THE BOTTOM LINE:
Last week I was forecasting technical trouble ahead for the S&P after the Nasdaq broke below long-standing up trendlines. A sharp decline then came on Friday in the form of key downside reversals. Such downside type reversals have also been termed 'bull trap' reversals, as described in my most recent (1/19) Trader's Corner article. A 'bull trap' or KEY downside reversal is a move to new high followed by a sharp decline in the same trading period; e.g., daily or weekly. I define a 'key' daily downside reversal even more specifically as a move to new high followed by a Close that is below the prior 1-2 day Low. A reason to pay attention to a key reversal pattern is that it's so often followed by a further substantial move in the same direction.
There was a bearish price/RSI divergence that developed this past week in both the S&P and Nasdaq that is highlighted on my SPX and COMP charts. This divergence served as a warning of a potential reversal; it was more pronounced in the S&P, but also appeared with the Composite.
What also developed technically in the Nasdaq Composite (COMP) and Nas 100 (NDX) this past week was that each rebounded to touch the previously broken up trendline on Thursday, which then proved to have 'become' strong resistance. The Friday breakdown then occurred after this rebound to what an early Wall Street mentor of mine used to call the 'kiss of death' trendline.
The aforementioned technical patterns were ones that gave some warnings of what came on Friday. I have so many experiences of technical patterns warning of future reversals that I no longer believe in straight line cause and effect relationships in some piece of data or news coming out of the blue to 'cause' a reversal. Technical action warns of impending reversals ahead of time quite often. Of course, all of this came within the backdrop of the market being quite overbought on both a shorter-term daily and long-term weekly, chart basis. Something was going to happen sooner or later in the way of a correction and which would be explained in terms of a precipitating event(s).
Where do we go from here? This is the big question of course and I can't say that I can predict where the major indexes are heading; we'll have to see how the market acts in the coming week(s). At a minimum, the S&P and Dow may at least test support implied by the lower end of their uptrend channels as highlighted on those charts. I doubt we'll see a rout here, just sideways to lower (and probably choppy) price action for the near to intermediate-term; e.g., a few days to 2-3 weeks.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index chart turned short-term bearish as Friday's price action technically consisted of a key downside reversal; i.e., a higher high, especially after a prolonged move, followed by a later sharp price collapse during the same trading period (e.g. daily) and a Close under the prior 1-2 days' Lows.
As mentioned in my 'bottom line' comments above about a bearish price/RSI divergence that set up prior to Friday, the recent advance (into Thursday) was not also accompanied by a similar move higher in the RSI. To confirm the trend so to speak, its helpful to see any new relative high also accompanied by a higher relative RSI reading. When the slopes of the trend of prices and the slope of a line connecting RSI peaks, are in opposite directions as seen below, it should not surprise (and we should be prepared) to see a Friday style reversal.
As to the downside potential for SPX, I anticipate at least a test of support in the 1260 area and perhaps 1220 will be seen again. Major support is anticipated at 1200-1175.
Near resistance is at 1300-1305 with major resistance in the 1350-1355 area currently.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index is still within its longer-term uptrend channel and wouldn't get knocked below it unless OEX fell to below 562 currently and also potential support implied by the 50-day moving average. The break below the 21-day average is bearish but one more day below the average is needed to confirm.
I've highlighted the key downside reversal pattern of a new high or the same high, followed by a plunge in prices such that the Close is not only under the prior 1-2 days' Closes, but that Close is below, often WELL below, prior Lows. The main characteristic is the collapse of prices within the same trading period. Key downside reversals have a good record when it comes to forecasting enough further weakness to suggest executing bearish trading strategies like buying puts on a rebound.
Resistance in the 586 area is quite apparent by 3 days in a row when OEX intraday high was 586 something. Major resistance is likely in the 600-601 area.
The 21-day average at 576.9 could still represent near-term support if the index rebounds on Monday. Next support looks like 570, then at 562, which is where the up trendline, and also the 50-day moving average, intersect. Major support is anticipated for the 530 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) average has fallen back to near support in the 11800 area. After hitting nearly the same highs for 3 days running and given the falling (prior to Friday) Relative Strength Index (RSI), it wasn't too surprising to have the Friday price break. You couldn't hardly pick the day it would happen but 'overbought' markets tend to see sharp selloffs.
When stocks stalled this past week, some traders saw it as a good sign to sell. So far, INDU has the kind of dip that, relative to its trend, is not that big of a deal correction wise. More weakness is suggested if INDU starts falling below its 21-day moving average. Two consecutive closes below this key trading average is usually suggesting more than just a fluke shift in short-term momentum.
11600 is a key technical support implied by the current intersection there of INDU's up trendline. A break of 11600 makes the Average vulnerable to a further 200 point drop. Major support comes in around 11000.
Resistance is seen in the 12000-1220 area. 12000 is what I highlighted last week. 12280-12300 should offer fairly major resistance.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
I did a not too out on a limb prediction last week that: "The likelihood of a further decline is now high." Boom, the return of the Nasdaq Composite (COMP) Index back to its previously broken up trendline marked the kiss of death to the 3-day rebound. A mention above how Michael Jenkins who was a minor mentor of mine in Wall Street days, called such a return to that trendline, the 'kiss of death' trendline. I've seen this pattern so many times I couldn't count them up.
Of course Thursday's High was NOT ONLY at the trendline but hit the same peak as its two prior highs in the current move. All the way around, the index looked vulnerable. Friday's close so well under the range of the prior 6 days, also provides a bearish chart outlook on a short to possibly intermediate term basis.
Very near resistance may be found on rebounds to the area of the 21-day moving average (currently at 2712); further resistance is at 2766-2770, extending to 2800.
Key support comes in at 2650, then at 2600. I'd rate the chart now as mixed, but more definitely bearish if COMP closed below its 50-day moving average (currently: 2643) for a couple of days running.
NASDAQ 100 (NDX) DAILY CHART:
I've been commenting for awhile now on the potential for selling to cap the prior strong advance in NDX once the 2330 area was reached. I saw it as potential longer-term resistance as it represented a 38% retracement of the 2000-2002 major bear market. Not an unlikely place for a pause and stumble.
After the Nasdaq 100 (NDX) lost its strong upside momentum of prior weeks and dropped below its up trendline, an attempt to regain its prior rate of upside momentum (what a trendline shows), resulted in a point where the rally was stopped, followed by a downside reversal. Resistance at an extension of the trendline that had been previously pierced was seen on Thursday. I've shorted such returns to this 'kiss of death' trendline on the basis of risk being 'small' (exit/stop out on a move to just above the trendline), relative to the reward potential of a sharp break. Given the way that RSI was already trending lower, it was reasonable bet or in a textbook way, a favorable risk to reward evaluation.
Prices looked headed still lower, but I'd also anticipate a short-term rally coming up. Support could well develop and buying come in on a fall to the area of the 50-day moving average; currently: 2228. I'm anticipating support at 2228-2237. 2200 represents a pivotal support. A decline to there would retrace more than half of the prior advance; specifically, it would represent a fibonacci 62% retracement.
Resistance may first show up on a rebound to the 21-day average currently at 2285. 2285-2300 is probably the key near term resistance area. The prior highs around 2330 on up to the current trendline intersection around 2345, suggests this zone as current major technical resistance.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
I'm anticipating lower levels consistent with the bearish chart. It's so often the case that a new up trendline is established at a lower angle or 'rate of ascent' and it's unlikely that this has been reached before another say 2 point drop.
Near support: 54.9-55.0
Next support: 54.0
Major support: 50.8-52.0
Near resistance: 56.1
Next key resistance: 57.5
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) follows the Nasdaq and its rally failure was as the index neared resistance implied by RUT's previously broken up trendline. It's been clear for awhile that the 800 area was going to offer selling resistance. Pivotal resistance in terms of reversing the short-term trend (to up), is at 800-805.
The structure of a decline would be 'complete' (i.e., by being symmetrical) in my mind if the index got back down to the 740 area. 772 is immediate support.
GOOD TRADING SUCCESS!