THE BOTTOM LINE:
This past week's rebound occurred after the two main S&P indexes retraced a Fibonacci 61.8% of their last upswing and from just slightly more (66%) in the Nasdaq. The sharp rebound those areas suggests to me that the prior sell off was driven mostly by big short-sellers. All the major indexes rallied after reaching the top end of oversold zones in terms of the 13-day Relative Strength Index (RSI). Given how much the indexes had retraced AND the oversold condition, rebounds weren't surprising.
Retracements in my experience tend to hit 38, 50, or 62% and sometimes a bit more at 66%. If the retracement exceeds one level, it sets up a target for the next fibonacci number. Once in a while there's a 75% retracement of a prior move or of course a round-turn 100% retracement back to the prior low or high point.
When retracements exceeded 50% and I anticipated 50% at a minimum last week, it was natural to look for a next low in the 62 to 66% retracement area and a 'natural' place for a bottom, especially given the oversold RSI.
If you were in puts during the fall or had adopted other bearish index strategies, the retracement amounts and oversold condition hopefully prompted you to exit those positions before prices took off again. Buying calls after retracements of 62% or a bit more, especially 66% or 2/3rds in an oversold market was a good risk to reward proposition. Staying with those positions? Hard to say but there's an old trader's saying to TAKE quick profits. I never like to turn a 'trade' into an 'investment' anyway!
Where to now is the difficult question. Here we are back near the top of the prior trading range. The S&P 500 (SPX) and 100 (OEX) broke out above their minor down trendlines, as did the
Russell 2000 (RUT). Not so with the Dow 30 (INDU) and the Nasdaq indices as rallies reversed at or near their down trendlines.
Bottom line, from current levels it's unclear whether there's enough buying power to lift the indexes to above technical resistance; first, at their down trendlines and second, to challenge highs made in late-October. It could be more of the same where the indexes chop around in a new trading range. To put one 'face' on it, this view would suggest that SPX trades between 1160 on the downside and 1280-1290, maybe 1300 on the upside. It doesn't look right now that the indexes will break out above their prior October tops.
SELECT INDUSTRY GROUP INDEXES:
There's nothing especially noteworthy to report with the CBOE Oil Index (OIX), Philly Gold & Silver Index (XAU), CBOE S&P Bank sector Index (BIX) and the Philly Semiconductor Index (SOX). All mostly rebounded with the strong market of this past week; none broke out above down trendlines. BIX rebounded this past week from a long-term up trendline dating from its 2009 low.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart regained its bullish pattern after snapping back from a 61.8 (I usually just say '62') Fibonacci retracement. SPX stabilized at lows in the 1160 area for two days running. Good potential for a low was based on a retracement 62%, the usual max (within a bull market), plus the oversold condition suggested by the RSI and by lows that got to the SPX's lower 5% envelope line per my chart. When SPX has traded 5% under its 21-day average, good-sized rebounds have occurred previously.
Highs tend to get stretched out and REPEATED highs form in the same area. Not so much after scary waterfall type declines. If you get 2 or 3 lows made in the same area after a big heart-stopping sell off and those lows measure to the fibonacci retracements, it calls for a play on a rally.
The test for the bulls is to pull SPX above its 200-day moving average and keep it there. The index has been struggling to regain that much upside momentum. The 6-12 months outlook looks still too uncertain, too tied to Europe.
1200 looks like a support floor now. 1200-1220 was the prior top end of the Aug-Sept price range and this area looks like it will be new support, although prices briefly knifed through 1200 in the low-volume thanksgiving week. That week, with market jitters what they've been, made for a perfect time for big short sellers to drive down prices and make their money for the quarter.
Resistance is 1260-1265, with pivotal resistance in the 1290-1300 area. Support is at 1233 or the trendline, then at 1200.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart reads similarly to the S&P 500. OEX also experienced the rapid recovery from a 62% retracement. Touched its lower envelope extreme and registered an oversold RSI reading on the Wednesday and Friday closes of Thanksgiving week. If you weren't too busy shopping and bought a few calls that day, congratulations on your best of all 'black Friday' bargains!
OEX pierced its minor down trendline when it soared above its 21-day moving average, but the 200-day average as been akin to a kind of resistance; or, faltering there simply is a good visual to show that upside momentum hasn't been consistent and robust after the early-August decline.
To keep a bullish pattern going technically, OEX would find support in the 553-550 area on pullbacks. A move above 570 suggests potential to 580 or higher. Right now 570 looks like strong resistance. Conversely, 540 looks like good technical support.
An extension of the recent strong rebound looks more in doubt if OEX starts trading under its 21-day moving average again. Conversely, staying above this average keeps upside possibilities alive for another leg higher such as to 580-590.
DOW 30 (INDU) AVERAGE; DAILY CHART:
I wrote last week that "The Dow is at the beginnings of an oversold RSI. Don't get more bearish due to the absence of an immediate rally, assuming prices stabilize. The Dow Index may be a best rebound play." Actually the rally WAS immediate! I don't know if it was the 'best' play in index calls but the Dow blasted higher after getting down to its lower envelope extreme and to an oversold RSI reading.
Better than average rebounds occurred in at least 18 of the 30 Dow stocks this past week. The Average as a whole then saw selling as INDU was approaching the 12200 area again, a strong line of previous resistance. INDU needs to get above its down trendline and challenge pivotal overhead resistance at 12200 to suggest another up leg could lie directly ahead.
More likely may be some backing and filling and a possible pullback to the 11800 area. INDU looks more likely to retest 12200 if it pulled back and consolidated some after its fast and furious rally. Conversely, a retreat back to 11600 support keeps INDU in a downtrend pattern.
Pivotal overhead resistance based on a line of prior highs is very apparent at 12200 and a bit higher. Next resistance looks like the 12400 area, at the low end of the consolidation made prior to the double top of July.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart was looking bearish prior to the most recent rally. On the one hand, COMP is maintaining a bullish pattern of higher pullback lows. On the other hand, next to maintain a bullish chart is a pattern of higher highs.
After hitting a low at 6% under its 21-day moving average (I thought it might even hit 7%), COMP rebounded strongly on news out of Europe. COMP's retracement of its prior advance was 2/3rds. Not in a bear market, but otherwise I've done well to buy retracements of 62 to 66%. This 2/3rds retracement also occurred at an 'extreme' low as suggested by COMP falling to 6 percent under its 21-day moving average. The RSI was also hitting its version of an oversold extreme. All the stars lined up.
COMP has failed in its first attempt to get above its minor down trendline. This trendline and the area of the 200-day moving average are key areas for COMP to churn through to keep bullish action going. If COMP instead falls back under its 21-day average, it may continue in the overall downtrend implied by the down trendline of recent weeks.
Very near support comes in at 2600, then at 2542-2535. Near resistance is in the 2650 area, next around 2700 extending to 2750.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) had looked bearish previously or at least painted an unknown as to whether its pullback was going to remain within a 'normal' downside correction OR was reversing its intermediate trend lower. The strong snap back rally was proof that the index remains within a long-term uptrend. The recent lows retraced a bit more than 2/3rds of the last upswing from 2043 to 2412. Retracements of 66% is a favorite buy area when I'm anticipating a snap-back rally. In addition to retracement amount, next up is to look at measures of 'oversold'.
They managed to push NDX to my lower envelope line, suggesting an extreme had been reached or was near; i.e., at a Close here of 6 percent under the 21-day moving average. NDX reaching the oversold zone in terms of the (13-day) RSI indicator was another harbinger of strong snap back rally potential.
The strong rebound of this past week took the index back above its 200-day moving average but not to above its down trendline which is a key resistance and currently intersects at 2340. If NDX doesn't manage to pierce this line, it keeps the chart in a bearish pattern. Conversely, buying the recent fall to the area of the lower envelope line offered successful trade potential for the week. In on Monday, out on Friday.
If NDX slips back under the 200-day average and the 21-day as well this would suggest another drift lower. My highlighted support points are 2290, with next support at 2240, then 2200. Overhead resistance begins around 2365, with pivotal next resistance at 2400-2412.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) chart is showing resistance at the highlighted down trendline, currently intersecting at 57.3. Further resistance comes in at 58 and an area of prior recent highs. An upside breakout above the trendline is key in terms of projecting a further up leg.
Support is seen in the 56-56.3 area, then at 55. The snap back rally showed the potential when QQQ gets to a real oversold extreme. What remains to be seen is will a next rally attempt be one that carries to or above its prior highs in the 59 area.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) achieved a bullish breakout above its down trendline after retracing its 'fibonacci' 62% retracement of its last upswing. Expected support is at the prior down trendline as highlighted on my RUT daily chart. Next key support is 700.
If RUT holds most of its recent gains, rally potential is suggested to retest its prior high. I've noted resistance in the 745-750 area, with next resistance assumed to lie at the prior high at 769 as an intraday high, 765 as the prior high close. It's an even bet as to which way is the next 20-30 point swing. Not my odds and am standing aside from trading a direction here.
GOOD TRADING SUCCESS!