THE BOTTOM LINE:

What I thought was a 'trading range' market wasn't, as the indices dropped like a stone as the S&P and Dow pierced their long-term up trendlines. The bearish technical pattern that suggested a sizable sell off was seen on weekly charts as the S&P 500 (SPX) and 100 (OEX) in particular. I can't say that I saw this bearish pattern and was ready for it as I was looking to buy SPX at its support up trendline, intersecting at 1270. WRONG!

I've been through 3 major and rapid declines going back to 1987, including parts of the late-2000 and all 2008 bear markets. I've only occasionally been able to make major profits from these big breakdowns. The tip off for them were mostly major trendline breaks. Trendline penetrations by themselves don't always lead to 'waterfall' declines like this past week.

In our most recent big sell off, there were Head & Shoulder Top patterns that were traced out on the weekly charts, particularly the S&P indexes. I'll be reminded forever to put out a sell 'signal' after the formation of the Right Shoulder or 3rd. top in the H&S pattern when seen on weekly charts, implying a MAJOR top. The H&S top pattern is reliable enough usually to start buying index puts without waiting for a confirming 'neckline' break.

For more on the Head & Shoulder's pattern, you can go to my previous Trader's Corner article on this subject.

By the way, 'minimum' downside objectives implied by the SPX Head & Shoulder's Top pattern has already been met by the decline to SPX 1180 (weekly low was 1168 in the S&P 500). There are some other technical chart aspects that may suggest still lower downside objectives ahead.

Our most recent sell off is similar to last year with the decline in SPX from late-April to early-July; from (intraday) peak at 1220 to trough at 1010, this break ran 210 points. Our SPX correction to date is 202 points. This most recent decline covered the same ground FASTER of course. This looks like a function of the excessive bullish sentiment that's been a feature since August of last year, which also went in hand in hand with extreme skittishness about the sustainability of the economic recovery, both here and in the Eurozone.

To better understand where the indexes are in relation to the bigger picture, I'll include weekly charts, instead of just the dailies, as part of my index commentaries.

MAJOR STOCK INDEX TECHNICAL COMMENTARIES

S&P 500 (SPX); WEEKLY AND DAILY CHARTS:

In the weekly S&P 500 (SPX) chart, there was a major penetration of SPX's weekly up trendline at 1270 and the chart has turned intermediate-term bearish. A long-term bear market would be 'signaled' on a weekly close below 1011.

I point out 4 technical aspects with the weekly index charts: 1), the lead in to this sell off was a Head & Shoulder's Top formation; 2)the retracement of the last big advance has now exceeded 50% and a 'normal' correction; 3) a further Fibonacci 61.8% (rounded to 62%) retracement, extending to a 2/3rd or 66% retracement, could take SPX to the 1128 to 1146 price zone; 4), in terms of the 8-week RSI, the index has just entered 'oversold' territory. Of course, an oversold condition can go on for some time.

If SPX gets to 1150, this may be an area to exit bearish positions. My daily SPX chart seen next will include the 62-66% retracement levels as potential further downside objectives.

If the weekly chart is bearish, then of course so is the daily chart here. I've kept my 4% trading envelopes or 'bands' as a reminder of how far SPX is below it's 'normal' trading range. It's rare for prices to be this far under the lower envelope line. Of course, the moving average and the simple moving average envelopes are falling and will 'catch up' with prices soon enough on even modest further weakness. I didn't note support at 1200 but on an hourly chart basis (not shown), you can see prices mostly stabilizing on its dip below 1200-1190.

I've noted pivotal resistance at 1260, extending to 1300 and the level of the current 21-day moving average.

I've noted potential support at the aforementioned retracement levels seen on the weekly chart above; i.e., in the 1145 to 1128 price zone. On a daily chart basis, SPX is quite 'oversold', although oversold readings can go on for a while after what's been going on. Then, there's the S&P debt rating reduction by the Standard & Poor's that the market hasn't reacted to yet.

We don't see the extremes in bearish sentiment (see above) that there could be given the steep decline, the speed of which works against an equally quick buildup in bearish strategies. Option traders haven't been spooked into puts in such large numbers. Of course, with such volatility as we've seen the premiums got very inflated, making outright purchases more daunting. VIX ended the week at 32, up from 23 at the start.

S&P 100 (OEX) INDEX; WEEKLY AND DAILY CHARTS

The S&P 100 (OEX) wasn't a buy in the 570-565 area as I thought it might be; my suggested stop point if anyone was brave enough to try to catch a falling knife was to exit on a close below 560. Anticipation of buy/sell points works well over time with index options, with occasional whack jobs along the way. The weekly chart 'breakdown' point was 575.

The weekly and daily charts are bearish on an intermediate-term basis but I would note that OEX has now retraced just over half of the last major advance. It's not uncommon for deeper retracements of 62 to 66%, which could end up with OEX trading down to the 510-517 area as highlighted on the weekly chart below.

The daily OEX chart, with its 4% moving average envelope lines (relative to the 21-day centered moving average) visually highlights how far below the lower band the OEX got this past week. There's a strong tendency for prices to get back closer to the broader bands, either by a rebound in the index or the falling average and its lower envelope to converge. Stayed tuned on what rebound potential exists in such a bearish environment!

Key resistance is noted at 568, extending to the 580 area. 'Support' and areas of potential buying interest is guesswork in this kind of panic environment. I'm using the big fibonacci retracement levels to suggest potential bottoming action in the 517 to 510 area. As with the S&P 500, OEX is now oversold on a daily and weekly chart basis; more so on the daily chart.

DOW 30 (INDU) AVERAGE; WEEKLY AND DAILY CHARTS:

I was last week of the mind to reverse from DJX puts into calls if the decline ended 11900 and what I saw as the low end of a broad trading range. However, major support was penetrated at 12917, basis the weekly chart up trendline and the sell off snowballed.

Only 6 Dow stocks are still trading above their 200-day moving averages: AXP, CVX, KFT, KO, KFT, MCD and IBM. No doubt now there will now be a long process of recovery just to get back to this key average; one that investors do look at more than most technical/chart factors.

The weekly chart highlights the 50% as well as the 62-66% retracements levels. Support in the 11257 area might again offer some support, but a move to or a bit under 11000 may be more likely to bring in buyers again. I've highlighted the 10716 to 10873 zone as a next target or objective. I can't call these levels 'support' in the sense of a prior bottom for example.

If there was an area I'd like to own the basket of 30 Dow stocks at this point, it would be on dips below 11000 of 200-300 points. On a risk to reward basis it looks reasonable right now as a call buy and more so as an area to exit puts. INDU is 'oversold' in terms of the past bull market; NOT so much, if looking at a new bear market. I don't believe in a second recession ahead but also have renewed caution on betting on a continued bull trend.

The daily INDU chart is now established as bearish given the sharp downside break below prior lows in the 12000-11860 area. This past week's sell off was well outside the expected envelope ranges that were 'working' so to speak in showing bullish/bearish extremes; that is BEFORE the market dove off a cliff.

I'm going with the idea that the 50% retracement level for the broad trend could be a continued support area and have noted 11287 as a potential first support. The 10873-10716 area, representing the 62-66% weekly chart retracement levels seen above, is of more interest as a potential support zone.

Resistance is at 12000, extending to 12200. This market is quite oversold now and suggests not chasing the indexes lower cause the world is going to fall apart. There's not much that is different this week in terms of already established bearish influences, versus speculation of all the troubles that could happen.

NASDAQ COMPOSITE (COMP) INDEX; WEEKLY AND DAILY CHARTS:

The Nasdaq Composite (COMP) weekly chart shows a break of the major up trendline this past week at 2640, now a potential future resistance.

The big first retracement of the July 2010 to July 2011 advance was the give back of half of those gains; i.e., at 2472. This level may offer at least initial support in the coming week. Or, of course, it may be a knife through butter on the way to the deeper retracements seen on the weekly chart. I favor covering tech shorts on dips below 2400.

The daily chart of the Nasdaq Composite (COMP) looks like a minor disaster as the dip was well under its prior range in terms of the moving average envelopes. However, 2470 may hold on further declines, as tech should be the first to recover. If 2500-2470 is penetrated, I've highlighted the 2374 to 2334 levels as possible objectives. Again, I don't like to imply that these levels are 'support' in the way that a prior low might be. Think of this zone as a target area.

I've noted resistance at 2650, extending to 2700. 2765, at the current 21-day moving average, is another resistance; it had been 'acting as' support but is assumed to now be a key rally stopper.

COMP is at an oversold extreme and my sentiment readings are mildly bullish. Price action MUST confirm any recovery expectations based on 'oversold' indicators alone. Markets get overbought and oversold and can stay that way for periods of time as investor and trader psychology/sentiment doesn't usually turn on a dime.

NASDAQ 100 (NDX); WEEKLY AND DAILY CHARTS:

The Nasdaq 100 (NDX) index weekly chart broke key trendline support at 2210 and could be headed lower. However, this trendline break is very slight and could reverse by the end of the coming week. Stay tuned on that! The key thing is that NDX is mostly just back at the low end of its prior broad trading range.

If NDX sinks to 2068 area, it will retrace half of its last big advance and I've noted this level as potential support. In terms of deeper retracements, the 1945-1980 price zone is next up as a potential price target.

I doubt that NDX is going to sink a much lower than to a 50% retracement. A give back of half of a prior big move is quite substantial for a stock group that's previously been as strong as this one.

I wrote last week about the 2250 area as an area to exit NDX puts and buy calls. Such a trade to establish call positions isn't a disaster, but stay tuned as to whether 2180-2200 continues to attract buying interest. This recent sell off seems overdone but the market will seek its equilibrium and I don't argue with it.

Resistance is at 2284, then in the 2317 area, extending to 2353 and the current 21-day moving average.

I've noted NDX support at 2170 based on buying that was showing up last this week as seen on an hourly chart basis (not shown). The 50% retracement level seen on the weekly chart above is 2068 and my next highlighted 'support'. A final target or potential support is highlighted at 1980 or just below the 2000 level which should be a major psychological support.

NASDAQ 100 TRACKING STOCK (QQQ); WEEKLY AND DAILY CHARTS:

The Nasdaq 100 tracking stock broke under its weekly up trendline when it dipped below 53.5, but on a weekly Closing basis the Q's hung in at this support. QQQ didn't extend its losses to what would be a 50% retracement of its last major upswing, which I've noted as a next potential support at 50.7. The deeper weekly chart retracements (of 62 to 66%) are at 47.7 to 48.6.

The Nas 100 QQQ tracking stock is back at the low end of ITS broad trading range but the Friday and weekly close (at 53.8) has held the low end of its broad trading range. Is this enough to buy the stock? I'm leery of making such a prediction in advance of the coming week's trade, but buying a further dip may be attractive. More price action is needed.

If you were to cover any shorts and get lightly long, this index is probably the one to look at on deleveraged basis especially; buying the stock not the options. Volume on Friday was huge and I don't hear of many new buyers coming in. A volume climax? Could be.

Look for support at 52.5, then at 50.7, with major support beginning around 48.6.

RUSSELL 2000 (RUT); WEEKLY AND DAILY CHARTS:

The Russell 2000 (RUT) chart pierced its weekly support trendline at 753 and then went on to slice through the 50% retracement level and nearly touched the next lower 62% retracement. The support zone possibly represented by the 62 to 66% retracements is at 681-695.

RUT is oversold now on a weekly chart basis, something not seen since the early-2009 bottom.

The daily chart is bearish, mirroring the weekly chart. However on a daily chart basis, RUT is quite oversold and I don't know that there's any further big down leg ahead.

RUT support is at 700-695, then at 680 based on the retracement zone mentioned above regarding the weekly chart.

Resistance is at 775, then at 800. A close over 800 in the Russell is needed to turn the chart picture to a more bullish hue. A close above the RUT 21-day moving average, currently at 809, is another milestone. As always, a single day's Close above prior or expected resistance is best 'confirmed' by a subsequent day's Close at or above the same level.



GOOD TRADING SUCCESS!