THE BOTTOM LINE:
This past week brought more periods of high volatility in the market, with a continued tendency for the major indices to lose ground. I anticipate the major indexes going somewhat lower still as suggested by several technical factors.
The first bearish factor is a longer-term overbought situation; e.g., the weekly MACD indicator shown last week with the Nasdaq Composite (COMP) weekly chart has been pulled lower generating a downside crossover sell 'signal'. The bearish MACD crossover occurred from a high level for this indicator, which are readings above 100. An overbought extreme can go on for a long time but there is a high correlation with significant pullbacks that occur after overbought extremes are reached. Corrections can be relatively shallow pullbacks and more of a sideways trend than a deep decline, so 'overboughtness' so to speak, doesn't tell us how where the indexes will get to from current levels.
There are some chart patterns that have 'measuring' implications and yield some downside objectives. One is when prices have traced out a bearish rising wedge pattern.
There is a less common rising bearish wedge pattern that is also a 'broadening' formation. This is seen in my Trader's Corner article sent out today. The two examples I highlight are with the S&P 500, where a possible downside objective implied by this pattern is to around 1253, but perhaps just to 1260. The other major index I look at in this analysis is the Nasdaq Composite (COMP), where the ascending broadening wedge formation has a measuring implication for a further downside objective to the 2650-2645 area and not a lot lower than recent COMP lows. The point is that a broadening type top formed and the implications of this particular pattern is for still lower levels, but no major rout. There is still a good deal of buying power out there as the public (gasp) after a rise of 100's of points already is starting to shift money into stocks.
There's another way to measure downside objectives with a different and fairly reliable bearish chart pattern that completed its formation this past week: that of a Head & Shoulder's top as seen on the hourly charts of all the major indexes. I highlight in my first chart the Nasdaq 100 (NDX) Index. The way to do the downside measurement is described in more detail in my 7/9/10 Trader's Corner piece which can be seen online
The measurement is fairly simple: the distance from the top of the 'Head' (the center top of 3) to the neckline is subtracted from where prices later broke below the extended neckline. NDX in this calculation has an implied 'minimum' downside objective to around 2240. Resistance is implied on a move back up TO the neckline as noted by the red down arrow.
I have highlighted expected support (and resistance) levels in the rest of my charts. I don't see that strong support has been reached yet in any of the major indexes. For example, the Dow appears to have support at 12000 and that's a number you will see in the media. I think its more likely that better support/buying interest would be found in the 11800 area, which is a measured move objective based on this current second down leg being approximately equal to the first downswing.
In all cases a decisive move above highlighted resistance levels should be respected. My current view is this market is not ready to rally in a sustained way yet and there's likely more downside to come.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index chart has fallen below its up trendline and appears to be struggling to stay above the 50-day moving average, all of which has turned the chart near-term bearish. If 1294, the prior downswing low is penetrated on a closing and sustained basis, the intermediate-term trend shifts lower. Next key support is in the 1280-1275 area, then at 1260.
Key resistance is implied at the previously broken up trendline, currently intersecting at 1320. A close back above this trendline that was maintained in subsequent days would be a bullish development. 1332, then 1344 are then the next pivotal resistances.
Trader sentiment got near a bullish 1.3 reading on Thursday, but then turned up some at the end of the week. Extremes in bearishness, as reflected in daily equities call to put ratios, tend to suggest future rally potential in a contrary opinion way; sort of an upside down Alice in Wonderland view of things.
An ideal buy 'signal' for is: #1.) prices bouncing from a key support; coupled with 2.) an oversold extreme in the RSI; with the addition of 3.) a significant level of bearishness as reflected in my CPRATIO indicator, especially if occurring on a 5-day moving average basis.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index has also turned near-term bearish given the break in prior upside momentum that's implied by the downside penetration of its up trendline. As of yet there has been no Close below OEX's recent 582 downswing low. A more pivotal technical level is the late-January intraday low at 575. Potential support extends from 575 to 570.
The ability for the index to move back above 587, at the previously pierced up trendline, as well to above the 50-day moving average, currently at 586, is something to watch for in coming days. No strong regaining of upside momentum would be implied short of a move back up through 599 and beyond that, to above the prior 602 top.
As with all the indexes, I'd want to see the 13-day RSI get to a 'typical' oversold extreme before I'd get excited about taking on some index call positions. An oversold extreme hasn't occurred since late-August when OEX was trading around 475. In a bull market, the indexes resist selling off enough to make it 'easy' for those waiting to buy at what they would consider cheap prices.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) average managed to rebound back above its up trendline on short-covering at the end of the week. This occurred as prices in some key Dow stocks rebounded a bit from their 50-day moving averages. There are some money managers who will do some buying at the 50-day averages when available. Assuming of course they remain bullish on the longer-term market prospects which does remain a 'consensus' outlook.
INDU stocks rebounding from the important 50-day moving average include: BA, CAT, DD, GE, HD, JPM, KFT, MCD, MMM, T and XOM. These were enough to cause the Dow Average to rebound some from its Friday low. CVX, DIS, IBM, KO, and PFE haven't been pulled as yet to as low as their 50-day averages. Modest rallies in these 16 stocks could pull the Dow up from here.
Contrary to what I expressed in my initial 'bottom line' comments, 12000 could hold as support in the Dow and we won't see even 200 points lower, to what I consider to be stronger technical support around 11800. Stay tuned on that!
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart is no longer holding above it's uptrend line and looks to be headed lower still in line with the Head & Shoulder's Top pattern I wrote about last week.
I also noted that I didn't "believe we'll have long to wait to see how this unfolds." That is how it went with the sharp late-week break. Where to from here? Lower I think and although 2677 could be a significant support, some chart projections I have suggest we could see 2650 as a low for the current decline.
Key near resistance is at 2265, at the current intersection of the recently broken up trendline. Above the trendline 2800 is an obvious next resistance, then at the prior 2840 top.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) broke lower on Thursday and the index formed a downside price gap. A bit of this gap got 'filled in' on Friday and may get covered completely by simply rallying back to 2309. Tougher going may be found back up at the previously penetrated up trendline, at 2336 currently. Even more pivotal resistance in the 'technical' scheme of things exists at the prior highs at 2375 and 2400.
I don't see that NDX has landed already in a solid support area, which would more likely come in around 2258, or at 2236, which were the lows of late and early-January, respectively.
I wrote last week that (like COMP) NDX could be viewed as having formed a "Head & Shoulder's top, which suggests a bearish down leg to come." We got a further move lower, but the chart pattern is a 'skewed' version of such a (H&S) top. The core idea is there; i.e., 3 tops, with one before and one after a middle higher peak. The two lower tops would have normally formed in a similar area. That's a bit of a stretch here with the first top hitting 2236 and the next at 2376. However, to not make a total liar out of me, a NDX Head & Shoulder's top did form recently on an hourly chart basis (shown as my 1st chart in my 'bottom line' commentary), which projected a potential downside objective to around 2240 once the neckline got pierced.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) fell under its up trendline, which visually of course shows declining upside momentum. I envision better support in the 55.4 to 55 area than around the Q's most recent lows at 55.9-55.8. The 55.0 area looks like it could be a next lower support and is currently my lowest objective. Moreover, 55 is where the hourly Head & Shoulder's top pattern (not shown) would suggest as a 'minimum' downside objective.
So far, daily trading volume has ramped up on the recent weakness and significant selling may continue as key big tech stocks continue to see profit taking and speculative selling. Apple is a stand out exception as the stock rebounded on Thursday and Friday from its 50-day moving average. We love the new super thin I-pads!
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart is mixed. On one hand RUT pierced its up trendline, a technical warning shot on arrested upside momentum and on the other had the index rebounded from it prior (down) swing low.
Key near-term support is at 795, with even more pivotal support at the late-January bottom in the 772 area.
Near term resistance is noted at 815 at the current intersection of the previously broken up trendline. As technical types like me say: previous support, once broken, tends to 'become' subsequent resistance. By extension, this goes for previous support trendlines also. Even more pivotal resistance levels are at prior 'failed' highs: at 830 and 838 respectively.
I'm not convinced that the Russell has gone as low as its going to in the current correction. RUT seems more likely to have a further decline to the 780 area or lower, such as to retest late-January support that developed in the 772 area. Such a move would complete the pattern often seen in a second downswing where a subsequent sell off equaled or surpassed the first decline.
GOOD TRADING SUCCESS!