THE BOTTOM LINE:
The week before last saw the intermediate trend turn down which was 'confirmed' by heavy further selling this past week. Given accelerating downside momentum, a retest of prior S&P lows at 1250 and at 2600 in the Nasdaq (Composite) seems likely.
The first big technical bear signal was when the S&P and Nasdaq markets broke below up trendlines, per last week's column. Once that happened and retracements of the last big up leg went beyond 66%, the next likely scenario is for important mid-March lows to be retested and make this correction a 100% retracement. A return to the area of prior lows that would make for a potential double bottom if prices rebounded; OR, if there's a decisive downside penetration of the aforementioned prior lows, this could preface a new down leg; unlikely in my view, given an 'oversold' RSI as well as my sentiment indicator.
There may be a bevy of professional traders willing to buy the S&P 500 (SPX) 1250 area and 2600 in the Nas Composite (COMP). For this reason and (finally) a huge shift toward bearish sentiment, a tradable rebound isn't likely to be so far off.
To trade this market profitably, once up trendlines were pieced (week before last), was to be short/bearish. What's the longer-term bigger picture?
Judging by the weekly S&P 500 chart, SPX has yet to fall out of its broad uptrend channel. Below 1230, the weekly chart starts to look more bearish for the long-term. Conversely, as long as support/buying interest surfaces in the 1250-1230 area, SPX stays within its current longer-term uptrend.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) continues bearish in its pattern, as the index has accelerated past the 2/3rds retracement level that I put a lot of stock in; once past a 66% retracement, I assume there's good potential for a round-trip 100% retracement of SPX's prior up leg. The mid-March intraday low in the 1250 area becomes my next objective or maybe SPX won't get that low, especially given an oversold RSI as well as the oversold extreme seen with my CPRATIO model.
1250 to around 1230 is likely to be many others' trade objective as well and SPX might not get that low or for long. The index could have a brief final dip to the 1200 area, but that is my lowermost target currently. A move to 1250 would make the second down leg in this correction 1.6 times greater than the initial move from 1370 to 1312. It's common for a second decline to be more prolonged; especially for the second decline to be a fibonacci 1.3, 1.5 or 1.6 times greater than the first down leg.
I anticipate resistance to first be found in the 1300 area, which was seen as prior support. 1340 is a pivotal next resistance.
RSI and TRADER 'SENTIMENT'
The 13-day Relative Strength Index (RSI) has finally gotten 'fully' oversold as seen above. In the long-term bull market we've been in since early-2009, an oversold RSI extreme like this has occurred near or at the END of corrections and a turnaround in 5 prior instances. IF the Market was in transition to a bear market, an oversold RSI like our current situation might not lead to much of a recovery rally; otherwise, in the context of the bull market dating from early-2009, an oversold RSI has been a buying bet since March 2009. Initial oversold readings can be early which makes it important to also look at chart/price action closely for 'confirming' type reversal action.
This recent bear move got traders spooked enough to buy enough puts to pull my CBOE daily equities call to put ratio (see my CPRATIO indicator above) low enough to suggest the market is at or near another type of 'oversold' extreme, which adds potential for a rebound.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) went bearish as it the index fell below its prior 577 intraday low, then dropped another 12 points beyond that before prices stabilized a bit on Friday on some short-covering buying. The obvious, maybe 'too' obvious, next downside objective is for a retest of prior lows in the 560 area. 540 is a next support if 560 is pierced.
As with the S&P 500, the decline to date has gone beyond a 2/3rds or 66% retracement of the mid-March to early-May advance and thereby suggests 100 per cent retracement potential or back to prior lows in the 559-560 area. (If SPX rebounded from here a second time, that's how double bottoms 'set up'.) The OEX is also at an oversold extreme in terms of its 13-day Relative Strength Index or RSI.
I've noted resistance in the 585 area, coinciding with the current 21-day moving average level; next resistance is expected around 596.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) is in the second stage of a bearish correction, within what has been a 2+year bull market. If this second stage decline runs true to the 'norm', it will be longer than the initial decline from 12876 to 12309 or a down 'leg' of 567 Dow points. With the most recent INDU decline this second stage of the downside correction has achieved a 'measured move' objective where each decline has fallen AS MUCH as the other.
Commonly however, the second downswing in a down-up-down or a-b-c bearish correction will end up being 1.3, 1.5 or 1.6 times the price loss of the first decline. This kind of thinking on the question of how low do we go here, would suggest further downside objectives to 11837; beyond that, to 11724 and lastly to a target of 11667.
I've calculated support in another way that suggests a key next support at 11800; a slide below this area yields potential for INDU to get to 11600-11605, with further potential to retest the prior intraday low print of 11555.
All in all a bearish looking chart and we've stopped seeing the pattern of ever higher reaction lows. On a rebound attempt, and this market is quite oversold, I anticipate resistance/selling pressures initially in the 12200 area. Next technical resistance is projected at 12300, representing a rebound back to the previously broken up trendline.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The current bearish-looking Nasdaq Composite (COMP) chart pattern started with the prior week's close below COMP's closing low of mid-April. Then, after the second failure of the Composite to hold above its up trendline, the technical picture got immediately bearish. Trendline breaks, of the up trendline in this case in terms of (basis) the daily chart, most often suggests an intermediate downside reversal.
This past week's weakness saw a slight acceleration of downside momentum. The long-term weekly chart (not shown) suggests that COMP will pierce its long-term up trendline below 2540 and I anticipate that 2540-2500 would be strongly held by those bullish on tech.
A point with the 66% downside retracement level is that pullbacks that exceed this amount often then go on to complete a decline back to the prior low, in this case to the 2600 area. With many looking perhaps to cover shorts and do some speculative buying at 2600, it might not happen. I've sometimes missed a tradable bottom by figuring only the most 'obvious' and watched downside objective. There has to be willing sellers in the 2600 area to satisfy all the potential buying that might come in; would you continue to be a seller at 2600, looking for 2550 or lower? Fairly major support should be found at 2550-2540.
RSI and TRADER 'SENTIMENT'
The 13-day Relative Strength Index (RSI) has finally gotten 'fully' oversold as seen above. In the long-term bull market we've been in since early-2009, an oversold RSI extreme like this has occurred near or at the END of corrections and a turnaround in 5 prior instances. IF the Market was in transition to a bear market, an oversold RSI like our current situation might not lead to much of a recovery rally. In the context of the bull market dating from early-2009, an oversold RSI has been a good buying bet. Initial oversold readings can be early however, which makes it important to also look at chart/price action closely for 'confirming' type reversal action.
This recent bear move got traders spooked enough to buy enough puts to pull my CBOE daily equities call to put ratio (CPRATIO line above) low enough to suggest the market is at or near another type of 'oversold' extreme, which adds to the potential for a rebound.
NASDAQ 100 (NDX) DAILY CHART:
The Nasdaq 100 (NDX) chart has been bearish since forming an 'island top' that I've previously highlighted. The decline maintained strong downside momentum this past week, which by week's end I partly attribute to Apple (AAPL) falling below a key technical support at 326. I've thought for some time that AAPL might be tracing out a large rectangle top. Based on the current chart, NDX rallies look like they may be short-lived; the bearish chart suggests this group of stocks is headed lower still, not withstanding a short-term bounce.
A next technical support is assumed to lie in the area of the prior 2189 intraday low. A decline to mid-March lows in the 2190-2200 area, followed by a rebound, would suggest the possibility of a double bottom. If NDX however falls below 2189-2190, next lower NDX support looks like 2150.
Immediate overhead resistance is in the 2265 area, then around 2300. I anticipate fairly major resistance at 2337 to 2350.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has gone from 'mixed' to increasingly bearish in the past two weeks.
I anticipate a retest of prior lows in the 54-53.7 area. If there is a move to this area, followed by a rebound, this pattern 'fits' with that of a potential double bottom, in the initial stages at least.
Conversely, if the stock pieces 53.7, it suggests potential to extend the decline to the 52.3-52.0 area; if there was an opportunity to buy QQQ in this lower zone, I'd favor it for a trade on a risk to reward basis. Needless to say, I'd also favor covering bearish options trades in the 52 area.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) is now very close to testing its potential to rebound in the zone bounded by prior key lows at 776 and 772. If the index doesn't pause or stop at 776-772, next technical support is in the 740 area.
Betting on RUT hitting 740 looks like a bit of a long shot and that 772-776 may instead end up being the low end of a broad summer trading range. If instead, there's a couple of closes under 772, such a move projects further downside potential of 30 points to around 740. There's further downside potential to 700 if the 740 area is pierced.
Near technical resistance is in the 800-808 area. Above this area, next resistance looks like 832, extending to 840.
GOOD TRADING SUCCESS!