline and by week's end found support at its 55-day moving average by the Close. A pretty good showing of relative strength and it seems the small to mid-cap investment theme is still finding favor. Time will tell whether RUT is a harbinger for the market or just the last one to give ground.
Near resistance is at 720, with fairly major resistance at the prior top in the 740 area.
Near support looks to be around 680, with fairly major support in the 660 area.
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.