The Market was basically unchanged for 2015, with the S&P off a fraction of 1% and Nasdaq up a half of a percent; the PRIOR 5 years brought average annual (SPX) gains of 36%! Dow Theory suggests a possible Bear Market ahead but that's questionable.
Traders and investors are likely 'spoiled' by the gains seen from 2009 through 2014 and start to believe that this is the new 'normal', when in fact it's not. After such a strong Market for the 5 years coming into 2015, it's completely unsurprising that there could be a flat year. It's somewhat more surprising that the Market wasn't say, DOWN 10 percent for the year, after such an amazing prior 5-year advance.
BOTH a down year and sideways 'flat' year are similar technically in one important way, which is that both price patterns 'throw off' overbought extremes. You'll see that graphically with the monthly charts with the 'non-trending' sideways trend in the major indices, relative to an 8-month Relative Strength Index (RSI) indicator, with RSI falling toward a lower end oversold reading. I've yet to see a bear market STARTING from a long-term oversold condition.
Before I comment on monthly charts of the S&P 500, the Dow, Nasdaq Composite and big cap Nas 100, a word about so-called Dow 'theory', which Charles Dow himself didn't think of as an overarching theory. He did observe in his time that when the two Market Averages he invented, the Dow Industrials (INDU) and the Dow Transportation (TRAN) Average 'diverged', that the major Market trend changed; both from up to down and down to up.
We've had a period when TRAN has been declining and INDU has had some sell offs but has held mostly steady for 2015 (-.02%). This diverging pattern has in past Market cycles suggested that shipments of goods were declining, inventories building up and a recession ahead. Dow Theory is a forecasting concept to predict either a start of or an end to recessions.
In a bear market, unless BOTH Averages go to new monthly Closing lows, one is not 'confirming' the other and a coming out of recession may be near. Here, I'll look at the potential for a Bear Market (recession) ahead because the Dow Transportation Average has been in a steady decline for months.
In the very long-term (monthly) line chart seen here, we see an initial instance where TRAN did not follow INDU to a new Closing monthly high. A decline in both averages followed, but the Industrials rebounded; not to new highs but without a break of key technical support. Actually, even TRAN would not penetrate key chart support unless it fell below a monthly Close of 7100.
The divergence of these two Dow Averages could ALSO imply some special factor hitting the transportation sector that DOESN'T imply a major hit ahead in earnings in the big cap INDU and forecast a recessionary period. In this situation, oil rail shipments have declined significantly given declining U.S. production and led to a substantial drop in railroad earnings and hence has pulled TRAN steadily lower. That said, could cheap energy bring on a U.S. recession? I would say unlikely.
Remember that Dow Theory attempts to predict recessionary periods when you would want to have quite limited equities exposure. This may not, probably isn't, the situation implied by the 2015 diverging pattern of the two Dow Averages.
WHY MONTHLY CHARTS?
Or more specifically, why would options traders gain by looking at the very long-term monthly chart picture of the major indices?
1.) It's important for even a short-term time horizon to know the environment we're in terms of being in a primary UP or DOWN trend; there are less surprises that way such as when there's suddenly a 500 point drop in Dow (within a bear market!) and you're in bullish positions!
2.) It's often important to know, especially in the case of trends tracing out broad up or down trend price channels, where long-term technical/trendline resistance or support may be located which is something that I'll be focusing on here.
THE S&P 500 (SPX) MONTHLY CHART:
SPX continues to trade within a multiyear uptrend channel. Note that support was found at the LOW end of this bullish channel. There IS a line of resistance at prior highs in the 2130 area. If there is a decisive and sustained upside penetration of 2130, major resistance is next highlighted in the 2275 area, at the upper resistance end of SPX broad uptrend channel.
Major support suggested by SPX's long-term up trendline is highlighted in the low-1900 area. 2000 is a key nearer-term support.
The 8-month Relative Strength Index and '8', part of the Fibonacci number series is the 'length' setting I use most frequently with monthly charts. Note that as the Index has trended basically sideways in 2015 but within its uptrend channel, the RSI has been declining as it 'throws off' its prior overbought readings.
The diverging price/RSI pattern suggests that at some point, perhaps after some further whippy price action, SPX could see a substantial up leg in a rally occurring from a 'neutral' to oversold RSI reading. A diverging price/indicator pattern is seen in all the major indices.
THE DOW 30 (INDU) MONTHLY CHART:
The Dow 30 did have one dip below support at its long-term up trendline, but INDU mostly held key support in the 16000 area. Currently, major support at the trendline comes in around 16380-16400.
A line of INDU resistance based on a number of prior highs is highlighted at 18300. Above this area, chart resistance implied by the upper resistance end of INDU's broad uptrend channel intersects at 19650. Major resistance is suggested around 20000.
See my note with SPX above on the pattern of the declining RSI. Good sized rally potential would exist given an 'oversold' reading in the 8-month Relative Strength Index indicator.
THE NASDAQ COMPOSITE (COMP) MONTHLY CHART:
The broad Nasdaq Composite (COMP) was up a scant 1/2 of 1 percent for 2015 but remains within its long-term uptrend channel. COMP has been unable yet to achieve a decisive upside penetration of its prior all-time peak (from March, 2000) of 5132. However, I assess fair to good potential for an upside breakout in COMP in the first quarter (Q1) that could carry to above the prior COMP peak highs and carry to as high as resistance implied at the upper channel boundary, currently intersecting around 5540.
Major COMP support in COMP is seen in the 4500 area as seen on the chart highlights.
Repeating next what I wrote regarding SPX and the 8-month Relative Strength Index indicator; '8' being as a Fibonacci number and the 'length' setting I use most often for monthly charts.
Note that as COMP has trended basically sideways in 2015 within its uptrend channel, the RSI has been declining as the Composite 'throws off' its prior overbought readings. This pattern suggests that at some point, perhaps after some further back and forth choppy price action, COMP could see a substantial up leg in a rally from a 'neutral' to oversold RSI.
NASDAQ 100 (NDX) NOVEMBER 2015 MONTHLY CHART:
The big cap Nasdaq 100 (NDX) managed to move to a new high for 2015 but upside momentum hasn't been enough yet (as with the broad Composite) to penetrate ITS prior all-time monthly high in the low-4800 area dating from March, 2000.
A sustained move above 4800-4816 is needed to suggest that there's potential in a new up leg to move to as high as the top end of NDX's uptrend channel, currently intersecting around 5050. 5000 is a pivotal or 'milestone' level in NDX.
Major support is implied at the LOW support end of NDX's broad uptrend channel. Support on nearing its up trendline was seen during the sharp sell off of August.
The NDX 8-month Relative Strength Index fell already to what I consider to be a 'neutral' reading. NDX has previously rallied (in the 2009-2015 period from lows in the mid-range 50 area. The last truly oversold EXTREME in the Nas 100 was seen at the end of the 2007-2008 bear market with lows occurring in early-2009.
GOOD TRADING SUCCESS IN 2016!