MY MAILBAG:

"how do you see this second sell off this week? spx back to its trendline, 50d avg holding in spx and ndx i guess."

MY RESPONSE:

Yeah, I thought we were going to see some upside follow through after the strong 2-day rebound from key trendline support at 1600 in the S&P 500 (SPX). However, buying needs to be strong enough to take the key indexes back above their 21-day moving averages. This average of course reacts quicker to the most recent 3-4 week trend. NOT piercing the 21-day moving average on the most recent upswing was suggesting an inconclusive rally.

To date (cob 6/13) only the Russell 2000 (RUT) has managed a close above its 21-day moving average. I usually consider break outs above/below key averages should be 'confirmed' by a second consecutive close above/below the average in question. RUT sometimes is a good market 'barometer' so I'm watching to see if there's Friday and/or Monday follow through.

Speaking of moving averages the 50-day is a widely followed one and is somewhat more relevant to a longer trend horizon, although not nearly as much as the 200-day average in stocks and the major indexes. The major indexes are so far holding above their 50-day moving averages and this has potential to continue based on the bullish longer-term bull trend picture.

I anticipate the key up trendlines and the 50-day averages will hold up as support. That however doesn't mean that there's a sustained rally waiting in the wings. Prices could just chop around, with only minor rallies and not much follow through, but good buying support on significant dips. Maybe there's a dip coming to 1550 but that's about my 'worst case' downside.

The hourly SPX chart seen next continues the hourly chart of my Trader's Corner article of last week. My speculation was my opinion of the downswing having run its course at 1600 trendline support and equal to a Fibonacci 1.5 times the first downswing.

The bullish price action seen after the strong rally from the 1600 area included a bullish upside price gap and a bull flag formation. However, upside follow through was limited and the subsequent fall was sharp and cut through any prior expected technical support.

The key development from a TREND perspective is that the recent rebound was from a higher relative low, so on the daily chart seen above SPX again found support and good buying interest at its up trendline. Behind the trendline mystique if that's ever the right word, is simply that such trendlines simply represent the average rate of upside increase over time that investors are willing to pay for stocks. Equities are still a dominant asset.

SPX looks to have limited downside, but may also have limited upside in the next 1-2 weeks. A decisive upside penetration of 1646-1650 in SPX would suggest potential for the index to retest resistance in the 1675-1687 area. Downside support was found a second time at SPX's 50-day average and its up trendline. The index looks capable now of a second test of key resistance highlighted by the red dashed level line below.

The Nasdaq 100 (NDX) big cap tech index presents a similar technical/chart picture as the S&P 500 with a key exception. While NDX has also found support in the area of its 50-day moving average AND also resistance implied by its 21-day average, there has not been a test of support implied by its up trendline.

A so-called internal up trendline can sometimes 'cut through' some prior lows as it connects the greatest number of lows made by NDX on the way higher over recent months and a means of trendline construction that has 'worked' the best for me over the years. By my reckoning trendline support comes in around 2870. Probably any dip to the 2870-2850 area would be a good place for a speculative buy on the bounce back factor.


GOOD TRADING SUCCESS!