THE BOTTOM LINE:
When the S&P 500 (SPX) and Nasdaq Composite (COMP) rebounded from key supports at 1100 and 2300 respectively, on the day that my 5-day bearish trader sentiment indicator touched an 'oversold/extreme-bearishness' level, odds favored a rally. It also wasn't surprising that the rally initially faltered at the key 21-day moving average.
Bottom line, the market remains in what's now 9 weeks of a well-defined trading range and there's nothing shaping up technically that suggests a breakout above or below the price range; i.e., 2300-2330 to 2600-2640 in COMP and the 1100 area to 1220-1230 in SPX.
The technical picture well matches the fundamentals of the US/global economy; we're not slipping back into recession (Europe may be close to that slip) but we can't yet rely on enough growth to favor a sustained rally in stocks.
Another way of looking at the chart pattern being traced out in the S&P and in Nasdaq, is that of a possible rectangle bottom. The 'rectangle' formation in stock indexes isn't thought of as having a most-typical outcome as a top OR bottom; unlike say a Head & Shoulder's bottom. Technicians tend to assume that if the preceding trend has been DOWN, a rectangle pattern suggests a bottom, but the key is a breakout above OR below such a well-defined trading range. In a study of this pattern in stocks (more patterns to study that way), if the breakout was to the upside, the most likely added rise was around 20%. If the breakout was to the downside, the most likely decline was a further 10-15%.
NOTE: The topic of rectangle formations deserves a comprehensive explanation on its own and I'm writing a separate piece on it in my Trader's Corner series that will be e-mailed soon. It could have been as soon as Monday (10/10), Columbus Day, if it was still a trading holiday. But that was when Italian-Americans were a strong presence as NYSE Specialists and Christopher was their man. That changed along with the heroic image of Columbus, given some controversial personal history. But I digress. On to:
My most extensive commentaries today are about the S&P 500 and the Nasdaq Composite. The Dow 30 (INDU) is the only major index to close above its 21-day moving average which may or may not be a harbinger for further advances overall. Short-term, the major indexes are 'overbought' and look like they will pull back.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) is mixed in its pattern. A bearish aspect is the break of its prior up trendline. A bullish story is seen in the rebound from the 1100 area; I assume that the intraday dip to 1075 on Tuesday (Tuesday and Thursday tending to be reversal days), was an overshoot based on exiting type stops. The key element is that SPX then rebounded back to above pivotal support in the 1100 area.
Currently, the SPX chart pattern is best seen as a sideways trading range, with the possibility that this price range represents a rectangle bottom as noted in my initial 'bottom line' comments above.
I wrote last week that I was looking "for lower levels and a likely test of 1100, or lower." 1100 was the closing low and 1075 the intraday bottom. I've also been anticipating that the 4% moving average 'envelope' lines was going to be once again a more reliable trading guide to possible extremes on the upside and down.
The rally was triggered on the same day that my trader sentiment indicator, on a 5-day moving average basis, touched the 'oversold' zone of extreme bearishness. Between that and having reached key support in the 1100 area, the rally that followed wasn't surprising.
The recent rally slowed and hit at least a temporary top at the 21-day moving average; this was also when the 13-day RSI got to a mid-range 'neutral' reading, which has been a typical occurrence of faltering rallies in recent weeks.
Where to from here? One key to the further upside potential is for a couple of days of Closes above the 21-day average and more importantly then, ability of the index to pierce and hold above its previously broken up trendline, currently intersecting in the 1200 area. On the downside, pivotal support is apparent around 1100.
Near SPX resistance is at 1195-1200, with resistance then extending to 1220-1230. Key near support is at 1120, extending to 1100; next support is 1075, extending to pivotal support around 1050.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart remains in a sideway trend or trading range. To suggest that the Index could retest the top end of its price range in the 550 area, OEX needs to climb and stay above 533, resistance implied by the prior (broken) up trendline; the 'kiss of death' trendline is one term I've used. I doubt this will happen and look for a pull back near term.
Near support come in around 510, extending to the low-500 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart remains somewhat mixed in its chart. Somewhat predictably, INDU rallied from the low end of its broad 11550-11700 to 10600 trading range, although panic selling and sell stops pulled the Dow to around 10400. The subsequent intraday turnaround was impressive and somewhat typical of an oversold market.
While there were two back to back closes above near resistance at the 21-day moving average, it doesn't look a decisive turnaround yet. INDU could reach the 11500 area again but that's about the best upside I anticipate. I think instead that the Dow may retest the 11000 area and may struggle to hold above 11000.
Near resistance looks like 11350, extending to the 11500 area. Near support comes in around 10800, then at 10600.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart has turned from predominately bearish to mixed in that the Index rebounded from key support
in the low-2300 area. This time COMP dipped to 2300 even and then rebounded after the last shot down when traders exited on the sell off below the prior 2330 intraday low. I noted last week that the Index looked headed still lower and COMP fulfilled my near-term downside objective to the 2300 area.
As with the S&P 500, COMP began it's most recent rebound after bullish sentiment reached a 'typical' oversold extreme that is often associated with upside reversals. In terms of indicators on the perhaps bearish side, the 13-day Relative Strength Index (RSI) has again gotten to the area registering a mid-point 'neutral' reading where prior recent weeks' rallies faltered.
I anticipate COMP struggling to stay above the 21-day moving average, but if it does, tough resistance next comes around 2600. A close above 2600 for a couple of days running would be bullish; more so if the prior 2643 high was exceeded. More likely is a pullback to the 2400 area. COMP is overbought short-term.
Near-term technical resistance still looks like the 2500-2505 area, at the 21-day moving average; even more pivotal resistance comes into play around 2590-2600, at the intersection of the previously broken up trendline. A sustained rally above this line of resistance would be bullish, especially as long as COMP is again climbing above this trendline.
Near support is at 2330, extending to 2315-2300. The 2245-2207 area is the beginning of more major support.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index is now back at resistance implied by its previously broken up trendline, suggesting 2230 as the key resistance hurtle near-term. Next resistance comes in around 2282.
Near support is in the 2150 area, with next key support around 2075, extending to the prior recent 2043 low.
NDX has retested the low end of its broad 2300-2050 trading range. Yet to come is a move back above what may prove to be trough resistance implied by the previously broken up trendline. I anticipate that the index will pull back from the high of this past week.
If instead, NDX regains the aforementioned up trendline, it should extend past a day to suggest a continuation of the recent oversold rebound.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish and the recent decline saw the stock fall out of (below) its bullish uptrend channel. This is not to say that the recent rally wasn't a substantial one as QQQ held the low end of a broad 57 to 50 trading range. For the bulls, better would be if the NDX tracking stock could climb back above near resistance at 54.2 and then work its way higher; next resistance would then be in the 56.0 area.
Near support is at 53, extending to the 52 area. Major support is at 50.
This latest rally was a low volume affair, although with QQQ this isn't inconsistent with how it trades; unlike regular company stocks, where better internal strength is apparent on higher volume accompanying apparent upside reversals. The jury is out on how much further the Q's will advance. More likely is a drift lower again. This rally may have run its course.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart remains in a mostly bearish pattern unless/until it can achieve a decisive upside penetration of the highlighted down trendline seen below. A further bullish turnaround would be suggested if RUT can close above 718, its most recent (up) swing high; it would then have further resistance at the 738 intraday high.
The index did hold and then rebound strongly from, the 600 area, the beginning of major RUT support and which extends to 587.
Even if RUT climbs a bit higher, I see the overall trend as more of a sideways one; e.g., the Index trades within a 740-750 to 640-615 trading range.
GOOD TRADING SUCCESS!