THE BOTTOM LINE:

I view the recent waterfall decline as a continuation of the correction that began in late-June, not as a 'signal' for a new bear market. My thought that prices may dip again, probably after a minor rebound, is the lack of even one day of heavy bearish sentiment among those actually trading options. There just hasn't been a recent extreme in daily put volume relative to calls/ The volume ratio between CBOE equities daily call to put numbers is what I use to reflect active traders' sentiment, not surveys, etc. I'll get more into sentiment as an indicator as part of my commentaries on the S&P 500 (SPX) and the (Nasdaq) Composite (COMP).

While I (last week) wasn't predicting as big a fall as occurred, I wasn't surprised either especially given the lack of a bearish extreme in my daily sentiment numbers. It's almost like the Market 'has' to go lower to get more traders into capitulation; i.e., personal recognition of the bearish (fear) phase the market is in. My 'minimum' downside projections on SPX and NDX (Nas 100) noted last week, based on hourly chart bear flag patterns, was to the 1050 area in the S&P and around 1800 in the Nas 100. These are always seen as 'minimum' objectives and of great value in suggesting what targets we might be able to 'count on'; a further profitable move is the gravy.

When the market/biz media seeks out technical types at periods when they don't have a clue as to what is going on (and not asked so much during major rallies) a couple of things may have filtered down to you: 1.) a major Head & Shoulder's (H&S) Top especially seen in the Dow and # 2, a Dow Theory sell signal.

I've traced the talked about Head & Shoulder's pattern on the INDU weekly chart below and also noted a 'conventional' measurement of the further downside potential when an H&S neckline is pierced.

I would also note that the retracement to date of the big run up from early last year has been a relatively shallow one so far and hasn't yet equaled a Fibonacci 38% retracement (at 9420); at which point the correction would still be a fairly minor retracement. The point is not to have a bearish viewpoint driven by fear but to continue to take the most objective look possible.

A basic problem with the above analysis is that a Head & Shoulder's (H&S) top pattern has been most seen and studied on a daily chart basis, tending to signal an intermediate decline only. The formula to measure the downside possibilities, once a stock or index has broken below an H&S 'neckline', has usually only applied to shorter-term charts.

On a daily chart basis in the major stock indexes, no Head and Shoulder's top pattern is seen. Even if there was, the downside price target measurement (after a neckline break) would not have resulted in anything as low as the Dow 8200 area gotten by transposing a target calculation to a long-term (weekly) chart. Such a low ball target is very speculative, but when the market is in a panic/fear phase bearish speculations ramp up.

DOW THEORY SELL SIGNAL?

The other longer-term chart consideration I've been asked about is whether a Dow Theory 'sell signal' has been triggered, which would alert long-term holders of stock to lighten holdings. I wouldn't suggest that a bearish Dow theory readings won't occur if stocks keep sinking, but let's see what index at what level would suggest the major or primary trend of the Market had reversed to down. Dow theory is too slow to alert you to an intermediate-term trend change, only a major one. Its relevance is to us as investors, not traders.

To identify what index at what level: a weekly Close in the Dow Transportation Average (TRAN) under 3822 would suggest a bear market was upon us. (TRAN closed at 3922 this past week.) This analysis is according to my interpretation of Dow Theory. That is a problem with the theory also; there are some different ways to interpret Dow's work.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) chart is bearish as prices continue to fall. What can also be said relating to the potential for SPX to rebound is that the chart shows now two down legs that are approximately equal, for a possible 'measured move' objective. Moreover, there is now a lower channel line that's been traced out, suggesting possible support in the low-1000 area. Add to this the fully oversold RSI reading suggests not getting complacent about taking your time to capture put profits.

My lowermost objective in SPX last time was to the 1010-1000 area, in an area of possible longer term support. I've noted key support at the low end of the downtrend channel; at 1005 currently. I don't have an immediate lower 'support' target as its not predictable chart wise; maybe in the 943 area, representing a next (50%) key retracement level.

I've noted resistance at 1150, then around 1072, the top end of the gap lower from Monday-Tuesday of this past week.

MARKET SENTIMENT:

Trader sentiment levels on a daily basis and showed little change last week as NO dips to or under the 'extreme' bearish 'oversold' level seen above occurred this past week. This as prices took a further big nosedive, suggesting continued complacency by those who are actually trading options (versus people mostly expressing OPINIONS).

I anticipate that a final low, whether that is a lower low (or a higher pullback low) will come when there is more fear of a bear market and more greed to capture the expected big further decline. There is no price target in this prediction, only that more bearishness is likely to occur BEFORE there is a tradable or sustained rally.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) chart is unrelentingly bearish. As with the S&P 500, I see some potential for a limited rebound. OEX is oversold enough and there is now a lower trendline from which it might bounce and at which I've noted potential support, currently intersecting (at the trendline) at 458. I'd peg possible next substantial support for the 435 area, representing a 50% retracement of the March '09 to late-April ('10) advance.

500 is looks like major resistance (what used to look like major 'support'), with more immediate and also tough resistance coming in around 486, at the upper end of the bearish downside overnight gap from this past week. You see where the price 'gap' is just slightly from the daily chart. Sizable chart gaps are seen on the Nasdaq charts as they show first trade as the 'Open'; not last night's close when NYSE openings are delayed.

Key near support is suggested at the lower (down) trendline as described already above. The index is as oversold as it tends to get without at least a minor rebound such as occurred on two occasions in May.

DOW 30 (INDU) AVERAGE; DAILY CHART:

The Dow 30 Average (COMP) chart is in some ways not THE index to focus on for determining how the Market is doing. In other ways the INDU chart traces out what is sometimes the most compelling technical picture in helping forecast the current and future trends.

A different aspect in the Dow chart, in best 'definition' so to speak, is a possible bullish declining wedge. It's too soon to call this as anything but early musings, but I'll be watching how prices unfold in the coming weeks relative to a possible bullish 'wedge' pattern. It may be nothing, but the pattern (if it develops) may end up zeroing in on timing for an oversold upside rebound when it comes.

INDU is at possible technical support (not major support) implied by the lower down trendline intersecting around 9600 currently. I'd peg fairly major support at 9420-9400. 9420 would represent a key retracement level (and potential support) at 38%; this relative to the long advance from the March '09 low to the recent late-May top.

Resistance is noted at 9908 or just call it the 9900 area; next, around 10134. Major resistance is suggested at 10400 currently.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite (COMP) Index's chart shows the steepest weekly decline since the early May week that kicked off this bear move. It's a 'galloping' bear market, although that motion seems more applicable to the bulls.

Given the oversold extreme seen on a 13-day basis (not yet on the 8-week RSI) you are advised to take, start taking, profits on puts. The probabilities of some bullish news or analysis coming along seems to increase in oversold markets. Well, lets say that the possibility of a bullish interpretation of some news, event or sequence of events, increase proportionate to how many shorts there are that could drive a next rally.

Support is noted on my COMP daily chart at 2050. 2048 represents potential support implied by COMP having reached a 38% fibonacci retracement (of the March '09 to late-May advance). 2000 is one of those big round numbers with a few zeros that could invite speculative buying. 2000-2025 in the Composite is probably the Dow's 10000 in terms of how it's perceived.

Near resistance/selling pressure now looks to come in at 2200, with next resistance seen around 2250. 2300 is resistance implied by my declining down trendline and an important level technically if overcome.

I think we're at or near where support/buying interest will be found, between 2050 and 2100 in COMP in the coming shortened week. Enough buying interest ahead in this oversold market for a rebound toward 2200. On the other hand, a close below 2050 in COMP suggests a new low ahead, such as to 2000. A touch to 1900 couldn't then be ruled out at some point; just not what I'm expecting currently, especially not near-term.

MARKET SENTIMENT:

Trader sentiment levels on a daily basis and showed little change last week as NO dips to or under the 'extreme' bearish 'oversold' level seen above occurred this past week. This as prices took a further big nosedive, suggesting continued complacency by those who are actually trading options (versus people mostly expressing OPINIONS).

I anticipate that a final tradable low, whether that is a lower low (or a higher pullback low) will come when there is more fear of a bear market and more greed to capture the expected big further decline. There is no price target in this prediction, only that more bearishness is likely to occur BEFORE there is a tradable or sustained rally.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart now shows the bearish aspect of the sizable downside price gap between Monday's low and Tuesday's high; the resulting 'space' representing a so-called (bearish downside) 'gap', showing visually increasing downside momentum.

The upper end of such gaps tend to mark substantial resistance and selling pressures; so, as noted on the NDX chart, this 'defines' key technical resistance for the 1823 area. Immediate overhead resistance, while not easy to ascertain after a straight line fall, may start around 1775.

Support/buying interest comes in potentially around 1700, following that lower down trendline. It's also where I'm focused in looking for a buy in point for a trade.

This selling may be getting overdone. Doesn't mean it's going to rally, just that a lot of shorts covering in a short span are enough potential buyers to lift the market ahead, especially if sellers get more selective and wanting higher prices to step into renewed selling and shorting. Major fund managers are not going to let go of all their tech bets; better to sell other sectors.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The chart is bearish. The only short-term bullish aspect to the chart picture is that QQQQ has now fallen to the low end of a possible downtrend channel, which could lift the stock a bit or at least mean that a further decline will slow, suggesting at least a pause in the 'waterfall' straight-down decline. This is important to know in options and assessing not only how much farther prices might fall but how QUICKLY.

Support, even if minor, is implied in the 42 to 41.6 area. It looks like a fair amount of short-covering and speculative buying occurred after the Thursday low was made, causing the brief dip under 42.0. It's easy to anticipate near support in this area. 40.6 begins a next key support area.

Tough overhead resistance begins in the 44.0 area, extending up to 44.8. Major resistance begins around 46.8.

Right now I'd rather be long under 42 (exiting stop set at 41.5) than short at 44.0. If I was short above 44, I'd wish for another dip below 42 in which to cover.

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) has this kind of downward sloping 'wedge' pattern but its way to soon to say this offers a bullish hope for a resumption of what has been a long-term uptrend. The recent touch to, and rebound from, the lower down trendline at least suggests one potential change ahead and a price dip to an area offering a launch for a bounce.

I've noted support in the early going this week at 587; more of a support zone between 600 and 587. 580 is a possible next lower support. Below 580, RUT could be in something like free fall again for awhile, at least until possibly the 568 area.

Resistance is at 638-640, extending to 650. A sustained move above 650, at the current down trendline, is needed to suggest a retest of the last upswing high at 677 or beyond.



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.