THE BOTTOM LINE:
After retracing 50% of their late-Nov to late-March advances in the S&P 500 and the Nasdaq, the Market may be at or near a bottom. There's also potential for another shot down ahead of a tradable bottom such as to around 2700 in COMP and 1260 in SPX.
Certain objectives or expectations for the length of the second downswing were met but possible bear flag patterns in the S&P and Nasdaq charts and a Head & Shoulder's type top in the Russell 2000 give some pause also. The market got fully oversold on a daily chart basis and is getting fairly so on weekly charts.
Last week I saw buying calls as risky due to a likely weak initial rally. When I saw how quickly bullish sentiment rebounded, I assumed even more that this would be a rolling bottom if that and not a 'V' type bottom with a straight shot down then an immediate sizable rally to follow.
Bottom line, I don't think EARLY bulls will fare so well as prices chop around some more due to slowing Europe AND now China. I don't think the slow-growing US economy can pull up the world but it can pull up stocks here further. Right now fear and loathing related to foreign menaces rule and I don't downplay the risks of our recovery being nipped in the bud.
Unlike the larger SPX index (and the Nas Composite and Nas 100), the big cap S&P 100 hasn't given back quite as much ground in terms of its retracement of the last big advance (late-Nov to late-March/early-April), which has been 45% so far, compared to a 50% retracement in the S&P 500/SPX and a bit over 50% in COMP.
A number of the big cap OEX stocks haven't given up much ground from their highs or are still in strong uptrends (i.e., WMT). Unlike the price averaged Dow 30, OEX is strictly capitalization weighted so OEX member stocks like AAPL, AMZN, AXP, BA, BRK.B (Berkshire Hathaway), DIS, EBAY, GOOG, HD, IBM, KO, PFE, KFT, PFE, T, VZ, XOM and WMT haven't had the steeper declines seen with some in the S&P 500 and 400. If you want a slightly less risky bet on some upside ahead, better to be the S&P 100 calls in the case of another shot down before a recovery rally has a chance to gain traction.
Based on the chart patterns to date, what we've been seeing is a fairly 'normal' correction in an overall (longer-term) bull market. It's not a rip roaring bull and the Transportation stocks didn't 'confirm' blue chip Dow strength to 13300 (correctly) but I try not to confuse trading opportunities with a hope to make X percent on investment holdings in 2012.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
1300 has held up so far as support in the S&P 500 (SPX). Sometimes the obvious in the Market is not obviously wrong. Moreover, the decline to below the 3% envelope line didn't last beyond a few days so far, a pattern common to index bottoms, although the SPX percent value 'extremes' vary in the 3-4% range.
I pointed out last time that the SECOND down leg is often more than the first (decline) by some Fibonacci factor; e.g., the second decline dropping 1.5-1.6 times more than the first downswing. This is a common pattern to corrections after a prolonged run up. It doesn't mean that the second decline won't go even beyond a Fibonacci 1.6 times the first but 1.6 is historically common in the indexes within a cresting bull market.
I've highlighted support at 1300, extending to 1280, but if the recent upward sloping rebound is a 'bear flag', another shot down could carry to 1260. I wouldn't be surprised if the buying in the 1300 area was on the early side or premature.
Near resistances look like prior support levels at 1340 and 1360. A close above the 21-day moving average would suggest possible further upside follow through, with the caveat that subsequent follow through is key; a single such Close above the pivotal 21-day average could be a fake out upside move.
The 13-day Relative Strength Index (RSI) as seen above and below hit a 'fully' oversold extreme. On an 8-week basis (not shown here) the recent RSI low in SPX and OEX was just over 30; low, not quite as 'extreme' on a longer-term chart basis.
My sentiment indicator seen above bottomed in an almost 'classic' leading-indicator manner, just BEFORE there was a rebound and ahead of prices establishing some support.
S&P 100 (OEX) INDEX; DAILY CHART
I wrote last week that "the S&P 100 (OEX) index chart is bearish but with its second down leg having fulfilled some 'minimum' downside objectives." Minimum objective refers to the 590 level and the 590 intraday low wasn't touched again on two different dips this past week. Still, I'm not ruling out another retest of 590 and the potential for a further shot down to the 584-580 support.
On a risk to reward basis, buying the dip in OEX to below 600 wasn't a bad move. As I noted above in my initial 'bottom line' comments, unlike the larger SPX index, the big cap S&P 100 hasn't given back quite as much ground in terms of its retracement of the last big advance (late-Nov to late-March/early-April), which has been 45% so far, compared to a 50% retracement in the S&P 500/SPX and a bit more than this in the Nas Composite.
A number of the big cap OEX stocks haven't given up much ground or are still in strong uptrends (i.e., WMT). Unlike the price averaged Dow 30, OEX is capitalization weighted so OEX member stocks like AAPL, AMZN, AXP, BA, BRK.B (Berkshire Hathaway), DIS, EBAY, GOOG, HD, IBM, KO, PFE, KFT, PFE, T, VZ, XOM and WMT are holding up and haven't had the steeper declines seen with some in the S&P 500 and 400. If you want to have a bit less downside risk, better to be the S&P 100 calls if you buy a further dip or have bet on a rebound.
I would especially buy a further sell off that carried to the low-580 area, risking 5-7 points under 580. A further decline would fulfill an expected move below a bear flag formation such as what may have formed in OEX. If there's going to be a further move below recent lows, odds favor early in the week. Otherwise, further backing and filling looks like a bottoming process.
OEX support is at 590-591, with next lower support estimated in the 584-580 price zone.
Resistance is seen at 605 in OEX, extending to the 609-610 area. 614 is the current level of the 21-day moving average. A Close above the 21-day would suggest the possibility of some further upside but the following day after any such move should be watched for upside follow through or the LACK of it.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) which has a still-bearish chart on a short to intermediate-term basis seems to be stabilizing above 12400. However, the idea that INDU has reached a support and area of solid buying interest is early. It still remains for the Dow to make a move above near resistance at 12500-12560.
There remains the possibility that INDU will fall to the 12000 area. I've highlighted support at and near the low-12300 area and next lower anticipated support at 12200.
Dow stocks holding up fairly well (or still even in rally phases) include AXP, BA, DIS, HD, IBM, KO, PFE, KFT, T, VZ, and WMT, which gets close to half (of the 30 stocks) with rebound potential. One more shot down and I'd buy Dow Index calls with the index at or near 1200. I'm being conservative; INDU could already be at or close to a bottom. I'm always looking for that final move, followed by waning momentum suggesting going the other way, assuming price action shows signs of a reversal.
Layers of resistance/selling pressure are anticipated at 12600, 12700, and then 12800.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
I've left the note from last week on the Nasdaq Composite daily chart below as to the completion of a common second down leg in COMP that is 1.6 times the point decline of the first decline.
The foregoing comment isn't to say that the longer second downswing necessarily COMPLETES the correction but it has the chops for it or the right symmetry in its pattern so to speak. At a minimum it suggests that put holders in NDX and key bellwether stocks (e.g., Apple) may have gained most of the profit that they could hope for. And of course if prices trend sideways more than anything (and volatility falls), put premiums will decline.
Near resistance is at 2860, with what is probably tougher resistance at 2900-2925. A couple of Closes above the 21-day Average is needed to suggest that the correction has run its course and lows for the recent decline might be in place.
Support is seen at recent lows around 2775, with fairly strong support around 2700, which is somewhat of my worst case downside scenario at the moment. A move to 2700 would fulfill an expected downside IF the recent consolidation is a flag pattern, which is simply a pause on the way to still lower levels. If so, there's a 'measuring' implication to around 2700 to possibly finish this decline assuming it's not over with already; a possibility given the move already to the lower envelope line.
The 13-day Relative Strength Index (RSI) as seen above and below hit a 'fully' oversold extreme. On an 8-week basis (not shown here) the recent RSI low in COMP and NDX was just over 30; low, not quite as 'extreme' on a longer-term chart basis.
My sentiment indicator seen above bottomed in an almost 'classic' leading indicator manner, just BEFORE there was a rebound once the Index found some support.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) Index also has the pattern of possible completion of an 'a-b-c' or down-up-down 3 part segment that's common for bearish pullbacks, especially after a long advance. NDX may still have a further shot down and one that would 'set up' further bearishness which in turn often precedes a tradable bottom.
I don't anticipate a big further decline and stocks transitioning to a bear market. There are still a lot of strong NDX big cap companies that haven't tipped into noticeable bear market patterns; see my 'bottom line' comments at top or in the OEX section. The S&P 100 has a good number of Nasdaq listed stocks which are just correcting(only) as well as NYSE listed companies.
One more decline, especially if it carried as far as to the 2400 area, should set up a buying opportunity having a favorable risk to reward (e.g., risking to 2350, with a target back up to 2600-2630). Meanwhile, I've noted close by NDX support in the 2475 area, extending to 2450, with fairly major support at 2400.
Resistance is at the high end of the recent trading range, in the 2555 area, with resistance then extending to 2600-2630.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish on a short to intermediate term basis, mirroring of course the underlying NDX index. If there's an extension of the recent decline to the 60 or lower, such as to around 59, I'm anticipating wanting to buy the stock. I tend to favor buying or shorting the stock on an unleveraged basis and not have a particular expiration time frame to also factor in as with puts and calls.
Near support is highlighted in the 60.7 area, extending to 60. 59 is also a support and my current 'maximum' anticipated downside and a likely short-lived dip at that. I believe buyers will come on any dips below 60.
Near resistance at 63, extending then to 64.0
Daily trading volume shot up on Thursday and fell way off on Friday ahead of our Memorial Day holiday. Not many wanted to hold much over the long weekend with stocks trading in Europe on Monday but not here. As said already, I think good buying interest will surface on any dips below 60, although there might not be much jump in volume. QQQ tends to see volume spikes mostly on sharp declines, particularly when well-defined support levels give way; or to below key moving averages such as when QQQ plunged below its 50-day average. These points then give you a good idea of expected resistance on a climb back up.
RUSSELL 2000 (RUT); DAILY CHART:
I've kept the extensive outline of the Russell 2000 (RUT) Head and Shoulder's top pattern. I've kept the notations that suggest that a 'minimum' downside objective would be fulfilled around 722 as a reminder that at least ONE of the major index charts suggests a further decline and not just immediately below current levels.
Near support is suggested at recent lows around 746 and I've estimated a next lower support around 734. A move to 722 would fulfill a measured objective that is seen with the H&S pattern and where a buying opportunity may set up. The 'measuring' implication is to take the distance from the top of the 'head' to the 'neckline' and if that's broken (after a 'right shoulder' top), subtract the first measurement FROM the neckline.
Upside resistance is seen at 770, then up in the 780-783 area. A couple of Closes above 783-785 would suggest that the index had regained a bullish pattern. I'm not expecting this anytime soon as RUT's top looks formidable; meaning, it's a broad top with 3 rally failures over a number of weeks.
Like the other indices, RUT is also quite oversold which suggest the potential for a rally OR the likelihood of at least a leveling off of prices.
GOOD TRADING SUCCESS!