THE BOTTOM LINE:
All downside objectives that I've had have been mostly met, such as to the 1260 area in the S&P 500 (SPX), a 50% retracement of the late-Nov low to mid-Feb advance. I also thought that the Nasdaq Composite could get back to the 2600 area; COMP reached 2603 as its weekly low.
I don't necessarily expect an immediate sustained rebound but if you bought calls or implemented other bullish strategies near my downside objectives, I think they'll be good trades. Good gutsy trades as most wait until they see the 'whites of their eyes' as far evidence of a bottom. Don't hesitate and wait for the thundering herd to join you in that moment. They won't! Trading is often a lonely business.
Besides price considerations of a potential bottom, we have FINALLY gotten an 'oversold' reading both on the 13-day RSI and in terms of low bullishness/high bearishness as seen in my market sentiment indicator, as you'll see on my charts further on.
This past week brought still more extreme volatility and the major indexes fell sharply before recovering some into their weekly closes. Levels reached were fairly predictable based on various ways of calculating downside technical chart objectives.
Coming into the past two weeks, there were various bearish chart patterns, such as implied by:
The tendency for the second down leg in an a-b-c (down-up-down) to be at least equal to the point decline of the first leg and often more than the first decline; e.g., anywhere from 1.25-1.38 to 1.5 to 1.6 times greater than the first downswing.
Prior formation of a bearish rising (and broadening) wedge pattern
Bearish Head and Shoulder's top patterns most clearly defined on the hourly index charts.
I wrote last week that: "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."
Sorry for a repeat of all that but it's important to explain the calculation for downside objectives once a 'neckline' is pierced. You will see these patterns again. In this case, 2240 was definitely a minimum downside target implied by the H&S pattern as NDX fell to an intraday low of 2189 this past week. Some traders, myself included, find that formation of the H&S top pattern alone is enough to initiate bearish option plays, without waiting for a 'confirming' break of the neckline. Formation of the 3rd top (the 'Right Shoulder') usually offers enough evidence of a top to take action.
I also noted last week about not seeing 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. Its more likely that better support/buying interest will be found in the 11800 area..." while the Dow closed above 11800 for the week, the low print for the week was 11555.
Expected and projected support levels, as well as resistance, are as usually seen with the charts below.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) index continued sharply lower after breaking under its up trendline, before rebounding some by week's end. The second down leg (from 1332 to 1249) has fulfilled a Fibonacci objective by the second decline being 1.6 times the point distance covered in the first sell off (from 1344 to 1294).
I noted last time that "an ideal index buy 'signal' 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 seen on a 5-day moving average basis."
My aforementioned price and indicator considerations point to good potential for the market having made, or being in the process of making, a bottom. After such a period of volatility and other thrills and chills, a bottom doesn't always take the form of a single spike lower and that's it for a low. Sometimes prices have to retest prior lows and potential support and just generally chop around before we there's sustained rally potential.
I've noted SPX support levels at: 1260; 1249 and at 1231, representing what would be a 2/3rds or 66% retracement (of the late-Nov to mid-Feb run up). Resistance is projected for the 1300 area, then back up at the prior highs at 1332 and 1344.
I noted in my initial 'bottom line' comments that the 13-day RSI AND my bullish/bearish sentiment indicators (seen above) FINALLY saw 'oversold', and potentially bullish, readings this past week. This development, along with fulfillment of certain downside price objectives suggest an increasing likelihood for the market having seen, or being near, a possible bottom.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) also has completed a 50% retracement of its last major advance from the 527-530 area to 602. The chart is now bearish on a short to intermediate-term basis; the major trend remains bullish. However, it also should be noted that the second recent down leg at 40 points was double the first 20 point decline. The second decline often has a Fibonacci relationship to the first. Common would be a second decline that was approximately, 38, 50, 62 percent, and sometimes 100% greater than the initial sell off. Once the longer second leg down has occurred the decline is over or nearly over.
For the first time since August lows (2010) in the 475 area, the 13-day Relative Strength Index or RSI has registered a 'fully' oversold reading this past week. If this is still a bull market, which it is, just an oversold reading or two (or 3) tends to suggest bottoming action ahead of an upside reversal.
Key support levels are: 565, then at the recent intraday low at 559 and next around 552, representing a 2/3rds/66% retracement of the prior advance.
Near resistance is in the 590 area, relative to our most recent OEX close at 572. Next resistance is fairly obviously pegged at the 599 and 602 prior highs.
As was seen with Friday's intraday price action, it won't be surprising to see a further period of whippy price action and rallies that don't catch fire, but also without the sharp declines of this past week. In other words, like bottoming action; emphasis on the 'ing' form of the verb of the present continuous tense.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) average didn't go too much past a 50% retracement before rebounding some. The chart has to be considered mixed, what with bearish short and intermediate trend patterns. The second downleg was 728 points versus 408 points for the first or around 78% more. The most I was/am anticipating is second leg decline that's double the first. In this regard at least I don't think there much more downside to come with INDU.
Judging how much more downside there may be is helped by retracement considerations. A 'normal' or average correction for a stock or index is to retrace around 50% of the prior rally, sometimes a bit more such as a decline that equals a 62% to 66% retracement. If INDU starts falling below 11660, then to below 11417, it would suggest the potential for a 'roundtrip' in INDU back to the 11000 area. This is not what I expect but to ALSO make forecasting room for the worst case scenario is worthwhile.
I've noted support at 11660, with a next assumed support at the recent 11555 Dow low; finally, 11417 is potential support implied by what would be a 66% retracement level for INDU.
Resistance at 12100 is implied by the current intersection of the previously broken up trendline, with next resistance at the prior intraday highs at 12283 and 12391.
Dow stocks now below their important 50-day moving averages include: AA, AXP, BA, BAC, CSCO, DIS, GE, HD, HPQ, IBM, INTC, JNJ, KFT, KO, MCD, MMM, MRK, MSFT, T, UTX, VA, WMT and XOM. 23 out of 30 stocks or 3/4ths of the Average looking weak in terms of this one key moving average. A lot of leaders on the prior prolonged advance have been shot down, at least temporarily.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq Composite (COMP) chart is bearish on a near to intermediate-term basis. The second recent decline, has carried about 50% further than the first; a second leg decline that's around 1.5 of the first is a common downside objective in the a-b-c corrective pattern or wave. Moreover, COMP has completed to date a Fibonacci .618 (commonly rounded to .62) retracement of the November to February advance. I don't anticipate a much deeper retracement although if COMP slices through 2586, the Index might be heading to as low as the 2460-2480 area again over the longer term.
I've noted expected layers of overhead resistance at 2722; then, well above, in the 2800 area; finally at the 2840 rally peak.
Future support is assumed again at the 2603 recent low with 2600 as a viable support area. 2605 to 2586 implies potential technical support as encompassing the key .62 to .66 retracement zone as highlighted on my COMP daily chart below.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart is bearish now on a short to intermediate-term basis, although recent lows have reached my particular technical expectations. Especially, in that NDX has now retraced fully 2/3rds of its last advance dating from its November low. In an index that is NOT reversing its major trend, pullback retracements of around 66% will stop there. If weakness continues then the possibility does come into play for a full round-trip 100% retracement back to NDX's November low.
I thought support might develop at 2258 or around 2236, which were lows seen in January. Not to be; once the selling got rolling, especially when 2200 was pierced, further panic type selling set in which is also fairly common in the second stage decline of a correction.
My first chart above (within my initial 'bottom line' commentary) showed a clear cut outline of a Head & Shoulder's top on the hourly NDX chart, with the predictable result of a sharp further sell off. Sometimes, use of hourly charts will bring into focus a chart pattern that is only vaguely evident on the daily chart for the same index or stock. Even on the daily chart there was the typical 3-top outline (of a H&S top pattern) with the middle top being higher than the two on either side.
Support is noted in the 2200 area, then at the recent low at 2189, extending down to 2179.
Key near resistance is pegged at 2307 then at the prior intraday highs, first at 2375, then at 2403.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The most recent sharp decline in the Nasdaq 100 tracking stock (QQQQ) may have panicked enough QQQQ holders to set up a next advance. Not necessarily immediately, especially if oil prices start climbing steeply again with the allied 'shut down' of Libya.
As with NDX of course, the NDX tracking stock, has retraced 2/3rds of its last sizable run up. I doubt that we'll see any prolonged decline below the 54-53.7 area. I anticipate support/buying interest will develop on dips below 54, extending to 53.6. If there is a decisive downside penetration of 53.6, that's another potential story as major support doesn't come before 52 to 51.
Resistance is well overhead currently, first at 56.6, then up at the prior 58.3 and 59.0 tops.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) chart is mixed, with only its long-term trend still up. However, RUT has not yet 'tested' and certainly has not pierced its prior its prior (January) pivotal 772 low.
If RUT continues the same pattern it has been in for awhile, it will resist as deep a decline as the Nasdaq and will start rallying first.
Support is implied at the recent RUT low at 776, extending of course to 772 and is lastly projected at 754, based on some retracement expectations.
Resistance is seen at the previously broken up trendline, currently intersecting at 822. Resistance then extends to the prior top at 830 and the earlier 838 peak.
I wrote last week that: "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." Not quite as low as 772 yet but that could happen. I'd buy into a successful retest of the 772 area. Right now the Index looks to be headed UP to a test of resistance implied by the 50-day moving average.
GOOD TRADING SUCCESS!