Panic selling lows tend to, as if by 'magic' sometimes tend to end at key lower envelope extremes; a 'random' thing it's not. The analysis tools I'll highlight again here helps in making strategy decisions, especially in a trading range market. The index exception to the sideways trading range trend is the Dow and not quite the 'bellwether' index it once was, is the exception as its in a downtrend. Even here the Dow Average remains within a broad multiyear uptrend price channel.

MAILBAG QUESTION:

"another low around your lower s&p support and this time I exited index puts. trading range, not bull not bear, right?.

MY RESPONSE:

Well, that's how the charts 'read'. Bottoms have been occurring at key (lower) moving average envelope extremes. This pattern when seen on charts shows that price swings are not a random and chaotic as it may seem as 'news' pushes stocks first one way, then another, within short spans of time.

The analysis tools I've often talked about and will highlight again below helps in making trading decisions and this indicator is especially helpful in a trading range market. A sideways trend does suggests a consolidation leading to a resumption of the dominant UP trend at some point. Not always, just usually.

If rallies and declines are relatively short-lived, you have to 'trade' more IF you want to participate. Or, adopt spread strategies that capture premium if prices remain WITHIN a certain range.

The S&P 500 (SPX) has been trading between values that represent around 2 percent ABOVE a 'centered' moving average of 21-days and approximately 2 percent BELOW the 21-day average. Note the most recent intraday low. Once such a percent 'range' is established relative to the 'envelope' values that tend to mark high and low extremes over prior months, you can cover puts (per the 'mailbag' note above) or buy calls on dips to and below the lower envelope line (aka 'trading band' AND 9 times out of 10 know that the Index in question is NOT going to go on into free fall.

There is likely going to be rebounds at the lower envelope line as seen in my SPX chart. Such rallies could be short-lived given our current 'whippy' 10-month trading range (2000 to 2130 in SPX). But, prices are unlikely to go into free fall below the moving average envelope. Worth saying again!

Another technical 'rule of thumb' so to speak is that percentage retracements that EXCEED around 2/3rds, 66%, of the last upswing have a tendency to go on and make a 'round turn' 100 percent retracement to or near to the prior bottom. Here, the lower 2% envelope line was even more pivotal in suggesting a possible area where panic selling could end.

Yet another dynamic technically at work here is that trader sentiment was quite bearish AHEAD of the most recent low, as seen in my lowermost (CPRATIO) indicator. This 'leading' indicator also supported the idea of a possible rebound ahead.

The weak Dow, but the Average that the media talking heads 'know' as 'THE' Market, once it made a deeper retracement than 66%, did retrace ALL of its prior decline and then some. Even here however, the dip to below the LOWER envelope line was intraday only and short-lived.

Whether 'short-lived' is 1 day or 3 below the lower envelope line, it's a good bet that prices will snap back from such oversold extremes. I've seen it work over so many Market cycles that I quite accept the idea that the Market trades within certain technical parameters. Envelope values may expand outward over time, perhaps going from 2 to as much as 3 percent in SPX (or the Dow) in a more volatile market with a persistently high VIX.

The envelope extremes at 'work' within a certain Market cycle or period will tend to be CONSISTENT in suggesting bottoms or tops but sometimes with limited rebound potential each time. As the Dow is NOT in a sideways range, it's a separate case as rallies are not from a sideways line of support. A look at the weekly Dow chart is also relevant.

THE DOW WEEKLY CHART:

The Dow is not in a sideways/lateral trading range, unlike the S&P but is in a downtrend yet still within a broad multiyear uptrend price channel. The low end of the weekly chart uptrend price channel is INDU's up trendline and goes back to the 2009 lows and other key lows made over those years. Hence, it's a well 'established' trendline.

As seen in the weekly INDU chart, the Average made multiple minor tops at resistance implied by its UPPER channel line. In the way of trends, it's not surprising that the lower (support) trendline could get re-tested, currently intersecting in the 17000 area. The sky is not falling, even given the Doggy Dow; not yet anyway!

Another factor here is the 'oversold' 8-week Relative Strength Index (RSI) as seen below prices. When INDU gets to a deep weekly chart oversold extreme, the Average is more likely than not to have a recovery move. How much 'recovery'? A retracement of at least half of the last decline would be fairly normal.

Even the red-hot Nasdaq 100 (NDX) seen next on a daily chart basis retraced as much as 66% of its last upswing; a little more than that even, but the decline stopped close to the NDX's 2.5% lower envelope line.

It's not surprising that the more wide-swinging NDX would have envelope values that are GREATER than the S&P; i.e., lines set to percent values that 'contain' most of NDX's up/down price swings.

It may surprise that my UPPER NDX envelope is set at 3.5 percent, a full 1% greater than the Index's lower envelope line. It's simply the case that the strongest index trends will have rallies that get to envelope 'extremes' that are greater than the moving average envelope value that contains most lows.

It still works the same in that the TWO top extremes (left and right down arrows) would tend to reverse at the SAME percentage envelope value, again relative to the 21-day moving average. Play with the upper and lower envelope values but use the 21-day moving average consistently is my advice.

NDX could yet of course retreat to a lower low (than most recently) and get back closer to its early-July bottom. I doubt this but won't rule it out and bet the ranch that the tech darlings might not retreat further but don't see it as a high probability outcome. Stay tuned on that!


GOOD TRADING SUCCESS!