THE BOTTOM LINE:
First, the bearish case: what the bulls (and their ranks have swelled) are fearful of. Bullish fund managers may also look at an inevitable correction as an opportunity for further buying at lower levels. Investment versus trading time horizons are different!
Prices are at a make or break level technically, as the major indexes have fallen yet again to at or near key supports. Given current downside momentum, support levels may not hold. If for example, the S&P 500 (SPX) starts breaking below 1180, there's another 40-50 point downside potential. The S&P 100 (OEX) needs to bounce off 540, otherwise its look out below. If the Dow 30 (INDU) starts falling below 11000 it looks vulnerable for another 3-4 hundred points down from there as a corrective bottom.
With the bearish case, I don't envision a sharp waterfall type decline. The next downside correction may be more prolonged than the last one, mid-Jan to early-Feb, which was relatively short-lived. The major indexes could meander ahead, with an overall downward bias.
Other bearish chart factors, especially on an hourly chart basis, includes the fall below hourly up trendlines which date back nearly 4 months, as will be seen on the SPX hourly chart below. The most recent SPX rally failed at the trendline that had marked support; support, once broken, 'becoming' later resistance. Moreover, the 3 highs in the hourly SPX trace out what could be a Head & Shoulder's top. To 'confirm' this top, would mean SPX falls below key prior supports in the 1190-1l80 price zone.
The rally to a new high approaching 1220 was accompanied by declining relative strength seen above, suggesting that the rally could fail.
A bullish case is made with a near-term rebound that keeps prices mostly within my redrawn uptrend channels on the daily charts; the ones you'll see in my regular index commentaries further down. You may notice on those charts that I have redrawn up trendlines. The projected up trendlines are tentatively redrawn when 2 or more recent intraday lows form a new 'best fit'(using the most number of prior lows) up trendline.
Another bullish benchmark for me will be the continued ability of key indexes to hold above their March peak prices; the March high will be noted on key charts.
I'll trot out a sort of 'wild card' indicator for possible insights as to the rally potential from here. When the CBOE Market Volatility Index (VIX)has spiked upward 1 to 2 times to levels greater than 5% above the VIX 10-day moving average, rallies have often followed, even if relatively short-lived. Recent history of the VIX, relative to spikes ABOVE the 5% moving average envelope is seen below. I'd especially point out the late-October and early-Feb periods. This time of course may be the time when this rule of thumb leads to a poke in the eye!
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
S&P 500 (SPX) remains bullish in its pattern as long as it holds key technical support at 1185-1180 on balance. Even a lateral move with 1180 as the low end of such a sideways trend, would suggest a bullish consolidation, to be followed typically by a continuation of the major (advancing) trend.
The most bullish chart scenario would be a early-week rally that keeps the index moving upwards within it's (re-drawn from last week) uptrend channel.
Conversely a decisive downside penetration of the lower trendline would suggest that a true blue correction to this strong market was unfolding. Working against the idea of merely a shallow or sideways correction at this juncture is the rampant bullish sentiment figures occurring before this recent volatility. The fire of such bullish sentiment extremes often are dampened by LOWER prices for a while.
SPX has key near support at 1183-1180, with next support around 1160. Prices might fall a rapid 20 points or so if 1180 is pierced, seen as a key area.
Pivotal resistance is in the 1220 area, with next resistance projected for 1240-1241.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart stays bullish, relative to its advance since early-February, if the index turns up from Friday's close. Such a next move would maintain its up trendline. If it pierces this line by continuing lower from Friday's close, the chart turns bearish on at least a near-term basis. 540 is a key number, a must-hold support in terms of the Feb-April up trendline.
As far as other chart aspects, a decline to under 540 or so would then suggest a correction (to the Feb-Apr advance) had begun with the last touch to resistance at the upper end of the Feb-April uptrend channel. From 555 at that high point to the recent 537 low is 18 points. From 550 at recent resistance, another decline of 18 points would put the index at 532-530 support.
I've noted key near resistance on the chart at 553, give or take a couple of points. Major resistance begins at 565.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The 11000 level which had been an important, but short-lived resistance as seen by the March peak, has been a price area where buying has come in for a few weeks now during whippy price action between 11000-11200. Therefore, 11000 is the pivotal technical support going forward. We had one recent day below 11000, but this was the only such Close since 4/9.
I also have noted the March 10955 intraday high as a kind of benchmark area for the Dow to consolidate above going forward if the chart pattern is to suggest that the recent sideways trend is a consolidation (only) of the Feb-April advance.
Key near resistance remains the 11200 area.
If INDU closes below 11000 for more than an isolated day, further weakness such down as to the 10800 area would be suggested. INDU would then be in the correction mode that I felt was coming for awhile now. These things get stretched out when so many, at least those in the market, get very bullish. Expectations are almost always then greater than the realities going forward. Think earnings are in a great recovery, that all gets priced in. When earnings are in fact great, prices sag on profit taking as the NEXT evaluation gets formed.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
Clear sailing higher for the Nasdaq Composite (COMP) Index got waylaid this past week, especially given the close below the up trendline seen below. If the index doesn't rebound shortly, it demonstrates in this visual way, less buying interest in tech. Certainly relative to the trend that existed over Feb-April. Lessoning momentum usually precedes a give back in prices. This is probably the case given that high-optimistic earnings valuations are in play.
I noted near trendline support at 2471-2472 per the green arrow. Yes, this is above the Friday close but current trendline support would be maintained if prices open above Friday's low; especially assuming a Friday over reaction and pre-weekend jitters. If the Feb-Apr up trendline is maintained, the chart remains quite bullish and suggests objectives as high as 2600.
Next most bullish in the unfolding of our current cycle would be to see a COMP consolidation above 2430, but mostly 2450, with a rally attempt to follow such as back to challenge 2530.
The start of a significant break is seen with a fall to below 2430, suggesting a further slide to perhaps 2380, a correction that would be fairly minor after the prolonged advance. A more extensive retracement would occur if COMP dropped back to the 2300 area.
NASDAQ 100 (NDX) DAILY CHART:
I'm back to noting how key Nas 100 (NDX) support at 2000 is. If the index bounces from here and has a go at 2050 resistance again, the chart continues to look bullish. If NDX consolidates in a sideways trading range, as long as above 2000, the Feb-April uptrend looks intact. If there was a continued sideways consolidation it would also continue to 'throw off' an overbought condition; as existed when recent 13-day RSI peaks were at or above 75. The same RSI is now down to a neutral 50.
If support implied by the trendline intersecting in the 2000 area gives way, NDX makes a shift on a short-term chart basis to bearish as the trendline break shows the slowing (upside) momentum. Assuming prices fall back from the 2000 area, next support is seen around 50 points lower.
2050 remains a key area of resistance, with major resistance suggested in the low-2100 area.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The chart remains bullish for the Nas 100 tracking stock QQQQ but if prices remain weak in the early going of the upcoming week, the chart turns near-term bearish with every Close below its up trendline.
The LOWER up trendline is the up trendline; the upper parallel line above the lower line suggests a rising line of resistance only; unlike the significance of a 'break' in the trend if the lower line is pierced.
If prices slid under 49-49.2, I anticipate selling to pick up as it would suggest to many a break in the advance going into the past 7-10 days of more volatile action.
The common volume pattern, if the sharp Friday sell off is to be believed, would be for an accompanying sizable jump in trading volume. That didn't happen, perhaps because the down trendline hasn't yet been pierced. A fall of QQQQ to below 49.0 would likely set off a volume stampede and it won't be precipitated by those looking to buy dips. If 49 gives way I've noted next support at 48.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has been in a strong uptrend for 3 months but the recent whippy price action and arrested upside, raises the possibility that 720 gives way and prices fall to a next likely support around 700. Next key lower support is in the 680 area.
740 remains the key near-term resistance.
If prices continue sideways between 720-718 on the downside and 740-741 on the upside, the pattern then looks like a bullish consolidation.
Conversely, a break here of the prior steep run up is all to the good. Markets get overbalanced in a bullish run and corrections keep values from getting too distorted.
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.