THE BOTTOM LINE:
As I discussed last week, once the S&P and Dow hit some key technical resistance areas, it was highly likely that the market would at least begin a correction. It (a correction) was 'due' to speak and I thought a pullback was likely once the Dow 30 (INDU) got to the upper end of its well-defined uptrend channel. Judging by INDU, the prior four pullbacks since August have had pullbacks of 321, 368, 487 and 441 Dow points as measured from peak to trough. The average correction has been 404 Dow points.
Does the same pattern hold here, as measured from the recent intraday high in the 10500 area? Nothing says the same pattern will repeat but patterns do tend to repeat. Otherwise, technical analysis wouldn't 'work' and I'd be a lot poorer too!
As I pointed out in my Wednesday (11/25) Trader's Corner article titled Probabilities, there were some other long-term weekly chart considerations that suggested at least a pause here if not the start of a pullback. Namely that INDU and the S&P 500 (SPX) were at resistance trendlines that they hadn't yet overcome. Moreover, both these indexes, which have been leading the market lately, playing 'catch up' to the Nasdaq, were in an area of resistance implied by a 50% retracement of the 2007-2009 bear market decline.
CHART OF THE WEEK:
I've kept the same explanations as in the aforementioned 'Trader's Corner' piece as to which variety or type of trendline I'm considering with the Dow weekly chart here. The breakout above the internal 'best-fit' trendline that occurred 3 weeks back showed strong upward momentum. However, the longer the market stayed quite overbought and had retraced 50% of the prior big decline and a 'natural resistance', then hit its 'conventional' (external) down trendline, a sell off simply had a high probability of occurring.
I know it always seems that corrections are 'caused' by some bearish news, but I see it as more that bearish news hits at the 'right' time; i.e., when the market is vulnerable to its influence. This seems to be part of the cyclical nature of market trends. My take on this all changed when the legendary institutional technical analyst George Lindsay appeared on Wall Street Week in early-1982 and predicted the start of a monster bull market beginning in August of that year. His work with market cycles predicted it would happen and the 'reasons' fell into line for WHY it happened.
An interesting story it was, among many re George Lindsey and I relate it in my (Essential Technical Analysis) book. By the way, since I'll never get a further future royalty on my book (since my advance to write it was so substantial), I can say without financial interest that you can get my book now for the Amazon Kindle reader.
But I digress via my story telling and summing up I'd say that the market will correct some more to the downside in the next week or two, although I'd look for an immediate bounce back from the Dubai news early in the week. By the way, I was once offered a job to manage some of the Abu Dhabi investment money but that is a different Emirate and another story. Time to move on!
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
After forming a line of resistance in the 1113 area and quite near the 1120 upside objective I've had for a while, the S&P 500 (SPX) 'gapped' lower on the opening after the Dubai story broke overnight. This action suggests a possible at least interim top. A correction here would relieve or throw off the overbought condition seen with SPX as measured by the RSI indicator on a 13-day basis. The weekly RSI had also gotten to an overbought extreme as can be seen with the INDU weekly chart above.
I anticipate some lower lows than seen already with Friday's sharp one-day sell off, which of course occurred with many market participants away from the market. Even thought participants will conclude that the Dubai news won't affect the U.S. financial sector all that much, it still points out the fragility of the global economy as real estate troubles are still out there in a major way.
Near support, as suggested by the 50-day moving average, is at 1073 currently, with a lower pivotal support down in the 1045-1050 area. Its possible that the Index might retest its prior recent low in the 1029-1034 area again, which is also support implied by the low end of SPX's uptrend channel currently but I tend to think that a next downswing low wouldn't get that far.
Nearby overhead resistance begins at 1105 and extends to 1113. Major resistance should begin in the 1150-1160 area.
Bullish sentiment, as measured by my equities call to put daily volume ratio seen above, is still quite pronounced, especially given how the major market indexes were struggling to overcome recent highs, not that these kind of 'technical' factors much influence options traders. Traders and investors are more known for their herd mentality than anything else and which is why the CPRATIO 'works' as a reliable contrary indicator.
I anticipate some lowered bullish expectations or a drop in at least one of my daily indicator readings before this market is ready to rip again. This is not to say that I expect my sentiment indicator to dip as low as where I define a fully 'oversold' condition in terms of bearishness.
S&P 100 (OEX) INDEX; DAILY CHART
As I noted last week: "My assessment (of the S&P 100 OEX Index) is that there's a better chance of a further 15-20 point drop then there is for that much on the upside relative to Friday's 509 close." Friday's drop took the OEX down to the 505 area, before a minor bounce occurred, so there was a bit more upside than downside last week relative to the prior week's close (at 509). Where to now? I think we'll see lower levels before corrective action runs its course. I'd also look for a rebound on Monday-Tuesday, but doubt that OEX swings into a new up leg and takes out the recent high.
Near resistance is at 514 to 518, then up around 530, resistance implied by the top end of the index's uptrend channel.
Support is anticipated in the area of the 50-day moving average, currently intersecting around 498; call support more precisely as 496-498. Next lower support begins around 485, extending to the 480 area.
Again, I'd note the tendency for rallies to begin after the S&P indexes get to a 'neutral' mid-range reading, rather than to an oversold extreme. This 'neutral zone' is highlighted on the OEX daily chart.
DOW 30 (INDU) AVERAGE; DAILY CHART:
As I'd been thinking would happen, the Dow 30 (INDU) Average finally got TO, not just near, resistance implied by the top end of its uptrend channel before Friday's sell off hit. I'd been writing previously that at or near this upper channel would be a place to take profits in Dow Index (DJX) calls. If it pertains to you, I hope that was on your Thanksgiving list to do BEFORE the holiday!
INDU of course recovered from its intraday lows at the end of light trade on Friday and is likely to rally further from this recent low coming up early in the week ahead. However, I also doubt that the Average will be able to rebound back above resistance at 10375 to 10450, at least not yet on a closing basis. Next resistance has to be assumed to lie in the 10495-10500 area, then up around 10600 next.
Initial near support I've again pegged on my Dow daily chart below as 10200, with a next pivotal support coming in around 10000-9975. Major support should be found beginning at the prior 9679 downswing low.
The last closing high in the Dow was not 'confirmed' by a similar new high in the RSI indicator. These price/RSI divergences are often telling relative to an upcoming correction. This kind of bearish divergence doesn't help pin down exactly WHEN a downturn will or could hit but does alert traders to a time frame where banking on still more upside is iffy. As most traders can attest, it's a more profitable outcome when exiting bullish options positions before a correction gets underway. That said, it's easy to say not always so easy to do!
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) has had a bearish-looking chart since forming an approximate double top in the 2190-2205 area. When Nasdaq is lagging, the S&P is not going to just keep chugging higher and vice versa. I noted last week that only if resistance at 2200-2205 was pierced, especially on a Closing basis, would I have gauged the chart as turning near-term bullish again which never happened of course.
COMP did have a good recovery move on Friday off its 2114 low and managed to close back above its 50-day moving average at 2131. Of course the Composite is not 'burdened' with all the financial stocks of the S&P. COMP could yet dip to support in the 2100 area, but probably not before the index rebounds further early in the coming week. I see some potential for the Index to 'fill in' the Wed-Thurs downside price gap by trading to at least 2170.
I also see a fairly significant resistance overhang beginning at 2180-2190. A close above 2200 that was maintained the next day would put COMP back on a bullish track in terms of the chart. Absent that, there's potential for further downside. Support levels are anticipated around 2100 as already noted, then in the area of the prior 2024 low. I doubt that COMP would re-test this low but it is the key level in terms of maintaining an UP trend.
In terms of my bullish/bearish sentiment indicator, as noted with the S&P I'd tend toward a more bullish outlook if traders had 1-2 days ahead of a sizable pick up in put volume.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) index chart indicates an ongoing short term correction, same as the Composite, but also still within a longer term up trend. On a near-term basis, once NDX dropped back under its prior top at 1781, the chart pattern suggested further downside potential. Not being able to maintain prices above a prior top once it was exceeded, suggests a possible interim top.
Absent a fall below technical support at the NDX lower up trendline, now intersecting around 1722, the index still maintains an overall bullish trend. A downside penetration of the prior 1652 (down) swing low would turn the intermediate trend DOWN however. Not what I expect but that's what the chart would suggest if this was an outcome.
What happens if there's a drop to the 50-day moving average is noteworthy, with just slightly lower technical support at the lower up trendline as noted. Pivotal resistance is in the 1814 area, at its prior intraday high. A move above or below these key levels would suggest potential follow through in the same direction. Most important in maintaining a bullish technical pattern is that the prior 1652 low is not pierced, especially on a closing basis.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
A very low volume sell off in the Nas 100 QQQQ tracking stock, followed by an intraday recovery off the low makes Friday's break less dire for the bulls. The On Balance Volume (OBV) indicator also hasn't headed down in a decisive way. The chart is bullish still although the best outcome for that picture is that the Q's stay within its uptrend channel.
Near resistance begins at 44-44.1, with even more pivotal resistance apparent at the prior recent high at 44.6.
Near support is at 42.9-43.0, with lower support suggested by the low end of the QQQQ uptrend channel, currently intersecting around 42.2. Major support begins at the prior 40.6 low.
It's possible that the lows for this recent sideways to lower correction have been seen. Even if true, prices may chop around in a mostly sideways direction for the next few trading days.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) for some weeks now has shown the more bearish technical action of the major indexes. I'd note again that small to mid-cap stocks seem to do best when there's a strong economy or the prospects of one. Discouragement about how long a full-blown recovery may take to develop is a drag on RUT.
A close at its Friday 577 low maintained a bearish chart pattern. If there was a recovery move early in the week ahead, RUT's recent low would establish 3 points in a still bullish long-term up trendline. A maybe big IF, but stay tuned!
Below 577, potential support next lies at the prior 553 low. Key resistance is at the prior recent high at 605. RUT has an exact double top in place at 625 which would tend to be 'confirmed' as a key top (and reversal of the dominant trend to down) if the 553 low was pierced on a closing basis.
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.