THE BOTTOM LINE:
I've become bearish on the short to intermediate-term (2-3 weeks) outlook and it's not just due to Friday's sell off, although Friday was predicting that the market is running into increasing resistance and less willingness to keep buying the dips.
The chart pattern in the major indexes that has formed since September, that of a rising wedge and that I'm now focused on (rather than the bullish major uptrend) is typically a 'reversal' type formation. It is not typically a major trend changer, rather short to intermediate-term.
In recent weeks I have been mostly focused on the long-term up trend, as seen with the long-term uptrend channel I've highlighted on my charts in past weeks. Mostly, being on the long side of stocks and long calls has of course paid off. That view now has to matched to the danger of a good-sized correction or pullback.
In my Thursday Trader's Corner article, which got e-mailed well after the OIN market letter due to a long look at some new things I was seeing technically, I wrote about how I suddenly realized that the steeper up trend (steep rate of price ascent) was matched by a rising line of resistance, with those two trendlines now converging toward the apex of a triangle. This type triangle is called a wedge pattern. Rather than go through what I wrote Thursday afternoon/evening (before Friday's sharp break), if you didn't see that article you can click to it HERE
A RISING WEDGE PATTERN:
You'll also SEE this pattern outlined not only in the aforementioned article (with general measuring implications for a pullback target) but also with my first chart below, that of the S&P 500 (SPX).
You might think that the rising wedge pattern seen on a stock or index chart, with its lower up trendline rising strongly UP, should be even more bullish than when prices are only in a gradual rise. But this is not usually the case. In a 'rising wedge' there is no evident barrier of supply to be vaulted but rather a gradual petering out of investment interest. This was first pointed out by Edwards and Magee, in their seminal Technical Analysis of Stock Trends. Their book is often called the 'bible' of Technical Analysis. While their examples are always of individual stock patterns, almost all of those (patterns) also are relevant to the indices based on own experience in 3+ decades as a market professional.
In the Rising Wedge, prices advance but each new up wave is feebler than the last. Finally, demand fails significantly and the intermediate-term trend reverses. The major trend does not usually reverse, but in trading index options we're not focused on the MAJOR trend normally.
The rising wedge pattern, when traced out in stock or the major indexes, typifies a situation which is growing progressive weaker in a technical sense. In a general sense, any sort of rise tends to increase the supply of stock and diminish demand. That would be the case IF it wasn't for the fact that rising prices actually ATTRACT, rather than discourage, public buying; this includes public fund managers who must keep performance in line with the rise in the major market indexes, especially SPX.
The difference between a Rising Wedge and a 'normal' Uptrend Channel, is that the Wedge sets a sort of limit on the advance. Its converging boundary lines focus on a point (the 'apex', where the two trendlines converge) at or near where the advance will halt and a reaction set in.
Many if not most of the times I overstayed in a position OR got out to soon for that matter, stemmed mostly from maintaining a fixed point of view and not looking at other chart and indicator aspects that would have guided me correctly. This looks like one of those times.
I tend to focus on the intermediate (typically, the 2-3 week outlook) trend and a bearish point of view here doesn't imply that I anticipate the major trend will reverse; i.e., as in heading into a major bear market. Rather, I think we're may be about to go into a period where prices have more two-way price swings. Stay tuned on that!
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
Based on my revised interpretation of the daily chart, as described in my initial ('bottom line') comments, I now see the S&P 500 (SPX) as bearish in its pattern. A 'maximum' downside risk for the bulls could be for a pullback to the 1030 area. For now, I won't focus on such far away price targets, but rather on where prices would start to 'break down' technically and give a clearer picture of an anticipated intermediate downside trend reversal.
The key support area is around 1134, at the lower trendline of the wedge pattern and near Friday's low. The next pivotal support (not noted on the chart) is in the 1100-1094 zone. Major support begins around 1080.
Pivotal near resistance is at 1155, not far above the highs of this past week. Above this area, next resistance is suggested at 1180. A decisive upside penetration of 1155 would also suggest that the bearish chart interpretation is not working out so to speak. It would be a type of negation of the Rising Wedge and what has frequently been a bearish chart formation.
Recent peak highs in both the RSI and my sentiment indicator suggest that the market may retreat further as is so often the case AFTER such extremes are seen.
S&P 100 (OEX) INDEX; DAILY CHART
I described the S&P 100 (OEX) last week as having a continued bullish chart pattern; one of higher pullback lows with higher relative highs made on rallies. I now see the chart as bearish for the upcoming period. How deep of a correction may develop is hard to say yet, but I see definite downside risk in holding bullish positions.
Key resistance is at the upper trendline of the wedge (triangle) pattern intersecting currently around 530-531 or at last week's high. In the event of a bullish 'breakout' move, next resistance is projected for the 540 area in OEX.
Technical support should be found at the lower trendline around 522-523, not far above Friday's high. Next support is just under this, at 520. Support below 520 (not noted on chart) comes in around 513. Major support, at the low end of the broad longer term uptrend price channel, begins in the 505 area, extending to around 500.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average has turned bearish in its pattern as Friday's sell off reinforces the idea of an increasingly narrow trading range, as would be true in the narrowing pattern of the converging trendlines (of a rising wedge pattern).
Key near resistance comes in around 10730, with next higher resistance at 10900 with such a move suggesting continued upside progress and tending to negate the bearish chart interpretation I'm offering here.
Pivotal near support is at 10595, extending to Friday's low at 10561. Next technical support is at 10400, with major support/buying interest anticipated in the 10230-10200 area.
I anticipate lower prices ahead, perhaps after a short-term rally attempt, into say Tuesday.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
All the major indexes are highlighted, and have, the same Rising Wedge formation, which is a pattern that suggests that previously strong buying power is not going to rule a lot longer. The Nasdaq Composite (COMP) looks bearish by the lights of this revised chart interpretation. The key will be whether, or when, the well-defined lower up trendline is pierced. If pierced, look for this line of support to then offer resistance on subsequent rallies. I also anticipate the potential for a short-term rally immediately ahead; e.g., such as developing Monday and extending into Tuesday.
Near resistance is projected for the 2336 the current intersection of the upper line of the highlighted triangular shaped 'wedge' pattern. If COMP were to achieve a decisive upside penetration of 2336, or 2350 by the end of next week, this would suggest potential for a further run in COMP to the 2400 area.
Key near support is the lower trendline, currently intersecting around 2285, but I should include last week's lows as near support also, at 2279-2274. Next support is noted in the low-2200 area, specifically and currently at 2216-2213. The current 50-day moving average stands at 2213 and will be perceived as a pivotal support area.
As noted with the S&P 500, along with a bearish looking COMP chart, the recent RSI and bullish sentiment extremes seen above also suggest that the market may now have entered a corrective phase.
Once daily sentiment readings in my 'CPRATIO' indicator start dipping below 1.6 (daily CBOE equities call volume falls to LESS than 1.6 times daily put volume) it would suggest the start of a decline in an over-done bullishness that has been pervasive.
NASDAQ 100 (NDX) DAILY CHART:
I anticipate a pullback in the big tech stocks beyond the recent correction. Recent lows in the Nasdaq 100 (NDX) at 2274-2279 will be a key area to watch near-term.
Below the NDX's recent lows, there was some prior support around 1850, but more pivotal support comes in at the 1810 to 1790 zone. If the index was to start closing below 1800, we would start looking at the prior downswing lows as key levels; i.e., at 1777, then 1759.
Key near-term resistance is noted (at the red down arrow) in the 1905 area. If there's a strong move above 1905-1910, a next target and potential resistance, comes at 1950. Such a move would be a bullish breakout of the bearish wedge pattern and suggest renewed upside momentum. I don't expect it, but knowing where current chart interpretations would change is always a good idea.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ), of course mirroring the Nas 100 index, has the same rising wedge pattern that I seem to have discussed endlessly, reflecting that it's the key pattern on all the major index charts currently.
Near technical support begins at 45.8 and extends to around 45.5. I've highlighted next support at 44.5, the top end of the upside price gap from 12/18-12/21. A close below 44.0 would confirm a bearish trend that was more than a short-term one.
Key overhead resistance still comes at 47. A decisive upside penetration of 47 even could suggest upside potential to 48.
The rising daily volume trend that I've highlighted by a rising trendline below, as prices have moved basically sideways, I also interpret bearishly. This volume pattern may represents distribution; i.e., sellers 'distribute' stock to willing buyers. This rising volume trend, at least prior to Friday's sell off, probably also reflects increased shorting, an effective way to hedge at least a portion(s) of tech portfolios.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) up trend seems to running out of stream and I look for an eventual move below support. The chart pattern as well as 'confirming' momentum indicators like the Relative Strength Index (RSI) suggest it.
The key zone of support begins at 630 and extends to 625. 625 is an important area as suggested by the line of prior highs. Once highs like this are pierced, the chart maintains a bullish picture if prior highs 'become' support on subsequent pullbacks. I doubt that you have heard this from me before! Kidding. Major support begins at 600, extending to 588.
Key near resistance is at 648 currently. A bullish breakout above 648-650 would however suggest upside potential to around 680.
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.