THE BOTTOM LINE:
I indicated last week that I'd buy calls on a good-sized dip, such as (at least) 30 points in the S&P 500 and 15 points in OEX. The dip was around 40 points peak to trough in SPX and 18 points in OEX, and the pullback was worth buying as prices rebounded from technical support.
I wrote on my 'technical' take on the major indexes after Thursday's close in a special Trader's Corner and pointed out that SPX retreated right to its up trendline I had in place last week. Pretty amazing to see prices go right to a support trendline and then to see the selling dry up and buying come in. After decades of trading it still amazes me when chart patterns come in like that. The Composite (COMP) and the Nas 100 (NDX) lows on Wednesday and Thursday resulted in redrawn up trendlines that look like they could be the next new (and better) 'line' of support.
I went over my rationale for a likely bottom in my Thursday e-mail (and online HERE) for the idea of the recent sell off likely being a correction rather than any significant trend reversal. I trend reversal would need to see penetration of the prior swing lows, which are noted on all my charts. Trendline and moving average considerations are another factor, with a third being the occasional insight provided by a non-price indicator, the spike in the VIX in this instance. I particularly recommend checking out the VIX chart and it's notations in the aforementioned article by using this online LINK.
The big upward spike in VIX into Wednesday carried the S&P Volatility Index well over my 5 percent upper 'threshold' or envelope line relative to VIX's 10-day moving average. As you'll see on that chart, such spikes have been significant in coming just before further upside progress in the current bull market.
That's about it for the summary stuff. You'll see a redrawn uptrend channel in the COMP chart, that explains the rationale for redrawing the up trendline. Once an up trendline is established, a parallel line intersecting the highest high(s) for the period shown forms the simple basis for constructing an upper channel line.
I'd lastly just note that this market is still showing an extreme overbought reading on momentum indicators applied to the weekly charts; not shown here, but the weekly MACD indicator appears with the COMP chart in my companion 'Trader's Corner' article of a couple of days ago. I don't want to minimize the danger of corrections in such an overbought situation. The recent sell off is a good example. No doubt the oil price spike was a key 'trigger' for the sell off, but the same events in a more neutral or oversold market might not be more than a ripple. The trend remains up and we have to go with the trend and not related technical or fundamental worries. An old Wall Street saying is about bull markets that climb "a Wall of Worry".
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index chart remains bullish as prices on the recent corrective pullback stayed within the uptrend channel highlighted last week. The Thursday-Friday rebound started almost exactly from SPX's up trendline. While the Index closed below its 21-day moving average for two days running, often indicative of some further weakness to come, trendline support 'trumps' moving average considerations. Moreover the next lower support of interest below the 21-day trading average, the 50-day moving average, was not tested in the case of the S&P and Dow and 'held' in the case of Nasdaq. One scenario here is an extension of the current rally (e.g., back up to the 1340 area, followed by another sell off toward 1300. This would 'complete' a common down-up-down corrective pattern.
Near support comes in around 1300 at the current intersection of SPX's up trendline, with lower and very key support around 1275, at the prior (down) swing low. A substantial break below 1275 would suggest further weakness to come, as this is the 'classic' indication of an intermediate-term trend reversal. Near resistance is suggested at prior highs around 1344, with fairly major resistance suggested at the upper end of the bullish trend channel which currently intersects in the 1387 area.
RSI and SENTIMENT INDICATORS ( see above)
SPX is no longer at an overbought extreme in terms of the Relative Strength Index (RSI) on a daily chart basis. The indicator didn't fall into 'oversold' territory but it RARELY does in a bull market. In a strong uptrend, a 'neutral' RSI reading around 45-50 seems to be enough of a drop to set the stage for a next rally.
I noted last week that: "Helping keep this rally going is still-moderate bullish sentiment, especially compared to the recent accelerating price trend ..." Friday saw a spike in the CBOE daily equities call volume that brought up the reading on my 'CPRATIO' (bottommost, above) indicator some. Sharp selloffs, as the herd stampedes for the exit at the same time, tend to inject more fear into the greed versus fear dichotomy. This market is more likely to top out with more associated greed than fear.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index chart remains bullish. As with the larger '500' index, this past week's sell off took OEX under its 21-day moving average, but the Friday close was back at the Average. The dip was on the order of magnitude that I suggested last week as a buying opportunity for (at or slightly out of the money) calls.
Near support is suggested now at or near the recent 582 low, next at the intersection of the up trendline around 578; and last but not least very key support is in the area of the prior downswing low at 575.
Resistance comes in at the recent top at 602, and then is suggested up in the 620 area, at the top end of OEX's uptrend channel.
I wrote last week that I would be "...cautious if there's a breakdown below the 21-day average; e.g., a close below this key average that is followed by further weakness the next day." This statement was somewhat balanced by also noting that even more pivotal technical support would come in at OEX's up trendline and especially at the prior 575 downswing low. I wouldn't be surprised to see a rebound back up toward 600, followed by another selloff toward 580.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) average was in a strong uptrend due to 16 of the 30 INDU stocks that were in strong uptrends coming into this past week; i.e., "AA, BA (breaking out above a multimonth trading range), CAT (construction), CVX (oil/energy), DD, DIS, GE (a prime Dow bellwether), HD, IBM, INTC, JPM (banking), MMM, PFE, TRV (financial), UTX and XOM (oil)." Still holding up pretty well are CAT, CVX, DD, GE, HPQ, JPM, TRV, UTX and XOM.
The rebound from Thursday's low may have tough going on a further rally, as resistance could be found next around 12200. Above 12200, fairly tough resistance should come in again in the 12400 area. Wherever a further rally takes INDU, there may be another subsequent pullback into the 11900-11800 price zone. I'll be looking to buy a second dip if it occurs.
It's likely that there's some support/buying interest back at recent lows around 12000, then at the up trendline, currently intersecting around 11892; even more pivotal support is in the 11800 area or back to the late-January prior intraday low.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart remains bullish. The recent pullback has so far reversed at a level above COMP's prior downswing low, which keeps the uptrend intact. Unlike the S&P 500, the recent rebound didn't start at COMP's up trendline. Rather, the lower up trendline you see on my daily chart is one redrawn per the notations for the old (gray) set of channel lines, versus a new bullish price channel in blue.
As a reminder and an aside, an upper channel line is simply a line intersecting the highest high(s) that is parallel to the (lower) UP trendline. The up trendline is the one connecting the lowest lows in an advance. The upper parallel line does give some idea of possible resistance but isn't of the same key importance as the lower line of support.
While I anticipate a resumption of the uptrend ahead, a related key question is whether COMP has another dip to the 2700 area soon or after a test of resistance around 2810, the lower end of the downside chart gap; OR from resistance at the 2840 high. A second dip to support, followed by a rebound would give more assurance that this recent correction had run its course. Major resistance comes in around 3000 and that's where I see COMP headed at some point ahead.
Near support is noted at 2710, the current trendline intersection, then at the prior lows around 2677-2688. I'm not anticipating lower lows below these but if it happens, next support is 2682-2676, extending to the 2650-2648 area.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart remains bullish, as long as the pattern stays intact of a corrective low that's above the previous bottom; OR, even on a further dip if NDX forms a double bottom around 2258. The rebound from the area of the 50-day moving average (and my redrawn up trendline) suggests a still viable uptrend in NDX. My revised lower trendline is now assumed to 'define' support going forward and time will tell on this. I've noted near support at 2292 relative to this trendline.
Resistance is anticipated at the low end of the recent downside price gap (not noted on the chart) at 2366. Next resistance is assumed for the prior highs in the 2400-2403 area. Major resistance may be found at the high end of the NDX's uptrend channel assuming NDX has another strong up leg above the 2400 area; the upper channel line currently intersects at 2533.
What I suspect is that this initial rally won't take us straight to new highs for NDX's advance so far without (first) another decline that retests support around 2300. I'd like to buy THAT dip if it occurs; not however if part of a high volume panic type decline that could fall like a stone through 2300-2292.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) rallied from the area of its 50-day average, thereby forming a higher relative low above the previous 55.4 bottom. The definition of an uptrend is higher relative highs and higher relative lows on pullbacks. There will be pullbacks in even the strongest advance of course; waiting for those dips is challenging as they don't always come along very often in a strong trend. This recent sell off looks like it was a decent buying opportunity. I'm not convinced however that there won't be another dip into the area of recent lows that would 'complete' a correction.
Heavy volume 'came out' on the sell off which washes some of the players out whether its profit taking or panic; e.g., by those who bought into this rally when big gains had already been made. Taking out the weak hands is favorable in poker and for further gains in stocks!
Near resistance is assumed to lie in the area of the prior recent high around 59.0. I anticipate fairly major resistance around 62 if there is a move to the upper end of the Q's uptrend channel.
A first area of support is highlighted at the up trendline, currently intersecting at 56.3. Next support is assumed to lie in the area of the prior 55.4 intraday low.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) rebounded from support in the 800 area and its 50-day moving average and well above its prior 772 downswing low. I've redrawn RUT's up trendline similarly as I have with the Nasdaq indexes. Redrawing trendlines is just something that's ongoing from time to time.
Resistance is anticipated on a move back up to the 830 area initially and certainly at the 838 prior intraday high. There could well be an initial rally failure at/above 830 and another decline back toward 800 which would then possibly or probably 'complete' a correction and set up a next leg higher. Of course, if RUT just went on to new high for this move, significant resistance may then come at the intersection of the upper channel line, currently at 867 but of course rising over time.
Support is expected on pullbacks to the 795-800 area, at the up trendline and 50-day moving average; even more key support is at 770-775. A decisive downside penetration of the prior swing low at 772 would suggest an intermediate trend reversal.
I noted last week that: "Key technical support is seen in the 800 area." This turned out to be at least a short-term buying opportunity in calls. I don't anticipate closes back below 800, but time will tell. With RUT no longer 'overbought' according to the RSI, that's a help in keeping prices from sinking further. The spike in oil prices could be cresting also.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
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.