THE BOTTOM LINE:
This past week's price action had the pattern I anticipated, in that an initial decline was followed by another rally. After the major indexes registered short-term oversold readings basis the hourly charts (e.g., per my first chart below), a good-sized rebound followed. My further expectations are for a second, probably more prolonged, decline after this recent rally runs its course.
CHART OF THE WEEK:
A chart I wouldn't normally feature but one of interest in its technical aspects, is seen with the hourly Nasdaq Composite (COMP) Index. When anticipating a short to intermediate-term reversal after a prolonged uptrend, I pay close attention to any well-defined up trendline of several weeks duration. Once there is a decisive downside penetration of such an up trendline, this becomes a reversal 'signal'. Often the first rebound after a trendline break carries the index back to the trendline, where selling again drives prices lower. A mentor of mine from my Wall Street days used to say that such a previously broken trendline becomes a "kiss of death" trendline due to strong resistance back at that line; what had been support reverts to later resistance.
Of trading interest also is seen above with the 21-hour Relative Strength Index (RSI). The recent dip of this RSI into the 25-30 oversold zone was the first such instance since August. Once into this (oversold) zone, a subsequent rally almost 'had' to be anticipated. In the context of stocks rising for months, a first significant sell off (especially with more dollars sloshing though the system with QE) is going to find buyers. A second decline, often not as much, as more bearish events capture the attention of market participants.
Typically a correction, especially after an extended advance, will have a first decline that's followed by a rally, but when the rebound runs its course, a second decline follows which is more extended than the first sell off and where the investment outlook is not at the bullish pitch it was at previously.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
Upside momentum in the S&P 500 (SPX) index has stalled and the dominant up trendline broken. The short-term trend is down, while the intermediate and long-term trends remain up. A decline below 1160 would turn the intermediate-term trend mixed to lower.
Conversely, SPX would 'regain' its up trendline by a move above 1227-1228 resistance and suggest that the intermediate uptrend was back on solid footing. On a closing basis, SPX (unlike Nasdaq) ended the week above its 21-day moving average, which shows that the index hasn't fallen apart. However, the chart pattern suggests to me that there's a further decline coming.
If SPX rebounded to the 1207-1210 area, a second decline starting from there might end up around 1130-1127. My current expectation is for a second down leg that carries farther than the first. I don't have a particular target as to an end point in SPX's most recent rally but don't think much higher; and don't think that, from wherever it starts, the prospects for a second decline is one that carries farther than the 54 points (peak to trough) seen in the first pullback.
Near support is in the 1173-1178 area, then at 1160. Fairly major support should be found in the 1130 area. Near resistance is at 1207, then at 1227, at the prior intraday high and extending up along the prior up trendline.
In terms of my technical indicators seen above, RSI finished the week at a 'neutral' 55. My sentiment indicator finished the week a bit higher in terms of bullish expectations than I think is warranted, given the risk of a further correction.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is mixed in the same way as with the larger SPX index. Prices are no longer advancing above the prior up trendline as upside momentum has stalled; such trendlines being a good visual representation of momentum. Another key gauge of support is holding up so far, as suggested by the most recent two Closes above the 21-day moving average.
Although OEX closed above its 21-day moving average, which is a bullish plus, I don't think we've seen the end of the recent correction and my expectation is for another down leg ahead.
Near support is evident in the 530 area, then at 520. Near resistance is in the 550-553 area. A close back above the up trendline and the prior 553 intraday high would regain OEX's previous upside momentum.
DOW 30 (INDU) AVERAGE; DAILY CHART:
Part of my outlook last week (11/13) regarding the Dow 30 (INDU) was that "I anticipate some further weakness in the early part of the week, but a rally by mid-week or so (it came Thursday) as a likely return volley by the bulls but which isn't likely to be as robust as before this past week's sell off."
We'll see how far INDU can carry on any extension of its recent (short-term) oversold rebound. At its 11203 close this past week, the Dow was just below support implied by its 21-day average. I anticipate another decline ahead after any further upside progress. Further upside for the recent rebound might carry to the 11280-11310 area but not as likely to or above 11400-11415.
Key chart resistance is at 11413 at the previously broken up trendline, extending to the prior INDU intraday high around 11450. Pivotal support is in the 11000 area, with next support projected at 10880.
I don't see sufficiently strong bullish patterns to easily get INDU back into its previous uptrend channel or back above 11400. Stocks in the Average looking capable of strong further upside are few in number; i.e., CAT, IBM, KO, MCD, and maybe XOM.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) Index chart is still mixed in its pattern, after its steep up trendline was pierced. So far the rebound is not impressive and COMP remains under support implied by its 21-day moving average. I'd be surprised if the Composite can challenge resistance in the 2600 area. Assuming it does, this would be a further opportunity to be short Nasdaq, as I anticipate another downswing after this recent recovery rally runs its course.
Key resistance is in the 2600 area, extending to around 2632. Near support is noted at 2460, then at 2400.
As noted with my S&P 500 commentary, an overbought extreme for saying extremes in the RSI is past, with a 'neutral' 55 reading on Friday. Bullish sentiment seems high for a market at risk for a further correction.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart remains mixed, given the slowing of upside momentum, signaled prominently by the break of its steep up trendline. Such high angle ascent rallies can go on for weeks, but not usually months; not in stocks anyway. This past week's snap back rally from a short-term oversold, isn't hugely impressive although the index did gap higher into Thursday. I can't say the current rally has run its course and we have the added wrinkle of heading into a big holiday week.
Key near resistance is 2150, then 2200. I look for another decline once this current rally runs its course; a second decline in a bearish correction typically falls further than the first sell off measured peak to trough.
Near support is 2090, then 2050.
I'm bearish to the extent that the typical corrective pattern is a sell off, a rally (and not tending toward a robust rebound), followed by a bigger point decline than the first sell off. The corrective pattern (within a still larger bullish trend) I'm anticipating seems mostly likely to complete in this manner.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
Low volume days only from the Wednesday low into the Thursday-Friday rally. A tepid response from the bulls on this rebound. The bloom may be off the tech 'rose'.
My analysis is that the Nas 100 is setting up for another sell off, either from the 52.5 area or perhaps 53.0. It looks least likely to me currently to expect the 54 level in the Q's to be seriously challenged. I'm a seller on further rallies from here.
Near support: 51.3
Next support: 50.0
Near resistance: 53.0
Major resistance: 54.0
RUSSELL 2000 (RUT) DAILY CHART:
A key bullish technical test for the Russell 2000 (RUT) index would be for it to 'regain' (trade back above) its recently pierced up trendline seen on the daily chart. My 729 red arrow 'resistance' highlight is because this level puts RUT (on Monday) at its previously broken up trendline; what was support 'becoming' resistance.
Absent RUT resuming its prior strong advance, the common outcome in a correction is one leg down, another up (a recovery rally), followed by another downswing; e.g., from the 725-730 area to 680-675.
Near support is in the 700 area, extending to 690. Near resistance is at 729-730, extending to 738-740. A close above 740 that wasn't reversed the next day would renew the strong uptrend dating from the late-August low.
GOOD TRADING SUCCESS!