THE BOTTOM LINE:
This past week's decline stopped at the lower support trendlines seen on my major index charts and a strong rebound followed. After the big advance of last week another minor pullback ahead would 'correct' a short-term overbought condition as the major indexes near some technical resistance. Another reason for thinking that this is not just going to be a straight-up move is that bullish sentiment increased pretty fast. Prolonged rallies can occur with consistently high sentiment numbers no doubt, but in terms of our still ongoing correction I think there will be more two-sided price swings (and typical of summer), although within an overall bottoming pattern as seen currently.
I wrote yesterday in a Trader's Corner piece (7/9) about the diminished likelihood that a major top formation was/is in play, especially a major Head & Shoulder's Top. Moreover, there is no Dow Theory sell 'signal' in terms of a reversal of the primary stock market trend, which is still up.
An interesting potentially bullish pattern is being traced out, that of a falling Wedge, which is seen prominently, but not exclusively, in the Dow 30 (INDU) which is my first chart.
A FALLING 'WEDGE' PATTERN:
This is one of a number of chart patterns that can appear at key reversal points, some more important than others. The 'Falling' or 'Rising' Wedge is not all that common but when it occurs it often represents a trading opportunity. The 'wedge' pattern that points down is usually bullish. A falling wedge is a downward price trend bounded by two down-sloping, trendlines that will 'intersect' at a point in the future if you extend the trendlines out. The wedge pattern typically forms over 3 months or less and is most often a consolidation of the prior trend.
A falling wedge should have at least 5 'touches' to the down-sloping trendlines forming the opposite sides of the 'wedge'; e.g., 3 along one side and 2 along the other. This can be seen on the INDU chart below as well as on other major indexes. The volume trend should be declining. When prices achieve a decisive penetration of the upper trendline there is generally a good-sized advance that follows.
Some traders, including me, may buy on the third touch (around 9614) to the lower trendline as seen above and set an exiting stop just under that line. Especially so if the index (or stock) is 'fully' oversold as measured by the 13-day RSI, which is displayed on my charts that follow.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is bearish in terms of its declining trend as the relative highs and lows fall under prior highs and lows. There is the possibility that a bullish falling Wedge is forming, per my initial 'bottom line' comments above. The (upside) breakout point in SPX is at the intersection of the down trendline; e.g., at 1095 on Monday. 'Confirmation' of a renewed uptrend however is on a couple of consecutive closes above the prior upswing high in the 1130 area.
I was mostly on target on key technical support as coming in at the lower trendline; the low was 1011 at that line. The market then rebounded from there, the third 'touch' to the lower trendline. SPX was also 'fully' oversold as seen with the 13-day Relative Strength Index (RSI). SPX just managed to close above its 21-day moving average on Friday showing renewed up momentum. The most important averages to clear are the 50 and 200-day ones.
I've noted near support around 1060 and fairly major support in the 1000 area, at the lower trendline. There is also likely support in the 1020-1016 area.
Trader sentiment levels rose this past week (as seen above) with the rally. My 'sentiment' indicator is not suggesting 'extreme' bullishness yet but I'd be more confident about the timing of a bigger rally if my call to put ratio stayed neutral or edged down toward the bullish 'oversold' line for a day here or there. The next sell off should tell the story on just how bullish options traders will remain. If the next downswing is accompanied by a jump(s) in put volume, this could be a contrary indicator; i.e., bullish. Since earnings are expected to be good, traders are no doubt positioning for that.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart remains bearish until or unless there is a breakout above the upper down trendline, currently intersecting at 495, followed by a Close above the prior 510 (up) swing high. The same potentially bullish falling wedge is outlined in OEX. This (wedge) pattern, if true, may continue to unfold, with the upper trendline representing resistance. Prices could bounce back and forth between the two trendlines but in a narrowing price range and which usually represents price 'compression' ahead of a spring to the upside.
I've noted resistance at 495 and then at 510. OEX cleared minor resistance implied by its 21-day moving average. Closes above the 50 and 200-day averages are further benchmarks to watch.
Near support is at 480, with fairly major support back at the down trendline, currently intersecting at 455; the prior 459 low is potential support of course as well.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Average (COMP) shows a potential bullish falling wedge pattern the clearest of all the major indexes. The chart remains bearish in its pattern of declining swing highs. The falling wedge pattern only suggests bullish potential. However, the falling wedge is a striking pattern and when I've seen it get fully developed (having 5 or more alternating 'touches' to the two down-sloping trendlines), this has often preceded a substantial new up leg.
Near support is in the low 10000 area, then back at the prior 9614 low and then at the low end of the pie-shaped wedge, intersecting around 9566 currently.
Near resistance is bumped up to 10350 this week, at the current intersection of the upper down trendline. Even more key resistance, in terms of a shift in the intermediate trend, is at the prior 10594 rally high. A couple of consecutive Closes above this prior top would suggest an upside reversal in the intermediate-term trend.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index's chart has been bearish for some weeks now and will remain so until the pattern of lower relative lows and lower relative highs turns around. Needed to suggest a shift in the intermediate-term trend is a rally that pierces the prior swing high (and for more than an isolated single day) to suggest a shift in the intermediate downtrend.
I wrote last week that "I think we're at or near where support/buying interest will be found in COMP between 2050 and 2100 in the coming shortened week. Enough buying interest ahead in this oversold market for a rebound toward 2200." With the low at 2161 and the week's high at 2197 I couldn't do much better (in forecasting) than that. I intended this advice to apply to covering Nas 100 (NDX) puts, short QQQQ stock, as well as to bearish positions in 'bellwether' Nasdaq stocks.
Near resistance is noted where the downside gap would get 'filled in' at 2208, with next resistance at the upper trendline at 2267; even more key resistance is seen at 2341 and last upswing high.
Near support is noted on my COMP daily chart at 2150 and up 100 points from my musings of last week. Next support is back in the 2080 area, extending to the prior 2061 low; the lower trendline intersects at 2036 currently and should again offer significant technical support.
Trader sentiment levels rose this past week (as seen above) with the rally. My 'sentiment' indicator is not suggesting 'extreme' bullishness yet but I'd be more confident about the timing of a bigger rally if my call to put ratio stayed neutral or edged down toward the bullish 'oversold' line for a day here or there. The next sell off should tell the story on just how bullish options traders will remain. If the next downswing is accompanied by a jump in put volume, this could be a contrary indicator; i.e., bullish. Since earnings are expected to be good, traders are no doubt positioning for that.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bearish and its chart doesn't show the 'complete' formation of the bullish falling wedge pattern as seen in the Composite; a matter of not having a 3rd 'touch' to the lower trendline, what may seem to be a minor point and it may be. If the Composite didn't have the requisites of a completed wedge pattern, I'd be cautious about saying this chart is also shaping up as having bullish potential ahead.
There's much to 'prove' yet by the bulls, since there are layers of resistance implied by the key moving averages, the down trendline (intersecting at 1870 currently) and the prior 1939 top. A move above the prior intraday high at 1939 or just a new high Close above 1913 is needed to suggest a turnaround in the intermediate downtrend. As always, a single such event isn't 'conclusive' until a second such confirming high.
Near support is noted at 1780, then is seen in the low-1700 area and finally back at the lower trendline.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nas 100 tracking stock chart is bearish, displaying also a downward sloping bearish price channel. I did forecast the potential for a rebound from the lower down trendline, and there was a decent bounce from there as you see below. This oversold rebound doesn't yet suggest any change in the bearish pattern for QQQQ.
To get bullish on this chart would start with the Q's rallying above near resistance at 44.8, extending to 45.2, then going on to pierce its down trendline (currently intersecting at 46.5), then climbing above the prior intraday high noted at 47.7; a couple of Closes above the prior closing rally high at 47.05 would be a big step in the right direction for the bulls.
Near support is at 43.7, then back down in the 42.0 area, extending to the prior recent low at 41.7.
A 'typical' low-volume QQQQ rally was seen this past week - see above. Volume has expanded in the direction of the trend mostly only on the declines in past weeks. As usual the only aspect of the volume pattern that seems relevant to a possible continued advance is the upturn in the On Balance Volume (OBV) line. Absent paying attention to heavy volume at key upside reversals (i.e., selling 'climaxes'), we need to mostly focus on price action and see where trade is within (or beyond) the downtrend channel.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has also traced out a well-defined falling wedge pattern that suggests bullish potential down the road, but within the context of a still bearish chart.
Support and resistance points are noted below with the key resistances being at the (upper) down trendline, currently intersecting at 643; than, more importantly, at the prior rally highs in the 672-677 area.
Support was seen in the 612 area on the recent advance. Fairly major support begins in the 595 area, extending to 587, then perhaps again to the lower trendline intersecting currently around 582.
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.