THE BOTTOM LINE:
The current technical/chart patterns primarily suggest prices will continue to drift lower, although the S&P (not the Dow) is hanging in so far at the low end of a well-defined trading range. The S&P indexes are also declining toward an oversold RSI reading, so could rebound. Any such a rally may be limited.
While I've been highlighting a possible Head & Shoulder's Top in the S&P, with support developing so far at the neckline of the H&S formation, this bearish pattern now looks 'activated' in the Dow 30 in that prices have broken under the neckline, as you'll see with that chart further on.
The Nasdaq 100 appears to have some potential support around 1350-1330. The specifics are seen with the charts below.
CHART OF THE WEEK:
A new pattern I'm featuring this week with the Nasdaq is that of the 'classic' down-up-down or a-b-c corrective wave pattern. In this interpretation, the Nasdaq Composite (COMP) and Nas 100 (NDX) are in the second down leg of this formation. Typically, the SECOND down leg will be longer than the first decline.
For example, such a second decline will end up equaling a fibonacci 1.62 times the point distance of the first downswing. This 'measurement' gives an idea of a possible downside target. The actual decline can be more or less than that of course, but it's often at least that amount. The point is that the second decline is longer than the first as more discouragement and less buying by the bulls shows up.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart can be viewed in a neutral to bullish light IF prices continue to hold at the low end of its multimonth trading range. If the low end of this range gets pierced it should however bring in more selling and prices drop.
There is also a more bearish chart interpretation in that the 3-top pattern of a high ('Left Shoulder'), followed by a pullback, another rally making a higher high (the 'Head'), another pullback and yet another rally that tops out (the 'Right Shoulder') around the level of the first high (the Left Shoulder).
Some technical traders will short or buy puts on the THIRD rally failure of the above described pattern when resistance turns prices lower from the same area as the FIRST top (the Left Shoulder). The study of many such patterns in stocks and indexes over many years has suggested this trading trigger.
A 'minimum' downside projection if there is a decisive downside penetration of the neckline OR the low end of the rectangular (trading range) formation at 879 is approximately the same and suggests a decline that carries to the 800 area.
Very near support is seen at recent lows (Wed and Fri) and, on a closing basis, at 879. Next chart support is well under recent support, first at 830, then in the low-800 area.
Near resistance is at 900, then around 930, with fairly major resistance in the 950 area.
I'm also keeping an eye on the 13-day RSI seen above as it gets down toward the oversold reading at 30 or below. As well, bullish sentiment has fallen to the point where another shot down in the market should put my indicator in a 'fully oversold' area that would also be an alert for a good-sized recovery rally within a day or few days of such a 1-day reading in the 1 to 1.1 range; i.e., total CBOE all equities call volume approaches parity with total daily put volume in stocks.
Note on my sentiment indicator: I divide call volume BY put volume instead of the norm in doing the opposite and why you see a fractional number with the put/call ratio. Which also means a high reading is bullish, a low reading bearish, which is opposite of the way most overbought/oversold indicators work.
S&P 100 (OEX) INDEX; DAILY CHART
I've outlined the bearish looking Head & Shoulders Top pattern apparent in the S&P 100 (OEX) Index below. Keep in mind however that only a break of the lower horizontal line (the neckline tends to 'confirm' the likelihood of a next down leg with an objective to around 380, but which is a minimum objective only.
A rebound from Friday's closing level, around the line of prior lows, with follow through buying would keep bullish hopes alive and a close above 420-422 could then lead to a rally back up to re-test the last rally high in the 435 area.
Very near support is around 410-412, with next support at 388, then at 380 even.
Near resistance is at 420, then at 435, extending to 444.
Looking at bullish sentiment on the OEX chart above suggests the obvious fact that traders are getting more cautious as prices have fallen to within a hair's breath of a break down below the low end of the trading range over the past 2+ months. Such a break would likely bring in a lot more put buying as the bulk of traders tend to be trend followers, which by the way, is not the most consistent way to make money in options trading in my experience. (Others have different experiences, especially if they have 'triggers' that help refine a strictly trend following approach.)
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) met my initial downside objective for a move to the 8200 area and then some. The chart is more bearish in its pattern now that it's broken under 8200, which can be viewed as the 'neckline' of a Head and Shoulder's Top (H&S Top).
I've suggested that such an H&S Top suggests a possible ultimate downside objective to as low as the 7550 area. However, I've also noted chart support at 7800.
A move back above near resistance at 8200 and that lasted for more than a day, would suggest potential for a rebound back up toward 8400 or a bit higher.
INDU is getting down toward a area in the RSI which would be an oversold extreme, but it's not yet to 30 and could get to 25 in the 13-day RSI as seen below.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart has been bearish ever since its break of its up trendline in late-June. I highlighted this week on the Nas 100 (NDX) chart what looks to an obvious still-bearish down-up-down or 'a-b-c' corrective pattern and the same is apparent in COMP. The a-b-c pattern simply a correction where the second down leg tends to be LONGER than the first and one rule of thumb is that such a second down leg tends to at least be equal to a fibonacci 1.6 times the first (decline).
The first downswing in COMP was from the 1880 area down to 1770. The second decline as measured from 1870 should be greater than the prior 130 point downswing; e.g., a fall to 1665, which also happens to a next chart support.
Key overhead technical resistance now is down to 1800. Next resistance begins at 1850, extending to 1870-1880.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bearish and the projected a-b-c pattern I discussed in my initial 'bottom line' comments is highlighted on the chart below, with objectives for the 'c' down leg. You'll find notations on the chart. The recent minor rally looks like a bear flag and a further decline is ahead.
Near support is at 1400, then down in the 1350 to 1330 area.
Key near resistance begins around 1430 and extends up to 1470 or a bit higher (to 1480).
I said last week that "... it will be surprising to many if NDX pulls back as far as 1350-1300." A move to 1350 or a bit lower seems quite possible now the prior 1413 low gave way this past week.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) projects down to the 34 area in terms of its current bearish chart and 33.1 as a next target. The Q's look like they're going to see still lower prices. What could suggest a more bullish chart picture would be a sustained rebound back above 35.75-36.
Daily volume and the On Balance Volume (OBV) line turned up with the recent rally but a small bearish 'flag' formed on this last minor rebound and it looks like it's a matter of time, not if, a next decline takes the stock lower.
Near QQQQ resistance: 35.75
Next overhead resistance: 36.5
Near QQQQ support: 34.0
Next support: 33.1
First area of major support: 32.0
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart pattern tracks the Nasdaq. If RUT could mount a sustained rally from recent lows from near important prior support in the 470 area, bullish potential then would look revived. Absent that, I anticipate another decline that would re-test prior chart support in the 450 area.
Near RUT resistance is down to 500 currently, with the next resistance coming in around 520. A close above 520 that was sustained after that (where support developed on pullbacks to the 520 area) would revive bullish hopes or potential.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.