THE BOTTOM LINE:

To 'confirm' that the intermediate-term trend had reversed from down to up would have taken a move above the June highs and instead we got a big sell off. 'Double Dip' talk resurfaces and I'm not talking ice cream.

I wrote last week that the Nasdaq Composite was facing resistance at the top end of a broad downtrend channel dating from its April highs. It has been downhill since the April top as each rebound has fallen short of the prior rally peak. Since the tech heavy Nasdaq had been leading the market, it was likely going to be quite a drag on the overall market if investors decided current tech valuations were too high. The PE's of leading tech firms (the Nas 100) were justified only if there was continued economic expansion, implying no double dip recession. Recently the Fed hasn't sounded too sure about the durability of the current recovery as economic momentum slows down.

The fundamental and technical pictures are in synch currently. The 'lid' on the market suggested by the various reporting on peak 2010 output possibly being behind us, was matched exactly and graphically by the double tops apparent both in the S&P 500 and the big-cap tech sector represented by the Nasdaq 100 (NDX). Looking at the short-term picture (next 2-3 days) suggests a rally should set up early in the week, say by Tuesday as the 21-hour RSI would suggest; not shown and oversold.

As I looked at all the major index charts after the week just ended, broad downtrend channels were what I was 'seeing' on the charts. Rallies in the major indexes this past week 'failed' (reversed) at the top end of downtrend price channels as will be seen below on my slightly redrawn upper trendlines in some cases; such reversals usually then see prices at least retreating back to the middle of the channel.

The bullish wedge pattern I had been seeing in earlier weeks, implying a strong likelihood of a further good-sized rally to carry ABOVE the June highs recedes into the background and is no longer the pattern to focus on. I'm back to looking at a simple downtrend channel. This pattern makes finding future resistance relatively easy; i.e., it's at the top end of the channel. Conversely, if there was a move to new lows for the year, support could be looked for at the bottom of the downtrend channel.

Speaking of new 2010 lows, which I tend to doubt will occur in the next few weeks, it would take the Dow falling under 9500 to 'signal' a break of the neckline of a possible major Head & Shoulder's (H&S) top pattern that is traced out on the weekly Dow chart below. While I don't think the market has built a massive top, I did notice that formation of the so-called Right Shoulder (RT) of the third high has gone on long enough and recent highs have pushed up far enough so that the Left & Right Shoulders now are more symmetrical, which further takes on the 'right' shape. It's worthwhile to see what's being talked about out there, as long as you keep in mind that the reason someone technically oriented talks about a POSSIBLE double top or a 'possible' H&S Top is that the formations sometimes don't end up making the further move that is thought to 'confirm' the pattern; e.g., in the case of the H&S top, the neckline has to be decisively penetrated to 'signal' a major further down leg.

Since I'm most focused on the week to week chart and indicator picture, time to move on to the various daily charts.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); DAILY CHART:

The S&P 500 (SPX) formed a possible double top at this past week's high and the index remains in a downtrend as traced out by the broad downtrend price 'channel' outlined on my next chart. Defining the dominant pattern with two downtrend lines as seen below allows us to now focus on pretty clear cut lines of potential support and resistance.

I wrote last week (8/7): "While SPX hasn't shown any bearish reversal, it hasn't 'proven' it will have a significant new up leg either until or unless it can substantially pierce a line of resistance at 1128-1130. A new up leg above 1130 suggests upside potential perhaps then to the 1170 area. A dip or close below 1100 sets up a test of 1080 support." Hey, that's were we are in SPX, knocking on the door of 1080. Next lower support is noted at 1060. Major support begins in the 1010-1020 area. Just going by the low end of the downtrend channel, major support could be closer to 960-965.

Pivotal resistance remains at 1130, same as last week and where the last rally failed. I didn't mark the next lower resistance on my SPX daily chart below, but I'd say it's at the recent 'breakdown' point in the 1112-1110 area.

MARKET SENTIMENT:

Given the recent sell off, bullish sentiment remains relatively high in my estimation. On the Wednesday sell off the ratio did dip, but not one suggesting wholesale bearishness.

I take 1-day or 5-day average readings that drop to near 1.2 (or under) as a 'signal' for an oversold reversal within 3-5 trading days. A low reading like this suggests traders are exhibiting a bearish extreme as regards their market outlook. Since the herd is not often right or at the right time, this rule of thumb has mostly worked over the years. The foregoing always assumes that price action within that period also suggests bottoming action, as well as an oversold RSI indicator.

S&P 100 (OEX) INDEX; DAILY CHART

The S&P 100 (OEX) has been 'clarified' chart wise in a bearish way as the index remains in a downtrend, as seen visually by both the broad downtrend channel formation and by the fact that OEX pierced the up trendline dating from the rally from the early-July low up to recent highs. Admittedly it did seem that OEX was going to climb above its prior intraday high at 510. The index did go to new closing highs but couldn't gain more than 2-3 points above 510. The longer the churn in the same area, especially with the 13-day RSI up near overbought levels, the greater the potential for a downside reversal.

I noted the increased risk of a sell off last week and not to 'bet' on much further upside. I equate the 'risk' of staying in calls bought at lower levels to the risk to reward equation if you were to buy OEX calls fresh today. If you won't take the risk of new positions, what about the risk to profits on calls bought early on in the rally?

Resistance is noted around 508, but not noted (by my usual red down arrows) at 505, then at 495.

Initial technical support is at 490, than at 480, which was a prior (down) swing low. Fairly major support begins in the 460 area and extends to 440, at the bottom of the downtrend channel.

DOW 30 (INDU) AVERAGE; DAILY CHART:

Based on this past week's price action it became appropriate to 'define' the Dow 30 Average (INDU) recent rally failure as hitting resistance at the top end of a broad downtrend channel. Once that bearish process completed, the sharp break of this past week knifed through the up trendline dating from the last low. The STEEPER a trendline is the bigger the price correction at the end of it.

Given the reversal patterns involved, bearish looking Dow stocks include CAT (potential double top), CSCO, DD, HPQ (still), IBM, KO, and WMT. MCD is the only stand out bullish Dow chart.

Last week I considered that INDU had cleared its prior rally high by enough to suggest a renewed intermediate uptrend, joining a short-term and long-term uptrend. WRONG! Or, more precisely, it was too soon to tell on the Dow with the S&P indexes not 'confirming' the same pattern. I did note (last week) that INDU hadn't "cleared near resistance or congestion around 10700." And, only if the Dow could climb above 10700 (to the point where this same level shows up as a new support) would a new up leg be suggested. Never happened and hopefully Dow Index call holders bailed because of it and maybe some puts got bought too. As I already said with S&P comments, the longer the churn the greater the burn. Especially when the 13-day RSI is nearing, or at or above, 65-70.

Near resistance is in the 10400 area, then at 10600-10630, extending to 10685. Near support is at 10200, then in the 10000 area.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The top end the Nasdaq Composite (COMP) Index bearish downtrend channel stopped the rally coming into this past Monday. If you took Monday close in isolation, it would look like a bullish breakout. The fact that it wasn't is why I always emphasize holding fire for the 'two consecutive day' rule on supposed 'breakouts' and 'decisive' penetrations of trendlines.

Last week I opined that COMP would NOT pierce near-term resistance, at its upper channel line and that was the way it went (fortunately for me), except for the minor rally at the beginning of the week. The most common outcome based on what I've seen in years of trading, is that reversals at the top end of price channels get pulled to at least a move back to the midpoint of the channel.

2150 is support, than 2100. Resistance is seen in the area of COMP's 200-day moving average and at the trendline; i.e., at 2270-2280.

MARKET SENTIMENT:

Repeating what I said in my SPX comments regarding overall Trader Sentiment, as seen in my indicator above: Given the sharp recent sell off, bullish sentiment remains relatively high in my estimation. On the Wednesday decline the ratio did dip, but not one suggesting wholesale bearishness.

I take 1-day or 5-day average readings that drop to near 1.2 (or under) as a 'signal' for an oversold reversal within 3-5 trading days. A low reading like this suggests traders are exhibiting a bearish extreme as regards their market outlook. Since the herd is not often right or at the right time, this rule of thumb has mostly worked over the years. The foregoing always assumes that price action within that period also suggests bottoming action, as well as an oversold RSI indicator.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) chart is bearish in its pattern. The reversal both from a potential double top as well as from its upper (channel) trendline was bearish, with a next bearish 'trigger' its break under a multiweek up trendline. Once pierced, steeper (up) trendlines tend to bring steep declines.

I'm anticipating lower levels for NDX, but not necessarily right away, given a short-term oversold condition as we may see an early week rally attempt; e.g., by Tuesday.

Near support/buying interest looks like 1785, at a prior (down) swing low, then in the 1750 area. Fairly major support should be found at the 1700 prior low. If evaluated by the current intersection of the lower channel line, major support is suggested around 1635.

Near resistance is in the 1850 area, then around 1882-1883, with major resistance beginning at 1900 to 1910.

NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:

The Nasdaq 100 (QQQQ) tracking stock is of course showing the same bearish patterns as NDX, but I'll go through the key levels of potential support and resistance. It would take an initial breakout above 47, then to above 47.7, to suggest a turnaround to the current bearish chart.

Near support: 44.0 - 43.8

Next support: 43.0

Major support: 42-42.15

Near resistance: 46

Next resistance: 46.6

Major resistance: 47.15-47.7

RUSSELL 2000 (RUT) DAILY CHART:

The Russell 2000 (RUT) chart shows a declining trend dating from its 672 high; subsequent highs then were touching the upper line of a projected downtrend channel made after that peak. Such upper channel lines often prove to be a substantial line of resistance.

When RUT then went on to break its 55-day moving average (my one exception to use of a 50-day setting) it was a further bearish 'signal' and not usually suggesting just a little price dip. A substantial sell off at some point so often follows reversal(s) at the upper end of a downtrend channel anyway. A move back to the middle of the channel tends to be a 'minimum' objective.

Near support is in the low-600 area; if reached, there could be a rebound from there. A short-term rebound looks due so whether from 600 (maybe too 'obvious' a level) or higher, a short-term rally looks due. Below 600, the prior low at 587 is potential next support. If there was a new low made (below 587), 553 is support implied by the current intersection of the low end of RUT's downtrend channel.

Key near resistance is at 640, representing RUT's Wednesday 'breakdown' point, which, not surprisingly was noted as near support last week. Next resistance is seen at the top end of the price channel, in the 655 area currently.



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.