THE BOTTOM LINE:
Some technical aspects of the market suggest that we are at or near a short-term bottom. Whether this is only a pause on the way lower is not clear yet but some signs are encouraging. If you are extremely bearish now, remember how bullish the pundits tended to be just 6 weeks ago. It wasn't warranted to be so bullish then and is probably not warranted to get extremely bearish now.
Suggestions that the market has reached a bottom is most strongly suggested by the possible double bottoms that have set up in the Nasdaq Composite (COMP) and Nas 100 (NDX) as highlighted in those daily charts below.
The S&P 500 (SPX) could yet retest a key prior low at 1250 (relative to Friday's 1271 close) or the lower end of its broad weekly uptrend channel (not shown) in the 1232 area. However, the weekly Dow (INDU) chart suggests that INDU's recent low may have reached support at the low end of ITS weekly chart uptrend channel. This is a slight bullish plus for a possible end of the current correction. When I see a 'strong' pattern like a double bottom in Nasdaq I look at the S&P and Dow charts for any 'confirmation' of a possible bottom there. For this coming week, 11870 in INDU is the key trendline support on the weekly chart as seen in my first chart. A decisive break below 11870 in INDU would suggest a new down leg was underway or a possible retest of its prior 11555 weekly low.
Another way of looking at the extent of the recent correction is to compare it to the first down leg. It often happens that the second down leg in an intermediate correction is # 1, longer than the first and # 2, often is longer by certain amounts; i.e., the second down leg often runs from 1.25 to a Fibonacci 1.5 to 1.618 (1.62) times the point decline of the first downswing. I'm still assuming that the recent correction is part of an intermediate downside reversal, but NOT a reversal of the long-term uptrend.
Based on the length of the second down leg relative to the first, yields the following: the Dow's second decline to date is 1.25 times its first. SPX's second downswing is 1.5 times its first decline. COMP's second decline is so far 1.59 times the first sell off. The Nas 100 (NDX) second decline, peak to trough, is to date an exact 1.62 times its first down leg.
What these aforementioned calculations suggest to me is that the recent decline has fallen 'enough' to fulfill a 'typical' corrective scenario. However, this reasoning on a possible end to our current correction is more speculative than more definitive chart patterns like a possible double bottom in the case of Nasdaq or finding support at a major up trendline as is seen, at least initially, with the INDU weekly chart seen above.
Looking at the Russell 2000 Index (RUT), a Head & Shoulder' top formation suggest a possible further downside object to around 751. Meanwhile, RUT has formed a potential double bottom in the 773-776 area. The double bottom, if it holds, 'trumps', so to speak, the 'measuring' objective of the Head & Shoulder's. The H&S objective becomes something to watch for if 773 is pierced.
In terms of technical indicators I rely on generally, upside reversal potential is apparent in the oversold extremes seen with the 13-day Relative Strength Index (RSI) on the following chart PLUS another type of 'oversold' extreme implied by a big jump in bearish sentiment or, in another way of looking at this, a major drop in bullishness. Option market participants are trading many more equity puts AFTER a major decline has already occurred; this shows the fairly typical 'shutting the barn door after the horse has escaped'! It tends to be fairly predictable that investors get bearish more at or near the tail end of a big decline.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart remains bearish but there's the possibility that the index has reached support in the 1260 area. As seen on my next chart, the cluster of prior lows at the March bottom ranged from 1260 to 1249. Certainly the RSI and my CPRATIO numbers are low enough to suggest at least an interim bottom.
As I noted in my initial ('bottom line') comments, the second down leg has to date equaled a Fibonacci 1.5 times the extent of the first downswing (from 1370 to 1312, peak to trough). The second down leg in a 'typical' a-b-c or down-up-down correction will see the second 'b' leg of this length or a little more; e.g., 1.62 of downleg 'a'. At a minimum, the extent of the recent decline fulfills a common pattern, so it wouldn't be surprising to see a rebound develop soon.
Other strong technical considerations pointing to at least an interim (upside) reversal coming soon, relates to the extreme oversold levels seen in the RSI and my CPRATIO sentiment indicators. We have to go back to November 2008 and January 2009 to see my sentiment indicator AS low on a single day and 5-day moving average basis. These prior indicator lows were well ahead of the final March '09 bottom and represents one of the few instances of extreme bearishness ahead of still further declines.
I've noted support in the 1260 to 1249 zone, with next lower support in the 1230 area. Tough overhead resistance begins around 1300, extending to 1320-1325.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) remains bearish, but the index has not yet pierced the prior March 559 intraday low and is showing signs of support in 562-563 area. You can look at a 60-minute OEX chart (now shown here) to better see this. If this index and the others were not so 'oversold', the chances of another down leg later on would be greater than appears to be the case currently.
An initial rebound could carry up toward 580 resistance and perhaps to 590. Near support is at 560, with next key support down in the 540 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU), in its second down leg, found buying interest/support this past week in the 11876-11900 area. I suggested last week an initial downside objective to around 11837. The lowest intraday low turned out to be 11862. If the most recent low holds, I'm happy to have had a forecast that might end up being within 25 Dow points of the low!
The Dow is the most bullish of the indexes in the sense that it might form a next bottom well above ITS March lows which, in the case of INDU, was in the 11600-11555 area. Irrespective of a potential rebound, INDU's short and intermediate-term trends are down. The long-term remains up.
10 of the Dow 30 stocks are trading below their 200-day moving averages, some just recently. Relative to this widely followed longer-term moving average, some key Dow stocks are seeing buying coming in on dips to the 200-day average. There are enough of the 30 stocks that could have oversold type rebounds to lift INDU higher. I'm no longer placing bearish bets on the Dow.
I've noted resistance in the 12200 area, then around 12400. Technical support as I noted was seen in the 11876-11900 area; next lower support is down in the 11600-11555 area.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Last week, I rated the chances of a retest of a retest of the prior Nasdaq Composite (COMP) bottom as quite high and that's just how it unfolded. When in a bit of a free-fall the only brave buying (including short-covering) that will tend to come in is AT a prior low. The question is whether the current pattern is setting up a possible double bottom.
If at least a short-term bounce doesn't happen it will be surprising given how oversold this market is in terms of both the RSI indicator and my CBOE equities call to put daily volume ratio line (CPRATIO). Traders still have gotten super bearish.
I know there are plenty of bearish negatives out there and it IS the whippy summer and all, but I never bet on much further downside when there are initial signs of support at a prior important low AND the market is quite oversold. I should also note that the market isn't yet at a major 'oversold' extreme in terms of long-term overbought/oversold indicators such as the 8 to 13-week RSI and the weekly MACD indicator.
I've highlighted support in the 2600 area, an obvious choice, with next lower support at 2550. Near resistance comes in at 2700; next higher resistance looks like 2760 currently.
RSI and TRADER 'SENTIMENT'
As already noted with my S&P 500 commentary above:
Other strong technical considerations pointing to at least an interim (upside) reversal coming soon, relates to the extreme oversold levels seen in the RSI and my CPRATIO sentiment indicators seen above. We have to go back to November 2008 and January 2009 to see my sentiment indicator AS low as it got recently on a single day and 5-day moving average basis. These prior indicator lows were well ahead of the final March '09 bottom and represents one of the few instances of extreme bearishness ahead of still further declines, although after that final low it was up, up and away for many months.
NASDAQ 100 (NDX) DAILY CHART:
I'll say just a bit more on a point I made last week that the Nasdaq 100 (NDX) chart has been bearish since forming an 'island top' in late-April to mid-May. I wrote about this type pattern in a recent Trader's Corner article on chart 'gaps' and this article can be seen by clicking HERE.
Island patterns are formed by overnight chart gaps or spaces between one day's high and the next day's low (upside gaps) and gaps between one day's low and the next day's high (downside gaps). Actually, the bottom of the aforementioned article has examples of island bottoms but you'll see that the island TOP is just the reverse formation. Identifying this top pattern could have gotten you into an excellent put play.
However, now we have the possibility of a double bottom formation. It's too soon to tell if recent lows will hold but given the extremely oversold RSI on the daily chart as well as very low bullishness/high bearishness, I am suggesting it's time to take at least partial put profits.
My take is that there's potential for at least a short-term bounce in NDX. If you want to hang in with bearish positions looking for a next down leg ahead (in line with all the bearishness out there in the news and with pundits), I suggest at least taking some profits on multiple positions.
I indicated last week that if NDX were to fall below 2189 it would like 2150 was a next downside target. The lowest NDX close so far as been 2192, so we'll see on any further downside moves and next support as around 2150. In terms of a broad uptrend channel on the weekly NDX chart (not shown), the lower support up trendline intersects at 2153 in this coming week.
I've noted initial overhead resistance at 2250 with next key resistance in the 2300 area.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has a bearish looking chart but it has met my downside objective for a move to retest the prior low. As I've noted with the underlying (NDX) index, I'd take some bearish bets off the table. Take the money and run. My son remembered this advice when he hit 8 in a row in roulette in Las Vegas recently. He couldn't resist giving back a little but then walked away with his trip paid for and then some. I love it.
Next lower support below recent lows is at 52.3-52.0. Resistance is at 55.5-56.0, with next key resistance in the 56.5-56.6 area.
On Balance Volume (OBV) just keeps ratcheting lower, so no change there; however, there was a bit of a volume surge in recent days probably due to short-covering and some speculative buying when prices matched, but didn't fall appreciably under, the March lows. Of course, there was also option expiration on Friday.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is the reason why I could still be bearish in that RUT had such a clear cut Head & Shoulder's Top pattern. When prices break below the implied 'neckline' to the H&S pattern, the 'measurement' for a next downside objective is subtracting the distance from the Head to the neckline and then further subtracting THAT number from the point where the neckline was pierced. This calculation yields a 'minimum' downside objective to 751.
I'm holding dual thoughts on RUT. On the one hand is the aforementioned objective for still lower levels. On the other hand is the reality that we've seen a cluster of lows form in the area of prior lows from January and March, making for a potential double bottom. I'll go with the potential for a double bottom having set up for now.
Near resistance I've highlighted at 804, then in the 816-822 area. Near support is at 776-772, then down in the 740 area. My 751 target on the Head & Shoulder's calculation isn't what I'd call a 'support', rather a rule of thumb target that sets up on downside penetration of an H&S neckline.
GOOD TRADING SUCCESS!