The Dow 30 (INDU) fell below its 10-month old up trendline recently and I discounted that as the S&P didn't follow suit. Today's bear rout suggests that INDU is the still-reigning champion Market bellwether
even though comprising only 30 stocks.
As I noted in my last Trader's Corner (8/22), that yes the "the Dow had a bearish penetration of its up trendline dating from its mid-November lows... (but) Keep in mind that INDU is only 30 stocks (and) ...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."
As INDU broke its trendline support, SPX rebounded from its up trendline and except for still-strong bullish sentiment, other technical indicators hit 'oversold' readings suggesting correction-over or mostly so. WRONG! Instead, the small (in number of stocks) but mighty Dow, again was first to suggest a bigger than expected bear move. INDU now looks like it could retest its prior Closing low at 14659 or its prior intraday low at 14551. I look at intraday lows and highs as key 'test' areas.
Once a retracement of a big prior move goes beyond 2/3rds (66%), there's a significant chance that the stock or index will retrace its entire prior move, or a 100 percent retracement. If a second low is made in the same area as a prior key low, this is of course how double bottoms can form. Once a prior important low on a daily chart basis is also pierced, this pattern suggests an intermediate-term trend reversal. (On a long-term trend basis, INDU would have to fall below 13000 to suggest a major trend downside reversal.)
Since I've made a big point of where the S&P (500) or SPX got to or didn't in terms of its chart, here's its daily chart next, with a re-drawn 'conventional' up trendline; one connecting only the lowest lows and not the greatest number of lows as in an internal up trendline. It's possible we'll see support at develop at this trendline but the chart looks more bearish than that currently.
The low-1600 area in SPX (1608-1616) represents support implied by the 62 to 66% retracement zone. A move to this area, but not lower, would suggest that the current correction could have run its course. 1560 is intermediate support implied by SPX's prior intraday low. A weekly close below 1560 would turn the intermediate trend lower, joining the short-term bearish trend. A weekly Close below 1500 would put the long-term bull trend in question.
I see this correction as a deeper one than I expected but I don't see it as reversal of the long-term bull market. It's more of a minor, not major, panic. A major panic would be something more likely brought on by a prolonged government shut-down or self-suicide by our government reps. I guess their approval rating could go to a MINUS 10 if there was a way to measure that!
Last but not least, as to whether there might also be a 'tech-wreck' ahead, I turn to my favorite index to trade when feeling bold, the Nas 100 (NDX). NDX of course tipped off some trouble for the bulls when the Index again made another high in the 3150 area which formed a line of clear cut prior highs/resistance. This wasn't such a big deal EXCEPT that after such a decisive new high (to the 3150 area) for the recent rebound, NDX then traced out a key downside reversal by the Index ending the day below its prior day's Close. A bad omen for the bulls there!
However, and to put NDX in perspective in technical/chart terms, the Nas 100 hasn't retraced much at its prior advance. Not even 38% which is more or less a 'minimal' Fibonacci retracement. The 2987-3000 area could offer strong technical support and NDX's up trendline intersects well under this, implying fairly major support at 2920 currently.
It's really a tale of two markets here as tech stocks are still not being sold off in a major way as they represent one area (technology) that can still see strong earnings growth. Not so with the 500 S&P companies, with a few exceptions (mostly tech), given their anemic earnings growth in the current economy.
GOOD TRADING SUCCESS!