THE BOTTOM LINE:
In my Friday, 1/31/14 Trader's Corner article I made some general observations of what I look for as far as possible bottoms in bull market corrections or pullbacks. That article, per the e-mail sent, or via the aforementioned link to it, is a useful 'companion' piece to this one.
There wasn't major downside follow through this past week to the sharp break of the prior week. The Dow 30 (INDU) experienced the biggest decline on the week at just over 1 percent. The S&P indices and the Nasdaq fell fractions of a percent.
My work suggests either daily and weekly chart up trendlines will hold as support and we'll see a further rebound from at or near recent lows. Conversely, up trendline supports are decisively pierced, suggesting a further down leg in the Market such as equal to the extent of the first decline; such as to the 1700 area in the S&P 500 (SPX), assuming a decisive break of 1770 support.
The following technical support levels are worth watching. I'm anticipating either rebounds from longstanding up trendlines (per my charts below) OR if these supports are shattered, another move down roughly equal to recent initial sell offs in the indices. For this reason in my various chart highlights I've noted very close by support levels (at key up trendlines) but also substantially lower downside target/support levels.
Key NEAR chart/trendline supports are seen at:
I'm keying in on recent lows being at or slightly above support implied by multimonth up trendlines COUPLED with oversold daily chart RSI readings consistent with bottoming patterns in prior corrections. Assuming trendline supports are not penetrated or not for long, the current period of weakness may be short-lived. Conversely, if pivotal up trendlines are pierced, my lower price targets come into view as possible downside objectives.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The recent S&P 500 (SPX) lows have occurred at SPX's long-standing up trendline, dating from the mid-November 2012 low. This coupled with a low (oversold) RSI reading, suggests a possible bottom, rebound and a bullish trading stance.
I also have to note that the recent cluster of lows could also be a bear flag consolidation ahead of another potential drop of 50-70 points. Watch for whether 1770 continues to hold up as support. Next lower support is seen around 1750-1748, with fairly major support beginning in the 1700 area.
I lean to an interpretation of at least an interim bottom forming or having formed around recent lows in SPX at its up trendline. Since a decisive downside penetration of the trendline would suggest a further next down leg to come, if I were to buy SPX calls or sell the index puts for example, I won't risk much on such a trade and would exit given any substantial penetration of the current up trendline. If prices snap back, I can get back in.
Near resistance is highlighted at 1812-1820, with next resistance at the line of highs that formed around 1848.
What suggests to me above that this market could make a secondary and LOWER bottom further on is that bullishness is still rather high in my view regarding my CPRATIO model. Bearish 'sentiment' hasn't gotten anywhere NEAR an extreme on even a 1-day basis. I figure that bearishness and the fear of the market may be seen again, before the current correction runs its course. There's an "no worry, stocks will rally after any dips like they have for months!" Great traders I've known have always a healthy fear of downside RISK and guard against complacency.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is bearish on a near to intermediate-term basis after a minor double top formed in the 824 area. It was downhill have that and the move accelerated through the 810 'breakdown' point. Given that support appears to have formed recently at OEX's up trendline, there is potential ahead for a rebound.
Conversely, a decisive downside break of OEX's support trendline at 786 would suggest a possible next dip to 770 and ultimately to around 750, which would fulfill a measured move objective where two down 'legs' would be equal.
Resistance is seen at the 810 'breakdown' support point; what was support, once penetrated, becoming subsequent resistance. Next key resistance is highlighted at 820, extending to 824.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) accelerated further to the downside after weakness was seen in more than half of the INDU stocks; I noted weakness last time in AXP, BA, CVX, DD, DIS, GE, GS, JNJ, JPM, MMM, NKE, PFE, PG, TRV, UTX, WMT and XOM.
Near resistance is at 16000, then at 16150. Key near support now is seen at INDU's up trendline, currently intersecting in the 15600 area. Next support comes in around 15400. Major support is at 14800.
The Dow is now near the low end of its 13-day RSI scale that starts to suggest an 'oversold' condition. I wrote last week that the Dow in recent months as reliably rallied from such oversold conditions but this year is also starting with less bullish influences from the Fed.
There is a principle that suggests that down legs 'a' and 'c' will have a Fibonacci relationship; e.g., the first down leg is 38% of the second and a second downleg ('c') a fibonacci 1.6 or 2.6 times the point distance carried on the first sell off. In the case of the Dow to date, down leg 'a' is a fibonacci 38% of down leg 'b' and the second decline is (also, so far) a fibonacci 2.6 times down the first sell off in INDU. This study of the relative size of the first and second declines suggests that the Dow's correction may have run its course as the decline 'fulfills' a key relationship of the two down legs.
The fact that the recent low has reached INDU's long-standing support/up trendline makes the foregoing comparison of the two downswings more relevant or more 'potent' as pointing to a possible bottom.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bearish short-term within a intermediate to long-term uptrend. A move above 4150 regains short-term upside momentum and could lead to a test of potent resistance implied what was the 'breakdown' point at 4200.
There's a bearish chart interpretations in the pattern of a sharp decline followed by a relatively narrow sideways move: that of a bearish 'flag' consolidation that could portend even a second dip of 200 points. There would have to be a decisive downside break of 4050 to suggest that such a second down leg was underway. A decisive downside penetration of 4030 without a quick snap to above the trendline, would set up 3900 as a possible next objective.
In a bull market like this, especially with tech, odds will tend to favor a continued bullish outlook until proven otherwise, which would mostly be a sharp break of the uptrend line currently; a trendline that's been defining support for a year+ period. I'd prefer to buy a dip TO the trendline that held and found buying interest.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart is short-term bearish with the recent dip to its up trendline. This dip would 'normally' be a buy as support is strongly assumed at the up trendline.
I favor buying dips like the recent one to NDX's up trendline if risk is held to exiting on any high volume break of the up trendline. Upside potential could be to the upper end of NDX's price channel in the 3700 area. Initial resistance is at 3550, then 3600.
If NDX's up trendline currently intersecting at 3467 gives way with no returns to back above it, there's potential for a decline that carried to the 3350 area, which is noted as a 'next' support below 3460-3450, support but I would also look for buying interest at 3400.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nas 100 tracking stock (QQQ) has seen bearish recent action but so far QQQ dipping only to the LOW end of its long-standing and well-defined uptrend channel. The big cap Nasdaq 100 via the key ETF for it, is noteworthy to have a clear-cut recent bottom at its up trendline. This pattern is pretty much the same on the NDX chart above, although due to the 'moderating' influence of a stock tracking the index rather than the index itself, QQQ patterns are most 'clear'. The tracking stock smooth's out NDX chart patterns so to speak.
Since sharply higher daily trade volume or daily or weekly volume spikes such as seen below with QQQ often suggest a possible bottom. As my trading mentor used to say: "volume 'precedes' price". An example of this principle is that exceedingly high daily volume often marks a volume-climax bottom in stocks and indices. Stay tuned on this!
Support and resistance levels are noted per the red down resistance arrows and the up arrow green support points.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) daily chart below is another example of recent lows stopping at a longstanding up trendline. This pattern is noteworthy in that RUT, like the Dow, often trades very 'technically'; meaning that the Russell Index often traces out patterns that are textbook examples of where and how upside or downside reversals form. RUT can at times be a bellwether index for the overall Market.
A rebound from the area of a long-standing up trendline, coupled with an oversold extreme in the RSI, lends weight to the idea of the formation of at least an interim if not 'final' bottom; even if such a low(s) gets re-tested later on.
Key near support is at the trendline at 1120 currently; support/buying interest should next be found in the 1100 area. Further anticipated technical support is at 1080.
1145 is near resistance; next at 1166 and 1180 resistance assumed at a key prior price peak in RUT.
The Russell has a tendency for rallies to develop when and after the Relative Strength Index (RSI) gets to the low end of the scale as seen above.
GOOD TRADING SUCCESS!