THE BOTTOM LINE:
Sole focus on how much the Dow was down for the quarter obscures the interesting story for options traders of the well-defined index trading range of the past 2 months. The S&P 500 traded in a hundred point range, the Nasdaq Composite in a 200 point range. Unfortunately, it's nearly impossible to predict the DURATION of a trading range market. Hence the use of exit/stop points.
IF we knew that SPX would trade between 1205-1215 on the upside and 1133-1122 on the downside over two expirations, what a deal in terms of the spread possibilities. Likewise in terms of the Composite trading between 2413-2600; there were 2 weeks of 2630 highs and in the first 3 weeks of 8, COMP lows were in the 2340 area. With the Nas 100 (NDX), the 8-week trading range has been 2300 on the upside (with 1 spurt to 2338) and 2040 on the downside.
I usually trade breakouts up or down but every time I've thought that was happening it was a fake out. So, I've been mostly standing aside trading wise while the Market has been range bound. Not my kind of market conditions but hopefully it's been great for some of you!
Something driving us all crazy now is how to interpret price action over the prior 8 weeks. Has it been basing action for an eventual move higher or a pause before there's a substantial new down leg, such as to 1000 in SPX and to 2200-2100 in the Composite; or, to around 1950 in the Nas 100.
We do see MAJOR double tops in SPX (March-August 2000 and July to November 2007 and in COMP in the Fall 2007 and the cluster of highs (the H&S Top) in Feb-July. There may be major tops in place, but this has little to do with upcoming trading opportunities, except keeping our expectations in check for how much upside potential exists.
I can't predict if the indexes are going to reach the aforementioned major downside support areas, but upside breakouts would be suggested by the indexes crossing above current trendline resistances at 1185 in SPX, 2600 in the Composite (also an area of substantial supply, as well as resistance implied by a return to the weekly Feb-July Head & Shoulder's 'neckline') or to above 2267 in NDX.
Those who would prefer a directional trade could wait for possible upside breakout moves OR buy in major support areas I've identified above. Of course, bottoms could be made shy of the major support areas mentioned. A bullish turnaround may be seen on a key upside reversal, especially if accompanied by heavy volume, an oversold RSI and extreme bearishness in my trader sentiment indicator.
I don't think the current trading range will go on for another 8 weeks, or 6, or past October even. More time in the current range would be nice for paired options positions. A move to well under our past 2-month price range would likely see oversold extremes registering in both the 8-week and 8-month RSI and probably 'set up' a next key bottom and a trading opportunity in calls.
Summing up, I suggest that we're in a wait and see mode here as to the next market turn. Volatility has climbed again in the past week and the numerous price reversals are keeping many if not most investors on the sidelines.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) continues bearish in its pattern but a key test of support is near, at 1120-1125, with support (more likely) extending to 1100. Major support begins in the 1050 area, extending to the even 1000 level.
Near resistance is at 1185, at the previously broken up trendline. SPX just about got TO the trendline but without a breakout, which was bearish. Next resistance is seen in the s1220 area.
I look for lower levels and a likely test of 1100, or lower.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is in a bearish pattern again as it failed to hold its brief pop above resistance implied by the previously broken up trendline. It looks like the index is headed for a retest of prior lows around 500. Major support looks like it begins in the 470 area and extending to 460-459, or the lows made in July-August 2010.
Resistance is at 530, extending to around 540 to 548.
The chart suggests OEX is headed lower. Maybe 500 will be a key support again. Like the Dow 30, the recent double bottom low was looking promising. If the index goes there again, it may not hold this area again. Triple bottoms in the indexes aren't all that common.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart is bearish to 'mixed' in the sense that INDU is falling again, maybe to again retest support at 10600, but it's a gradual decline as INDU has slipped, but not dramatically, below its 21-day moving average again.
I thought the chart was looking mildly bullish with the second low setting up again at 10600. The passage of some weeks made this second identical low look more promising than if it had been a week apart. About the most bullish thing I can say is that about half of the Dow 30 stocks are holding in a sideways pattern; the other half are sliding lower just not dramatically so.
11185 is near resistance implied by the current level of the 21-day moving average, with next resistance in the 11335 area; with further overhead resistance in the 11500 area.
Support is highlighted at 10600 as mentioned, with next support estimated for around 10440. Major support begins at 10,000 extending to 9600.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bearish in the near-term as prices broke to a new Closing low for the current move. Somewhat predictably, resistance was hit at the previously broken up trendline; i.e., support or support trendlines, once pierced, tend to 'become' resistance on subsequent rebounds. COMP looks headed still lower.
I've noted initial technical resistance in the 2500 area, then at 2580, extending to 2600, at the current intersection of the trendline.
Near support has to be assumed at the prior lows in the 2330 area, extending to 2300. Major support begins around 2207, extending to 2200.
The 13-day Relative Strength Index (RSI) suggests that the Composite isn't yet at an oversold extreme and would have to sink lower to have this factor favoring those probing for a bottom. Moreover, trader sentiment is just not showing the kind of bearish extreme that would suggest this added aspect of an oversold market. Bullishness is still 'too high' in my opinion to suggest that the seeds of a rally were setting up anytime soon.
NASDAQ 100 (NDX); DAILY CHART:
The one-day rebound to above resistance in the Nasdaq 100 (NDX) index implied by the previously pierced up trendline was not enough to suggest a decisive upside breakout. As I often say, beware of single-day apparent breakouts or 'breakdowns' that don't see follow through the next day. Sure enough, the next day saw NDX sink below its up trendline again on new bearish news/perceptions.
Key near resistance and the new 'breakout' point is implied by the current intersection of the trendline at 2267, with resistance extending to 2300.
Next support is at 2100, which is also where the lower 5% envelope line intersects. I noted last week that with recent high at the upper 5% line, a decline might carry to the lower 5% envelope. The envelope lines are again providing somewhat of a guide to where NDX is 'extended' either on the upside or the downside. However, if the index is going to overshoot the envelope values (set in relation to the 'centered' 21-day moving average), it is likely to do so on the downside as NDX did before. Below 2100, we're looking at support implied by the double bottom low in the 2037 area.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) saw a bearish break of support implied by the low end of its month + uptrend price channel. Key near resistance is implied by this 'broken' trendline at 53.5, with next resistance around 56.
Daily trading volume was again high on the break toward the end of the week. I noted last week that: "Daily trading volume spiked on Thursday sharp decline, suggesting that there are still holders that can get 'flushed' out of their positions if prices break enough. Not exactly a bullish omen." How true is turned out to be.
Anticipated support is first at 52, than in the 50 area. Major support is expected in the 48.5-47.7 price zone. This past week's price action could be the beginning of a next down leg. Stay tuned on this outcome. NDX is not yet 'fully' oversold according to the RSI as can be seen above
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart is bearish in its pattern as it broke to new lows for the current decline. I wrote last week that: "... if this was a commodities chart, I'd be forecasting another down leg ahead. It just looks so." The 'commoditization' of the stock market seems to be one effect of great uncertainty and also computer programs helping drive that kind of volatility.
It looks like RUT could be headed to a test of support in the 600 area, with potential support extending to around 587. Since RUT has now retraced more than 66% or 2/3rds of its August 2010 to May 2011 advance, retracement theory would suggest that the index could be headed back to a retest of the July-August double bottom low at 587 and a 100% retracement.
681 is key resistance suggested by the down trendline as highlighted on the daily chart; it would take a couple of consecutive Closes above this level to suggest a bullish turnaround. Next resistance then would be in the 718 area, extending to the 738 area.
GOOD TRADING SUCCESS!