THE BOTTOM LINE:
I've been saying for awhile now that major extremes in bullish sentiment AND high overbought readings suggests extremely high risk for a correction. I suppose I could make a flat 'rule' that 8-week Relative Strength Index (RSI) readings at 80 and above is an opportune time to exit long calls at a minimum and buying puts for the adventuresome. For this rule of thumb to 'work' out there should also be extremes in bullish sentiment AND price action that also suggests a top. In terms of price considerations, the weekly highs of the past two weeks stopped exactly at resistance implied by a Fibonacci 62% retracement of the prior major decline (late'07 to early'09).
In terms of a projected wave 'count' I've been playing with, I wrote that ..." a correction is coming but there should be a rally to higher highs after that. A correction ahead, which is certainly due or overdue, would likely constitute the second corrective downswing ('small' wave 4) within a 5th wave 'final' rally, before a more major corrective pullback, most likely in the Q1 to Q2 period. This is some thoughts on the bigger picture and not a specific guideline to trading decisions obviously."
A background to the foregoing (Elliott) wave forecast/interpretation is seen in my most recent Trader's Corner article. (See the second chart). I don't base short to intermediate-term trading decisions on projected 'wave' counts alone but I do find them of forecasting interest when I see what I think is an 'obvious' wave pattern on daily and weekly charts.
I have the view that whether it takes the form of sideways choppy action or that of a more significant retracement of prior gains, the correction that got underway this past week may take a few weeks to play out. This market got too overbought to suggest that a counter-trend correction will be a very short-lived affair. Sometimes it happens that RSI extremes will be quite early in terms of timing a top based on this indicator extreme alone. However, this most recent 'extremes' in price, RSI and my sentiment indicator, all occurring on 11/5, looks to exactly coincide with an interim top; not in my estimation, a 'final' top for this bull market that began 19 months ago.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
Last week I was thinking that a move in the S&P 500 (SPX) index above 1220 could signal a move to around 1240 or so. NOPE! Instead SPX formed an approximate double top. A difference of 7 points in the two tops isn't particularly significant here. I don't think this a 'final' top for the bull market that began in March of last year, but it's appropriate to pay attention to such prospective tops until the prior highs are pierced. Near-term I look for still lower prices, especially as signaled by a break below the 21-day average.
Resistance as implied by a weekly chart retracement of 62% (at 1228) as seen above in my initial 'bottom line' comments is noteworthy. A sell off was 'signaled' by the first break of SPX's up trendline. The chart is now mixed in its pattern but no intermediate downside chart reversal is suggested unless SPX starts falling below 1130.
Extremes in price, the 13-day RSI AND bullish sentiment were made on (Friday) 11/5. It's unusual for all to coincide on the SAME day but this market was 'due' for a correction and these technical considerations appeared to be spot on in signaling the day of the top. Tough to 'get' in trading sync with that top immediately but some did. I wrote last week that ..."the RSI is also at a major 'overbought' extreme. This can go on a while longer but such extreme readings (e.g., at 80 & above) are associated with market tops as you can see." Was I short right at the recent top? No, I get caught up in pronounced bullishness to a degree also.
Initial support came in at the 21-day moving average (at 1194 currently) on Friday. Next support is 1180, then at 1150. Major support begins in the 1130 area.
Near resistance is at 1210, with pivotal and key resistance at 1226-1227. Major resistance is at 1253.
Per a query I got on this, I haven't been highlighting this pattern, but the Inverse Head & Shoulder's that formed over the late-May to late-August period (see above SPX chart), followed by an upside breakout above the 1129 'neckline', suggested a 'minimum' SPX upside target to around 1149; i.e., distance from bottom of the middle decline, the Head, to the neckline, ADDED to the neckline (after the upside penetration of it). However, these measuring implications are not hard and fast, but 'rule of thumb' estimates of rally potential in the case of inverse (bottom) H&S patterns and downside decline potential with H&S tops.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart, consistent with it lagging the larger 500 (SPX) index a bit, didn't achieve a robust retest of its prior highs in the 555 area. OEX got into that ballpark, as the prior top saw a cluster of highs in the 553 area and the index touched this level on a few occasions before coming down fairly hard this past week. As with SPX, the S&P 100 has formed a potential double top and pierced its up trendline, so the chart has turned mixed. The short-term hourly chart (not shown) pattern suggests further weakness in the early part of the week.
Very near support is assumed in the area of OEX's 21-day moving average, now at 538, with chart support next suggested around 530. A further and pivotal support is seen in the 524-520 zone.
Immediate resistance is at 543-544, at the previously broken up trendline, now assuming to 'act' as a resistance. Pivotal chart resistance is at 550-553.
DOW 30 (INDU) AVERAGE; DAILY CHART:
In a short-term Dow 30 (INDU) downside reversal, INDU has fallen below its trendline and to below the pivotal 21-day moving average. These are the kind of fluctuations that Charles Dow called not worth paying attention to. However as traders we surf these smaller waves or at least want to know what's breaking.
I anticipate some further weakness in the early part of the week, but a rally by mid-week or so as a likely return volley by the bulls but one not likely to be as robust as before this past week's sell off. This is still a bull market, but this time of year doesn't favor a lot of new investors piling in to keep this rally going as signs come of holidays ahead with a tendency to wind things down. This is a rally that's covered a lot of ground since the late-August lows in the 10,000 area; for this particular group of 30 stocks especially.
Given that INDU is composed of so few current glamor stocks especially in tech. The Dow can't maintain a rally above 11,000 with just IBM firing on all cylinders. Of course there have been some high flying Dow stocks in recent weeks in mainline mature businesses; recent examples are provided by CAT, DD, HD, IBM of course, KO, MCD, T, TRV, UTX and XOM (surprise).
Key support is at 11000, with next support at 10900-10880. Major support begins in the 10725-10700 area.
Immediate overhead resistance is suggested at 11290-11300 and would be a return of the Average to its recently broken up trendline; what was support tends to 'become' subsequent resistance. Pivotal resistance at the prior recent highs is in the 11450 area. If INDU gets back above 11400 anytime quick, it would be showing more strength than I'm anticipating today.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index chart turned mixed in its pattern once its steep up trendline was pierced. This is not to say that a reversal in the dominant uptrend is suggested, short of a fall that carried the index below 2350. By the way, the Inverse Head and Shoulder's bottom described for SPX was paralleled in the COMP chart, only the 'minimum' upside objective projected for COMP was fulfilled when the Index got to 2560.
Extremes in price, RSI and my sentiment indicator were made on the same day, Friday 11/5. Unusual for all to coincide on the exact same day but this market was due for a correction and these three technical aspects appear to be spot on in signaling a top to the day. Price resistance was suggested more by the weekly S&P than the weekly COMP chart (not shown). It was true that the weekly COMP had only a single Close above its March peak. I often say to look for a second consecutive close at new highs to 'confirm' a breakout.
Resistance is at 2585, extending to 2600. Major resistance begins around 2700.
Near support is noted at 2475, then at 2400. The 2350 area looks to be the beginning of major support. I look for lower prices ahead; one signal for that would be the 21-day average getting pierced further intraday and especially on a closing basis.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart has given up its highly bullish pattern with the break in the well-defined up trendline. The chart is now mixed in its pattern as the short-term trend has turned down. The index pierced its trendline at 2177 but closed at 2187 above the line. Nevertheless, momentum had started to shift and traders were given time to exit index calls and long stock positions like QQQQ. The Friday close at the 21-day moving average suggests a possible rallying instinct. However, the shorter-term hourly charts (and for all the major indexes) have bear flag patterns, projecting further weakness early in the coming week.
'Overbought' extremes finally caught up with the market but the decline has been measured. It's still a bull market folks!
I think the decline will also continue to be measured, without the free fall waterfall type declines more characteristic of bear market periods.
It was insightful to see the 13-day RSI reach a high at about the same reading that occurred with the March top. Any RSI reading for indexes (not for other markets necessarily) over 80/81 can continue but it's a 'black swan' event to do so for more than a day or few days. Look for still lower prices after the weekend, but a bounce by mid-week would be about as expected.
Key/pivotal support is at 2100, then at 2050. Major support begins in the 2000 area.
Pivotal resistance is at 2200 currently as demonstrated by the line of resistance that formed on the hourly chart (not shown) at 2191-2200 and projected as well by the current intersection of the pierced up trendline. Next resistance I've highlighted as expected around 2240.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
There's little to add for the QQQQ tracking stock in terms of cautionary comments made to NDX bulls if they're looking for continued strong rebounds like we've gotten used to seeing in prior weeks. I think instead we're in a price discovery period where it will be found that current tech stock prices may be a bit rich given the still precarious state of the economy, ours and globally, which will directly affect earnings.
While QQQQ has held support at the moving average and could bounce from there, current downside momentum suggests still lower prices ahead.
Volume expanded on the decline as some long holders of the stock, some of whom were ready to lock in significant profits with stock bought well under current levels. To gain 8-10 points in the stock is a very nice move indeed and was doable on this last power move; one having the general characteristics of a 'wave 3' or a power move most often seen in the midpoint of a rally, not the end of it.
Near support: 52.0
Next support: 51.6, then 51.0
Pivotal support: 50.0
Near resistance: 54
Major resistance: 55.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) sold off this past week of course in lockstep with the overall market. RUT looks to be coming down to test support at its up trendline, currently intersecting around 715. A break of the trendline, a better than even odds of it happening, suggests a drift to what had been solid support in the 700 area. I anticipate that area to be tested but I see 690, as the key domino support point to watch.
Resistance is at 740 clearly, extending to 746, resistance suggested by RUT's last big top (April 2010).
I wrote last week (11/6) that I didn't have higher upside projections than to the 740-746 area and RUT got to up to 739 this past week which now looks to be the maximum upside for now. I guess it would have triggered too many sell orders if the index got bid at 740. 739-740 is pivotal resistance in the coming week.
Near support anticipated is at 715, extending to 700, with key support at 690. Major support begins in the 660-662 area.
GOOD TRADING SUCCESS!