THE BOTTOM LINE:

I wrote last week that the indexes were 'on track' to move higher but it was a 'big question' as to whether they could exceed a half to 2/3rd's retracements of the last downswing. As if on cue, key major indexes stopped dead in their tracks, and then reversed sharply, at the 50% mark. The Dow ran up a bit beyond the 50% benchmark, ending half between the 50 and 62% levels. Only the strong Nasdaq 100 (NDX) ran well beyond a fibonacci retracement, but then didn't quite make it to the next fib line at 61.8% (62), before also tanking after the big Monday run up. There were also reversals in other key indexes at pivotal moving averages.

Important technical aspects/clues to resistance points for the arrested rally and turn around included:

Exact 50% retracements, followed by downside reversals, in the S&P 500 (SPX) and the Nasdaq Composite (COMP), as well as the Russell 2000 (RUT); the Nas 100 (NDX) reversed a hair's breath shy of a 62% retracement of its late-March to late-May decline.

The S&P 100 (OEX) reversed exactly at its 200-day moving average and the Dow 30 (INDU) at its 50-day average.

I maintain that all the aforementioned reversal points were not random, but reflect the tendency for rebounds to go so far and no further technically when the market turns out to still be in a bearish grip.

Monday's key downside reversal was pivotal in knowing that the recovery rally was OVER. So much so that I wrote a late (Wednesday) night Trader's Corner to that effect; this went out in the wee hours of Thursday morning. In addition, the hourly index charts had traced out bearish flags on Wednesday and I wanted to alert as to the further downside potential implied by those formations. I'll update those hourly charts next but also suggest checking out my mid-week piece online by clicking THIS LINK. If you didn't see it already, this column gives a little more background on some important reversal patterns that I saw as 'teachable moments'. When you study reversal patterns, you are forewarned when they come up again; they always do!

Someone just wrote me asking about the world class private option trader Mark Weinstein with a desire to know more about his method of trading. A major thing I learned from professional traders (I was not strictly on my own in the markets; while I managed trading accounts, I was also a full-time analyst at a major Wall Street firm) was that you had to work hard at understanding EVERY market cycle, every trading 'set up', so that you would recognize key (reversal and continuation) patterns NEXT time, if you didn't 'see' it THIS time. Great traders weren't just born: they developed trading expertise and profitability over years of trading.

The hourly charts I spoke about and the patterns are suggesting to me still more downside to come. Not a freefall/waterfall type decline but probably back down to the low end of a broad trading range. A near-term rally shouldn't be surprising, as the short-term 21-hour RSI got down to oversold areas recently as can be seen on the hourly SPX and NDX charts seen below.

I'm not a long-term bear. I'm not a long-term bull either. I look for trading opportunities with favorable risk to reward potential. That's what I do and pretty much all that the aforementioned Market Wizard Mark Weinstein does. I am primarily non-'political' as to a years out, or even months out, forecast.

The hourly charts I mentioned and that continue through the rest of this past week. Prices broke out to the downside (of the bear 'flag') on Thursday and while the market now is oversold on a short-term basis, the pattern suggests still more downside. I'd like to see the 13-day Relative Strength Index (RSI) get fully oversold before betting much on the upside. Sentiment readings are getting more bearish, but I'd like to see them get to a more bearish extreme also before betting much on the upside.

The updated (through Friday) HOURLY charts of SPX and NDX seen next are the hourly index charts I used in my mid-week update. NOTE: the breakdown to the BELOW the low end of the up-sloping 'flag' pattern had not occurred (yet) when I made my chart notes.



My second HOURLY chart, that of NDX:

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

Prior to this past week's bearish price action, there were some bullish developments seen in the S&P 500 (SPX); e.g., the move above resistance in the 1105-1108 area. However, the failed rally at the beginning of this past week created a key downside reversal (this after SPX hit resistance implied by a 50% retracement of the prior major downswing) and resumes the bearish pattern for the index. A key downside reversal is a decisive new high in a rally phase that's followed by a sharp collapse in prices, with a Close below the prior 1-2 day's LOW.

It's of course possible that the S&P is establishing a longer-term support base in the 1040 area per the potential double bottom that has formed to date. The 1041-1042 'double' bottom may end up not just being twin lows around 1040 as added lows might occur in the same area. Or, we could see lower lows (for the current move) in the 1010-1000 area, where some longer-term technical support is seen, but not shown on my daily chart.

I've noted resistance at 1105, then in the 1130 area.

Near support is back in the 1050-1055 area, then at 1040-1042. Fairly major support is anticipated at 1010-1000.

MARKET SENTIMENT:

Bullish sentiment or the bullish outlook of traders dipped significantly on Thursday, according to my equities call to put ratio, but then bounced back on Friday. I anticipate a further dip or two in bullishness that creates another bearish extreme or two, before this market is ready to rally in a substantial and prolonged way.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart has resumed its bearish pattern as the prior rally only made a limited recovery before the index got taken down by renewed selling pressures. While the 473 double bottom low was suggesting a bottom could be in place, 'confirmation' of such a bottom comes only when the prior upswing high (before the twin lows) is exceeded; i.e., meaning OEX would have to climb back above 532. Instead, OEX's rally failed at resistance implied by its 200-day average, the best known and important of any moving average in stocks and stock indexes.

Resistance last week was noted at 510 and this is an even more pivotal resistance going forward given the sharp reversal after this high was hit. Near resistance is at 500, extending to 492.

Key support is seen at 477, extending to 473. A close below 473 would suggest further downside potential to the 450 area. Major support is in the low-400 area.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Coming into this past week, we had half of the 30 Dow stocks trading above their 200-day averages. No longer, as 5 of the 'weaker' INDU stocks that had been pulled up by the strong, settled back below this key average; i.e., CHV, which really got whacked (not surprisingly for a big oil company), INTC, MMM, PG and UTX. WMT (Wal-Mart) also got pummeled after failing for 2+ weeks to get back above its prior long-term up trendline.

As to the Dow 30 Average (INDU) chart itself, its pattern is bearish; we could also say 'mixed', in that the Dow may be trying to establish a bottom over the sometimes punishing summer doldrums. INDU has made lows in the same approximate area (at least within 65 points) now on three occasions since February. By the way, 'triple bottoms' are not all that common or 'solid' as having bullish potential. Too often lows that are seen more than twice are a way station to a yet a lower low.

I've noted near resistance at 10200, then at 10330. Fairly major resistance remains for the 10600 area

Last week I noted "Key INDU retracement level tests exist at 10504 (50%) and then at 10681, representing a Fibonacci 62% (61.8) retracement." You saw what happened when the Dow got into that zone and slammed into its 50-day moving average; it wasn't 'in the zone' as in having winning potential!

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

I wrote last week that the chart was 'mixed'. This week I'd have to say the chart remains bearish on a short to intermediate-term basis. The Nasdaq Composite (COMP) Index's "W" bottom notwithstanding, COMP couldn't gain traction beyond retracing half of its prior decline; late-March to the late-May to early-June lows.

I thought that COMP was going to perhaps challenge its 62% retracement level, but only the big-cap Nas 100 managed to nearly do that. I'm not anticipating a new down leg but can't rule it out either, since triple bottoms give way often enough to give pause to the idea of tech leading the way to a continued long-term bull market. As to a 'triple' bottom, it's more or less what we have to date, counting lows made mostly in the 2123 area back in February.

Key near support begins around 2200, extending to 2186. I've noted next support at 2156 and that extends to the 2140-2139 twin lows of the past few weeks.

Near resistance is at 2250, the area of the current 200-day moving average, with next resistance noted at 2315.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX), while having the greatest relative strength of all the major indexes as suggested by it having regained the most of its prior downswing (as measured by its intraday high), got whacked with the rest of the market. Charles Dow always made the point that when the tide goes out it takes all boats to lower levels.

I'm anticipating that NDX will work still lower, such as back to the 1800-1793 area; the index could also retest prior support around 1770. Fairly major support/buying interest should still be found in the 1756-1752 area.

A more bullish scenario is that the Nas 100 holds in the area of its 200-day moving average (currently: 1837) as it did on Friday, alone among the major indexes, which could then set up another rally attempt. Maybe strength in Apple alone can spearhead that; this seems a bit doubtful but we'll see.

Anticipated near resistance comes in at 1870, extending to 1890-1900. A close above 1900 that was maintained should help NDX regain some bullish footing.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

I noted key resistance last week at 47.7 for the Nasdaq Tracking Stock (QQQQ) and somehow came up with the exact high for Monday's rally. I say 'somehow', as I can't remember exactly how I came up that number but think it was the level that 'closed' an earlier chart gap, which often marks important resistance.

QQQQ looks headed lower still as no clear cut signs of support have appeared yet although stopping at the moving average may have brought in some buying. When the stock finds support and rallies there should be at least a small uptick in daily volume.

As mentioned, the Nas 100 has held its 200-day average so I would keep this on your charts; on Friday the average stood at 45.19. I've highlighted near chart support back at the previously broken down trendline, currently intersecting around 44.3. 44.0 may offer bring in some support/buying interest also. The prior lows at 43.6, then 43.2, are potential support levels below 44.

Near resistance is at 46.0, then at 43.5.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) of course couldn't resist the market decline but it does seem to be finding scale down support at the previously broken down trendline. RUT may yet bounce from this line as it did in a minor way on Friday. There's a reasonably good chance that RUT will rebound further, along with the Nasdaq 100. It's retraced now about half of its recent rally.

Near resistance is seen at 660, extending to 670. Fairly major resistance begins around 685, at the prior long-term up trendline.

I've noted support at 623, then at the prior 607 low.



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.