THE BOTTOM LINE:
A correction to the existing uptrend appears to have begun, the snap back rally notwithstanding. Most often, downside corrections are a two-pronged affair: a first decline is relatively shallow and is followed by a rebound that suggests that the bulls are still in charge. However, this pattern is often followed by another steeper selloff that causes some concern among those optimistic bulls.
The down-up-down pattern of an 'a-b-c' correction often see the second down leg 'c' carry farther than the initial decline 'a'; e.g., the second downswing carries 1.5 to 2 times farther than the first sell off. This pattern occurs often enough that I sometimes take it on faith that a second downswing is coming. I don't like to 'assume' too much in stocks as the Market is often full of surprises, but this a-b-c pattern is common, at least when a bull market correction finally comes.
A strong move above Dow 14000 would negate a bearish view, at least for now. In the S&P 500 (SPX), a decisive upside penetration of 1530 would put the index back on a bullish track but SPX would then have some major resistance in the 1550 area. In the Nasdaq Composite (COMP) a sustained advance above 3200 COMP might get to 3300.
Other than the foregoing 'breakout' type moves above resistance, I anticipate the major stock indexes working lower. I have support levels noted in my individual index commentaries and may be near-term downside objectives.
This is not to say that the dominant trend is not still UP. For example, an intermediate uptrend in SPX remains intact provided that SPX didn't retreat to below 1400. The SPX major or primary trend wouldn't appear to reverse lower absent a weekly Close below 1360. As always when talking about 'the' trend its important to distinguish what aspect of trend we're talking about; e.g., short-term, intermediate or long-term.
Last but not least in terms of Dow Theory or on a very long-term primary (major) trend basis, there is yet to be a new closing weekly or monthly high by the Dow 30 Industrials that 'confirms' the recent all-time high in the 20 Dow Transports (TRAN). Dow only considered new monthly closing highs as 'valid' so to speak, suggesting that 13900 is the price to beat at the end of February. Stay tuned on that for
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart has turned mixed. The recent correction held so far in the 1500 support area which doesn't cause much technical damage so to speak. The retreat to the middle of SPX's uptrend price channel after a prolonged advance and a prolonged 'overbought' situation can however be an initial tip off that the market is vulnerable to further weakness ahead.
A move back above 1530 in SPX is needed to suggest that the important 2007 highs in the 1550-1555 area could be tested or re-tested. Near support is at 1500, extending to 1480 currently. 1430 is a next support area after that.
The last advance in SPX to a new relative high was not 'confirmed' by a similar new high in the (13-day) Relative Strength Index/RSI. This type of bearish divergence is something that can provide advance warning for an upcoming downside reversal; not always of course, but it can pay to follow the interaction of price and momentum indicators like RSI.
Failure of RSI to 'confirm' a new high (or low) is something to pay attention to given the potential for sometimes sharp reversals. Diverging price/RSI patterns can be used to avoid account drawdowns. I especially am leery of getting caught in a sharp correction after overnight news. Bearish news seems to 'come out' when the market is technically vulnerable!
As to bigger chart picture, there could be a pullback to as low as the 1400 area and the longer-term uptrend would remain intact.
Bullish sentiment as seen in my CPRATIO indictor above seems high to me given a period ahead of more political gridlock impacting economic growth, but bullishness is not so high that this indicator in and of itself should warn off those looking for still higher levels.
S&P 100 (OEX) INDEX; DAILY CHART
The pattern seen in the S&P 100 (OEX) chart mirrors that of the broader S&P 500. The sharp 2-day pullback in OEX, after such a prolonged advance, could well be the initial part of a substantial downside correction; e.g., OEX pulls back to the LOW end of its bullish uptrend channel currently intersecting at 664.
Very near resistance is seen at 685-689, then up in the 696-700 area, at the upper 'resistance' end of OEX uptrend channel. Close by support is at 676-680, then comes in around 673, extending to 664-660 near the low end of OEX's uptrend price channel.
In terms of long-term resistance, I discussed this for SPX and in OEX the 2007 weekly highs occurred at 726-733. I could see the Index achieving a test of this prior important top but assess it more likely to occur after a correction that, in technical terms, 'consolidates' the last run up from the 636 area.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) was looking like it would break below support implied by the low end of its multiweek trading range but that (support) held by the Close on Thursday. The rebound that followed of course took INDU back up to 14000, which is the key or pivotal near resistance currently.
A decisive upside penetration of 14000 or a rally that was sustained (e.g., a move above 14000-14035 with any subsequent pullbacks holding this area as 'support') is needed to suggest that INDU could break out above minor resistance at 14100 on the way to a possible test of more significant technical resistance at 14250, the top end of INDU's uptrend channel.
Key near support is at 13860-13830, with important lower support in the 13600 area and the 50-day moving average; expected support extends to 13525 at the intersection of INDU's up trendline.
CVX, DIS, GE, HD, JNJ, JPM, MMM, PFE, PG, and TRV are the Dow stocks with the strongest bullish patterns currently. Others with mostly bullish charts look iffier than these 10. Minor bounces in HPQ and KO have added a little juice to INDU. Hard to predict is if the aforementioned bullish 10 or some further recovery in the mixed or faltering Dow stocks is enough to power INDU to a new up leg. A mixed picture, but the Average getting above 14035, then holding above this line of prior resistance is key.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart saw a bearish, but only 1-day, break below its up trendline. The snap back rally the following day (Friday) has kept the Index overall bullish in its pattern as COMP held its up trendline. A one-day break ONLY below key support level usually involves temporary panic selling and stops being run. COMP's pattern is mildly, not wildly, bullish as the lengthily sideways move led to such a brief rally above 3200 resistance.
I've noted support at 3130, extending to 3100 with more major support anticipated at 3020-3000.
Key near resistance comes in around 3213, at this past week's highs. Above 3200-3213, technical resistance is seen at the upper end of COMP's uptrend channel, currently intersecting at 3300.
The mixed pattern of the Nas Composite doesn't lure me into trading Nasdaq. If I had to pick a next (directional) move, I'd say look for another downswing. A clue comes in whether COMP can climb back up above its 21-day moving average easily or for long.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart has turned mixed. The way I have the up trendline constructed on the NDX daily chart (and different than QQQ) is that the Index has fallen under this technical support. This also implies that a move back up to this trendline at 2750 is a first chart resistance. More pivotal still is the well-defined line of resistance at 2780, with next resistance (if there's an upside breakout) coming in around 2850.
The move above the prior trading range took NDX up to 2780 repeatedly but not above this level. When NDX couldn't progress higher and was stalled at 2780, after what looked like a bullish 'breakout' move, gave a warning that the big cap tech index was vulnerable to a downside break.
On the bullish side of this 'mixed' chart picture is that NDX on Thursday held the low end of a well-defined multiweek trading range in the 2700 area and closed the week back above its 50-day moving average. Below 2700, support is anticipated in the 2665 area, which would 'fill in' the prior big upside price gap that kicked off the move to above 2700.
Strategies that would pay off with NDX staying in a range have been the best play. Those holding calls haven't done well given premium erosion in the back and forth relatively narrow (for NDX) trading range. I like stocks and indexes in up or down trends. This kind of 'indecision' pattern we've seen for a few weeks now in NDX makes me glad to have been on the sidelines with Nasdaq. Fortunately in options there are multiple ways to be successful!
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) saw a sharp break on Thursday on higher than recent daily trade volume which suggests 'weak' hands getting out and profit taking selling. QQQ then held and found support at the low end of its prior multiweek trading range, at the intersection of its up trendline and in the area of its 50-day moving average, with these chart/indicator aspects maintaining an overall bullish pattern.
Not so bullish is the fact the apparent 'breakout' in the prior week to above a well-defined trading range, didn't lead to much or sustained upside follow through.
Near support is at 66.5, with next technical support at 65.2-65. Resistance is noted on my QQQ daily chart at 67.6, extending to 68.2 with next higher resistance around 69-69.3. Major resistance can be assumed at the prior highs at 70-70.5
The On Balance Volume (OBV) line didn't turn up with the Friday rebound (nor did trade volume), which is mildly bearish. I don't anticipate QQQ getting into any sustained advance near-term.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) Index is mixed in its pattern as RUT has fallen outside/below its long-standing uptrend channel. A all to pivotal support at 900 which held keeps the chart overall bullish. I think of this kind of chart pattern break as a warning to bullish traders that the index is 'ready' or primed for a correction. Typically, the first down leg is not the end of it and a second, often steeper, decline will follow.
Support as noted already is at 900, extending to 880-875. Major support is anticipated in the 840-830 price zone.
Immediate overhead resistance is at 920, at the previously pierced up trendline which may have 'become' technical resistance. I've noted resistance at 931, with further resistance projected for the 945 area, extending to the upper end of RUT's uptrend channel currently intersecting at 963.
GOOD TRADING SUCCESS!