MY MAILBAG:

"do you see a bottom yesterday-today like at the trendline in s&p you were talking about? the dow broke its."

RESPONSE:

Yeah, the Dow 30 (INDU) pierced its up trendline dating from its November lows. I recall the saying that "trendlines are 'made' to be broken". It was a truism in futures as the floor traders would get short and push prices into clusters of sell-stop orders and would be buyers would run for the hills. Keep in mind that INDU is only 30 stocks. It's not for nothing that portfolio managers consider the S&P 500 to be the best 'benchmark' index for main stream economic stocks as it has so many of these stocks in this Index.

My first chart, that of the daily SPX, shows the decline halting yesterday AT SPX's internal up trendline; a so-called 'internal' up trendline connects the MOST number of lows on a bar (Open, High, Low, Close) chart. I learned to apply such 'best fit' trendlines from Jack Schwager when we worked together at PaineWebber (now UBS). Jack is a terrific chartist as well as author of those terrific 'market wizard' books. He used to say that he didn't believe in (conventional) trendlines drawn only through the extreme intraday highs or lows, but had found that internal trendlines did 'work' in defining support or resistance areas most of the time.

Sorry, I digress! Besides pullbacks to trendline support as something to look for as suggesting a correction has run its course, I suggest tracking retracement levels; i.e., what are the levels where a stock or stock index would retrace anywhere from a Fibonacci 38 percent, to 50% to 62% of a prior run up.

In the case of a stock/stock index in a very strong bullish move, a retracement can be as little as 25%. In the case of a weak stock/stock index, a retracement can extend to 62% or as I say a 'little bit more'; specifically, 66%. When a retracement extends beyond 2/3rds of its prior advance, it's quite possible that an Index is headed to a full round-trip back to its prior bottom. This is a 100% retracement; and, is how double bottoms often set up.

I remind you and everyone that we're in a BULL market and Fed action is NOT the sole determinant of what makes a bull market. This general truth is also what explains that bullish trader sentiment is still relatively high or at least got down to a 'neutral' reading on my Indicator, but didn't get into what I consider a bearish outlook or bearish 'oversold' extreme.

The S&P 500 (SPX) chart held at its up support trendline at the most recent low. In terms of its retracement levels, SPX did not dip below a 'normal' retracement amount of HALF (50%) of its prior advance. Stay tuned on that! (INDU is a different case we'll see after the SPX chart.)

SPX held at support implied by its 'internal' up trendline, so far at least and its bodes well for yesterday (8/21/13) being a possible, if not likely, bottom. Holding at or above its 50% retracement is a bullish plus for that, along with the fact that the Index got to a 'fully' oversold extreme, as seen with the 13-day RSI. In a bull trend like we've been in, we often ONLY see 1-2 brief dips to such low RSI extremes; unlike tops, which have a different dynamic.

Continuing with what I was saying previously, the Dow (INDU) pierced its up trendline on the recent decline as the weakest of the major indexes; and the one having the least number of stocks in it. Given the trendline break, my attention shifts to the extent of its retracement of its last advance. INDU is in the area of a 66% retracement which I don't anticipate will be exceeded, at least by much or for long.

A 66% retracement of the weakest index in an overall bull market is close to a typical 'maximum' give back. Do I want to buy DJX calls because of a possible INDU bottom? No, I don't like adopting bullish strategies on the weakest Market segment or sector. Better, is buy into the sector or segment that has had the LEAST retracement; more on that shortly with a look at the Nasdaq.

As seen above INDU also reached a 'fully' oversold extreme which is potentially bullish for a rebound.

Looking next at my next chart, that of the Nasdaq Composite (COMP), it's given the least ground on this latest sell off. COMP has only given back a very 'minimum' retracement and seems to be resisting much of a further dip as it holds technical support implied by support suggested by its line of prior lows and a minimal (25%) retracement level. The strongest market segment as represented by the tech-heavy Nas Composite can also be examined in a more detailed look provided by COMP's hourly chart which follows the daily chart.

The COMP hourly chart is next and what we see here is COMP's dip into its support zone which has been followed by a possible next break out above it. We'll see how this plays out on a challenge to near resistance at 3650.

COMP got 'fully' oversold at its recent lows on a 21-hour basis, so is another way of assessing the possible start of another rally up to test overhanging resistance.

Last, but not least when looking at formation of a possible bottom (or, at least an interim bottom), is to look at the Russell 2000 Index (RUT) as RUT has been a good Market bellwether in recent months. RUT has rebounded strongly from the area of its 50-day moving average and looks ready to challenge pivotal near resistance in the 1040 area. Interesting times at the tail end of August here. The Russell 2000 also got to an oversold extreme as measured by its 13-day Relative Strength Index.

A number of signs at this juncture are encouraging for the bulls as the Market seems to have absorbed the shock that the Fed will possibly abandon us earthly mortals and let stocks go where they will without tons of money created out of thin air!


GOOD TRADING SUCCESS!