THE BOTTOM LINE:
The major index charts have mostly turned bearish again, 'confirmed' by the S&P 500 falling under 1230 and the Nasdaq Composite below 2600. With investors quite uncertain the selling push goes into overdrive from computerized programmed selling or just plain old short selling by some big money managers and traders. Only the Dow 30 (INDU) has a pattern that looks like this recent sell off could yet be part of a consolidation, ahead of an eventual push higher.
FYI on inclusion this week (at the bottom of this section) of comments only (no charts) on major industry group indices; i.e., the CBOE Oil Index (OIX), Philly Semiconductor Index (SOX), the Gold & Silver stocks Index (XAU), CBOE S&P Bank sector Index (BIX) as well as another composite index, the NYSE Stock Exchange Index (NYA).
THE FREE MARKET REINS - WITHOUT THE 'UPTICK' RULE!
Short selling used to require an immediate prior uptick in price in order for a short sale to occur but the uptick rule was done away with in 2007 by the S.E.C. One study reported that twice as many stocks had greater than 40% drops in corresponding 12 month periods before and after the repeal in 2007.
In 2008 a survey indicated that 85% of members of the New York Stock Exchange wanted to bring back the (short-selling) uptick requirement. One well-known financial sage and old Wall Street hand, Muriel Siebert, was quoted as saying: "We've never seen volatility like this. We're watching history being made...the S.E.C. took away the short-sale rule and when the markets were falling, institutional investors just pounded stocks because they didn't need an uptick."
Of course you could always short the stock index futures on the way down but futures couldn't get too far ahead of index levels due to arbitrage going on and the market itself didn't usually go into free fall due to the more limited shorting resulting from the uptick rule in stocks. No more!
END OF RANT!
As to my views last week and now. I was anticipating that the 3 week old sideways move was a consolidation before a push higher. WRONG! I always have my chart 'trigger' points figured where the trend changes. In the case of this past week the intermediate trend change was from sideways to bearish.
The way I've profited from long call positions is to enter when the market is quite oversold, traders are very bearish and after there's some degree of upside price reversal even though minor. I then would get out as soon as momentum slows and especially when the 13-day RSI got to the overbought 65-70 zone and above. Add to that level of 'overboughtness' so to speak is when my equities call to put ratio reaches 1.9 and above. All the foregoing had occurred but I also thought there would be one more push higher. Just a little bit more upside please and then I'll suggest shorting this market. HA! In this market when upside momentum stops, it's like when the music stops and its time to grab a chair.
Where to from here? The path of least resistance is again DOWN so I would sell rallies; especially on rebounds to the area of the 21-day moving averages; e.g., currently 1247 in SPX, 560 in OEX, 1195-1200 in DJX, NDX 2443, 56.5 in QQQ and 735 in RUT. Moves to the 21-day moving averages would allow setting fairly close exiting 'stop out' points as the most common pattern in these situations is for a rebound back to the area of the key 21-day moving average but without much penetration of the average.
I'm not looking to probe the long side and take on bullish positions until the opposite technical conditions occur and traders get quite bearish again (this showed up Friday for the first time in awhile), the (13-day) RSI gets to or under the 40-35 zone and until there's an upside reversal type pattern.
While volatility seems extreme and intraday price swings can be big, in terms of the VIX we haven't seen daily closing extremes above 35 since early-October. On the other hand we haven't seen the volatility index UNDER 25 since before August!
RETRACEMENTS AND MOVING AVERAGE CONSIDERATIONS
The S&P has retraced a fibonacci 38% of its October advance; ditto the Nasdaq Composite and Nas 100. The Dow would have to fall to 11555 (from 11796) to retrace that much (38%) of its prior advance. In terms of the S&P and Composite I anticipate they may retrace at least HALF of their October advance. The retracement levels will be seen on the charts.
The 200-day moving average was a 'constant' in terms of implied resistance and the major indexes just couldn't hold above this key longer-term moving average. The Dow did as long as it stayed above 12000, but that's past. The Nasdaq Composite couldn't hold above 2700. The Nas 100 stayed above its 200-day average the longest but has now fallen below it at 2300.
SOME OF THE OTHER (INDUSTRY) GROUP INDEXES:
The CBOE Oil Index (OIX), last at 755.9 is in the middle of a weekly uptrend channel and may have topped out; OIX could not get above its down trendline on its recent rally. Major support: 650. Major resistance: 930. Needs a weekly Close above 800 to get back on a bullish track.
The Philly Semiconductor Index (SOX) also could not get above its down trendline on a weekly chart basis and looks headed lower again. Needs a weekly close above 397-400 to get bullish again. Major support in the low 340 area. Last at 371.25.
The Philly Gold & Silver Index (XAU) has topped out twice at resistance implied by previously broken weekly up trendlines, at successively lower levels. Looks headed lower. Resistance in 218 area, likely support around 175. Last at 196.
The CBOE S&P Bank sector Index (BIX) was the short of a lifetime, going from over 400 in the first half of 2007 down to the 50 area at its early-2009 bottom. 104 is key support; next support around 87. Resistance at 128. Last at 119.6.
Not an industry group average but worth following: the NYSE Composite Index (NYA). In retreat from the approximate mid-point of a broad uptrend channel at 7870, where there is a large supply (stock for sale) overhang. Major support in the 6860 area. Last at 7282.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has turned mixed to bearish as it retreated under 1220, support implied by the top end of the August-September trading range. Admittedly SPX stabilized on Friday and Closed just under 1220. Still, the inability to get above resistance implied by the 200-day moving average coupled with piercing the 21-day average shows the loss of upside momentum that's going on.
SPX has probably built a secondary top. As long as worries about Europe so spook the market, the direction for SPX looks lower. Rallies to the 1247 area or a bit higher (e.g., to 1260-1270) would be a place to initiate bearish trading strategies such as buying puts, preferably December; my suggested 'exit' point is 1280, although there's the risk that the a short-covering rally takes the index up for a 1-day close that 'runs' stops, only to have SPX turn down again. One thing we're learning in this brave new world where stocks can be pushed down by shorting with no limits (like the done away with 'uptick' rule) is that they SLIDE faster and harder than they glide!
Very near support is at 1209, with next support in the 1180 area; 1183 represents a 50% retracement of the October advance. If a stock or index is in a strong position, retracements will tend to be limited to a Fibonacci 38%, but in a market that is being pushed back and forth, retracements of half/50% of the prior price swing are common. If the buyers still are scarce, we could see a retreat to the 1160 area.
Near resistance begins around 1240, extending to the area of the 21-day moving average currently at 1247. Next resistance comes in the 1270-1275 area. More comments are below my SPX daily chart.
The 13-day RSI seen above, which is first and foremost an indicator of price momentum suggests that this body in motion may stay in motion and currently its direction is down. The RSI last bottomed with a readings in the 37-36 area, but a common level that suggests a real oversold extreme is in the 35 to 30 area and under.
Bullish sentiment readings got into my 'oversold-extreme bearishness' zone on Friday and that's about the only bullish technical dynamic happening here in a contrary opinion sense. Due to this and the fact that shorter-term momentum indicators (not shown) are quite oversold, a rebound near-term wouldn't or shouldn't be surprising.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart, like the S&P 500, is the same in terms of having lost upside momentum with the plunge below 560 in the case of OEX. The chart is not extremely bearish in that prices have stabilized near the low end of the past 30-day price range. However, assuming this recent retreat signals another period where would be buyers are scared to get back into the market, the big short-sellers stand a good chance of driving the index down again in another down leg.
For those looking to participate in this market, adopt bearish plays on rallies, especially on a rebound back to the 560 area or to at or near the 21-day moving average. So often index breaks of this key average lead to a rally back to the average but the rally dies there and another downswing follows. And typically a subsequent decline carries farther than the first sell off.
Downside potential may not be huge from Friday's close. The index is oversold on a near-term basis, so best to wait for another rally where the risk to reward on the short side gets better.
OEX has retraced 38% of its October advance already and a decline to 534 would be a 50% retracement. The retracement could be deeper than this of course, such as to the low-520's, maybe even back to the 500 area again eventually but I caution against assuming this market will totally fall apart. The big money traders will drive it back up again at some point. Many would-be participants are on the sidelines so rallies and declines carry farther and faster. But big cap S&P stocks are being bought when there are sizable dips. Stocks are still the only game in town for longer-term investors, especially for those looking for a return above what the long bond is paying.
My trading envelope lines, the red one above and green one below 'float' at 6% above and 6% below the 'centered' 21-day average. These remain a good visual for when the index gets to a real upside or downside 'extreme'.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average is mixed. I can't say the chart is bearish on an intermediate-term basis as INDU found support again in the 11667-117000 zone which has been the low end of a 3-week trading range. Unlike the S&P and Nasdaq, the Dow pattern looks like it might represent a consolidation ahead of another push higher. 12000 is the key near resistance, with tough overhead resistance then coming in 200 points higher.
How to 'reconcile' the INDU chart with the more bearish others? The Nasdaq 100 seemed to go against the bearish tide for some time and looked like it could almost go its own way, but it didn't. There are times that one index or the other is a bellwether/forecaster for the overall market OR it just resists declining longer. Either could be the case with INDU and its small group of 30 stocks. A decisive downside penetration of 11600-11565 would suggest a further decline to 11400 or a bit lower such as to the 11340 area and a 50% retracement.
Near term the market is oversold but not yet on an intermediate basis as can be seen with the 13-day RSI. INDU could lead the other indices higher in any short-term rebound and get back to the 12000 area again. That raises a question of buying Dow index puts around DJX 1200 which looks favorable on a risk to reward basis assuming close stop protection. If INDU manages back to back closes above 12000 again, a possible retest of the tougher line of resistance at 12200 is suggested. Next resistance above 12200 is between the prior recent high at 11284 and 12400.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) has turned bearish. The pattern now looks a bit like a Head and Shoulder's top in the rally to 2700, retreat, then having made a higher high in the 2750, with a subsequent rally falling short of the top. Whatever you call it, the chart now looks a secondary top formation relative to highs made in the 2850 area back in late-July. Projections I've made suggests COMP getting back to the 2500 area. 2527 represents a 50% retracement of the October advance and giving back half of prior gains is a common retracement.
If a very strong advance was in process, a common retracement is often at most in the range of 33-38% and that's not the case with COMP as its chart looks weak. Apple (AAPL) is leading the way lower in the tech indices after the stock acted like it would keep going up forever. The overdone ones usually look like that!
Immediate overhead resistance is at the 2600 level, representing a recent 'breakdown' point. COMP is oversold on a short-term basis as is the market. I'm anticipating strong resistance on any rebound back to the 21-day moving average, currently at 2662. Next resistance comes in around 2700.
The only bullish technical is the level of bearishness starting to show up on my call to put 'sentiment' indicator. However, any short-term rebound will probably cause the bears to pause in their put activity and some bullishness will come back in, even if mostly short-covering. I don't think that we'll see COMP go into free fall here, but the index may get slammed again after a rebound that 'throws off' a short-term overbought condition.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) has finally cracked so to speak as seen in NDX falling under its 200-day moving average after a prolonged period where only it among the major indexes was so positioned. Apple's (AAPL) decline has been key to this weakness and it looks like AAPL may be headed to technical support around $360; if that level gets pierced NDX could sink further along with the stock.
Analyzing NDX, the index looks like it can reach the 2227-2200 area but a short-term rebound also looks quite possible ahead of such lower price targets, given a short-term oversold condition; this shows up on the hourly chart and a 21-period RSI (not shown here).
A rally back to the 2300 area would not be surprising, with potential to extend gains to 2340-2365. I suggest selling rallies of this nature from a risk to reward standpoint. Looking for NDX to go into free fall from current levels is a gamble, as many tech stocks look toppy but not that bearish yet.
Relative to a longer-term oversold, NDX is not quite there yet as seen with the 13-day RSI indicator below and the last time it got into the highlighted oversold zone. In terms of the same RSI indicator, Apple is nearing an area that is about as oversold as it's gotten since it took off from the $100 level back in early 2009. Actually not quite, as AAPL's 13-day RSI was last at 37 and it can dip under 35 (or get closer to 30) before the stock might be in a position for a good-sized rebound. Watch for a possible test of $360 support in AAPL in terms of the stock being an NDX bellwether.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish of course like the underlying NDX index and follows the same pattern. Support/buying interest may come in around 54.6; if reached, this would be a 50% retracement of its October advance. Next lower support is in the 53.1-53.6 area in terms of the most common retracement levels assuming the stock is not headed back to 50 and a 100% round-turn retracement which I doubt.
Resistance/renewed selling is likely on a rebound to the 56.3-56.4 area, with next higher resistance coming on a move back up to QQQ's 21-day moving average, currently at 57.5
I was a bit surprised that volume slowed as it did on Friday, given the extension of weakness into a 3rd day. However, once there's been a 3 day decline, this becomes a good time to look for a rebound. Those who wanted to exit the stock or were looking to short a breakdown in QQQ probably did so this past Thursday when the Q's pierced prior pivotal support in the 57 to 56.3 price zone.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart, which had a 'mixed' chart last week given its previous sideways move, turned to a bearish pattern with the slippage below its 21-day moving average (and the area where I peg initial resistance ahead). RUT is not experiencing much downside follow through yet, which would be more suggested by RUT retesting expected support at 705-700; next lower support is estimated at 685 and would represent a fibonacci 50% retracement of RUT's prior (October) advance.
It looks like RUT has made a significant top in the 750 to 760 area but no dramatic downside follow through has occurred and may not; RUT stopped following the Nasdaq higher and now is not especially seeing any dramatic follow through weakness as those indices come under pressure. RUT may just slowly drift lower. The 660 level, extending to 640, looks like fairly major support.
On any short-term rebound, I anticipate resistance in the area of the 21-day moving average; currently at 735. The 749-754 zone should offer tough resistance/selling pressure if reached.
GOOD TRADING SUCCESS!