I got this OIN SUBSCRIBER E-MAIL with a question on follow up regarding updating downside technical objectives and where possible support may be found on the major indices. This was in regards to my predictive comments made in my weekend 'Index Trader' Column. I usually don't just do a midweek chart update in this column, rather look at latest price action relative to the technical principle(s)I'm talking about in my Trader's Corner column. However, given the spine tingling action of seeming market free fall, I will look at my charts and update while weaving in whatever technical aspects might be of telling interest, including a web link reference to any Trader's Corner past columns that might also pertain to the subject.
"Would yu update any trendlines or envelopes, whatever might suggest where a temporary or final bottom might come in the market? You talked about 11120 in the Dow being an area where you would take profits on DJX puts. Still think so?"
Since this references my most recent Index Trader article, which most of you know is a section ONLY seen on the Option Investor.com web site, my Saturday (5/13) article can be seen online by clicking here.
I've written recently, especially in this last article referenced above about what tends to happen when there is a 'solitary walk of the Dow'. This is when the Dow is going up like gangbusters but the rest of the blue chips and the broader NYSE market, as reflected in the S&P indexes, is lagging or underperforming.
What drives this? It's usually in times like this, where there's an uncertain outlook for the economy and stocks. This might be in situations like now where inflationary or anticipated inflationary pressures are also present; and the Fed is raising interest rates to ward off the inflation bogeyman.
In times like this, there may be a tendency for the general public to not be huge market participants; unlike, say in 1999-2000. That period was definitely NOT a Dow (INDU) led rally. In times like now where public participation in the market tends to be more through their contributions to mutual funds, who tends to be in the market driver's seat so to speak, are the professional fund managers. A mostly trend following and sometimes timid lot due to the fear they will UNDER-perform the major averages.
Since the big cap 30 Dow stock performance gets a lot of press and investor attention (not always deserved!) AND can absorb a lot of buying from the behemoth funds, most investment attention gets focused in this small selection of stocks which is the Dow Average (and not capitalization-weighted even). There are other factors too of course, since these companies' earnings tend to hold up better in uncertain periods, plus many pay some return in the form of dividends.
Anyway, the Dow becomes the 'engine' driving the market higher. However, strength in INDU tends to also pull up the S&P 500 (SPX) and 100 (OEX) and the tech heavy Nasdaq Composite (COMP) and 100 (NDX) more than they would otherwise advance. Fund managers tend to have to FOLLOW the indexes. If they are going up, they will put more money to work there also, especially in SPX. They are graded on and their jobs can fall on, their relative quarterly performance/underperformance to the S&P.
The whole dynamic then collapses if a few Dow stocks get hit by heavy selling, as portfolio managers shift money out of stocks that have had big gains; when their PE's get to way over-inflated levels. Major market rallies that are led pretty much solely by the Dow tend to end in sharp corrections.
I don't think however, that the market is going to go into free fall for a lengthy period, although the Nasdaq looks like it is. There is not the rampant speculation and hyper-bullishness that sets the stage for this kind of situation.
However the market often adjusts ALL AT ONCE. Many casual market observers wonder why the market will go up, or hold up, for many weeks or months, and then give back all those gains in a few days. Mostly, this is reflected in the fact that money is committed to the market gradually and piece meal. As the market continues to advance, more and more accumulation goes on.
If ExxonMobil (XOM) keeps advancing on balance month after month week, there might be 10-15 buys of the stock by a fund manager until they're are weighted or over-weighted as much as they want to or can be in energy.
However, if oil prices start to break, demand falls, windfall profits taxes get considered, etc., a manager might decide to go from over-weighted to in-line or even under-weighted overnight. This adjustment can lead to huge selling and tends to be more of a 1-time or few days event. Selling of 3-5-10 stocks in the Dow 30 can set off an avalanche of selling when the market gets overextended, overbought, whatever you care to call it.
Other fund managers tend to then follow along in the selling and it can even reach a slightly panic stage. Why are you selling? Because everyone else is! Well they always have many seemingly well-informed reasons they will give you...if you think I don't have an especially high opinion of most money managers, you would be right.
Now for some chart talks and updates. First and foremost of course is the daily chart of the Dow Industrial Average, symbol INDU, as seen below. It was no accident that the Dow reached the top of its uptrend channel and reversed there. This is common technical action, only the reasons change; basically the market has a certain amount of upside momentum based on current perceptions of fundamentals and that's it. Technical analysis can show the 'that's it' price area.
Remember the opposite, high or low end of a price channel only requires one or a few points from just one period in order to construct the opposite parallel line. If in an uptrend, there's an uptrend line connecting 2-3 or more lows. A line connecting the most number of lows is an 'internal' up trendline and may cut through one or more intraday lows in the case of a daily chart.
We take the up trendline with the best 'definition' and the implied UPPER end of its price CHANNEL is a line parallel to the up trendline that touches the highest high for the period you want to examine. That's how the upper channel line was constructed in the chart below. More on constructing trend channels is found on a Trader's Corner devoted to this subject reached by a link at the bottom of this column.
Drawing a line parallel from the November peak in SPX did NOT define the area of its recent high. Since INDU was LEADING the market that is the way it worked here. A general rule of thumb is to focus on analysis of the index that is leading the market. Sometimes its the Nasdaq, sometimes the S&P, etc. Anyway, my downside target was to the LOW end of the uptrend channel or back to the area of the up trendline.
Today's INDU low is also in the area of the lower envelope line set at 1.5% (under the 21-day moving average). However, given the expansion of the price swings to a more 'normal' or more common volatility and because of the principle we can call 'as above, so below', a 2.5% envelope line is also constructed, intersecting around 11100 and which also is the area of the prior 11073 low Close. If a high was 2.5 ABOVE the 21-day average, the next low may represent the same percentage value UNDER the average. More on the ins and outs of using moving average envelopes is seen at the LINK to a prior Trader's Corner article also seen at bottom.
Getting back to the Subscriber question, the most I am looking for on the downside in INDU is to the 11100 area before a countertrend rally sets up. I think the market could begin at least a short term rebound tomorrow (Thursday), perhaps carrying back up to the 11300 area.
There are a couple of scenarios that I focus on with the INDU chart above. Today's low is basically it on the decline and the Dow holds support implied by its up trendline. OR, there is a further decline, maybe after a short rally first, that will carry under today's lows made today. The 'logical' target is for a re-test of the prior intraday and/or closing lows made last month in the 11050-10773 area. I try not to get too carried away with 'logic' when analyzing the market.
The S&P 500 (SPX):
Again, this would be the 'logical' place for SPX to wind up given the substantial downside penetration of its up trendline. And, unlike INDU, SPX is now fully oversold on a daily chart basis. (Not so yet on its weekly chart). The S&P 100 or OEX (not shown) could ultimately reach 569-570, although near term it has support in the 578-579 area.
The NASDAQ COMPOSITE (COMP):
I noted before regarding the COMP WEEKLY chart pattern shown below, which suggested a possible bearish rising 'wedge' pattern, especially since the Index was stalled at the upper line of the triangular shaped wedge. A long-term trend reversal is 'confirmed' so to speak, with a weekly close BELOW 2215. Stay tuned on that. The week is not over, but today's close was 2195!
COMP DAILY CHART:
COMP fell under this today and had a weak close technically, as it was also at the intraday low. However, as with the Dow, it would not be surprising to see a short-term rally set up by tomorrow (Thursday) and buying interest develop around the area of the prior intraday low at 2190.
NASDAQ 100 (NDX):
When the Nas 100 gets cranking on the downside and has one of these sharp breaks, prices can easily carry down to a 5% or more envelope from what has been it's more common 3% of the last few months at least.
I have long had a target of or thought that major support was down in the 1600 area and today's low may be at least a short-term low. If you got puts from higher levels, take the money and run; nice trade, thank you very much market, don't get greedy or unrealistic. This is not 1999-2000.
More on Internal trendlines and constructing trend channels here:
More on Wedge patterns here:
More on Moving Average Envelopes here:
** E-MAIL QUESTIONS/COMMENTS **
** Good Trading Success! **