THE BOTTOM LINE:
I noted last week that a second bearish down leg often carries farther than lows seen on an initial decline. Another common occurrence is for prior lows to be re-tested with a subsequent rebound setting up a possible double bottom.
In this past week, my closely followed technical model of market sentiment finally flashed its first 'cry uncle' daily sentiment reading. The CBOE daily equities call to put volume ratio finally tipped to a bullish 'oversold' extreme with almost as many puts bought on Thursday as calls. Now that the market has retraced ALL of its first down leg, traders are now brilliantly poised for the next 1000 point decline! As brilliantly poised as they were ready for the Dow to move to 12000.
I suspect a double bottom low has sat up. Time will tell on that score. The second down leg, possibly still in progress, could go lower still and fulfill the common pattern where down leg 'c' is longer than the first (the 'a' portion) sell off; sometimes as long as a fibonacci 1.6 times the first decline.
Given the (so far) successful retest of prior lows, the recent oversold (extreme bearishness) sentiment reading and the low Relative Strength Index (RSI), the odds of another down leg from current levels is slim. At least not without a period of sideways consolidation and some attempt(s) to rebound.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) is bearish in its pattern, with potential for a double bottom low assuming there's no decisive downside penetration of Friday's 1056 low; a level a bit under the early-May intraday bottom, with anything that close a possible double bottom nevertheless. Double bottoms are only proven over time, so there has also has to be some tendency for buying in the area between the Friday 1087 close and the recent 1056 low.
Near resistance is 1120, then up in the 1150-1160 area.
Near support is 1066-1070, with next support assumed in the area of the 1045 early-February low.
Both the RSI and my Sentiment indicator hit fully oversold extremes and now may not be the exact time to buy but it's no time to short this market either.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) continues bearish but with the same potential for a double bottom to be in place or to be forming. To date there have been three important lows made around 481-482. If the May lows hold up, the chart would suggest a February-May double bottom. A secondary double bottom would be if the two May declines having the same approximate low, plus or minus a couple of points. The chart pattern, along with the recent oversold extreme seen on the 13-day RSI, would suggest a sideways to higher move near-term.
Near resistance is at 500, a prior key support, and next up in the 520 area.
Near support is in the low-480 area, with next lower support at 440-447.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart is bearish like the others and with the same potential for a double bottom. I noted last week that of the 30 INDU stocks, only BA, HD, KFT, and MCD looked capable of mounting much of a rally; and that small pocket of 'strength' much due to buying of consumer defensive stocks. Sure enough, further selling tipped the Average south again big time this past week.
It happens with INDU, unlike SPX and OEX, that the recent Dow low was a bit above its prior (reported) low; a potential double bottom anyway. Itâ€™s probably safe to say (as much as anything in this volatile period) that dips under 10000 will bring in buying interest in key INDU stocks and will support the Dow.
Near support at my green support up arrow is at 9870, but I should also note the 10000 area as immediate expected support.
Near resistance looks like the 10400 area, then at 10500.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index has the same potential for a double bottom low, perhaps more so than the S&P. This is potential only at this point within a bearish chart. There is the possibility of a further slip back to the 2100 area and a retest of the February bottom.
For the double bottom possibility, COMP should continue to hold its recent low to 2186. I've noted initial support at 2186, with next key chart support at 2100.
Near resistance begins in the 2250 area and extends to the top of the recent downside chart gap at 2270. Next resistance then begins around 2350.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart mirrors the Composite as mixed: the chart is bearish, but there's a recent low that's a bit above the low of the first sharp downswing. Given that the first decline was under clouded trade circumstances so to speak, NDX 'held' where it needed to in terms of suggesting that NDX has seen the low end of a trading range for now.
Buying interest at 1890-1900 caved and the slide continued mid-week until buying interest surfaced below 1800. It seems that 1770 to 1755 is the sweet spot for those looking to buy the dips.
Tough resistance is seen at 1850 at the top end of downside gap, then at 1900. A couple of closes above 1900 is needed to suggest NDX had begun to reestablish a bullish footing.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq tracking stock (QQQQ) continues in its bearish pattern but the chart now offering up the possibility that the 44-43 zone is going to be the low end of upcoming trading; e.g., looking out into mid-June.
Support is at 44, extending to 43. Resistance begins at 45.5 and extends up to the 47 area.
The On Balance Volume (OBV) line turned up on Friday along with prices. A possible secondary signal for at least a temporary low.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is no longer the hold out index with a still-bullish pattern. In the case of RUT, the index finally broke under its long-term up trendline, reflecting its declining upside momentum.
So far, support has developed on dips toward its 200-day moving average, an area that money managers would favor with the generally still-favored (as a 'theme') small to mid cap universe.
Support at the moving average comes in around 628, with next support at 620, then down to as low as 580.
Near RUT resistance is at 660, 670, with pivotal resistance at 700.
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.