The prospects that the market is in a bottoming process is still with us even with the yo-yo volatile price swings. It's also likely that this market will offer more short-term trading opportunities.
I've gone back, in this lighter-volume summer market, to using moving average envelopes as my 'front' technical indicator for the major stock indexes. This because we're in more of a trading range market for which this indicator is superb.
I mostly use moving average envelopes with the stock indexes and only rarely with individual stocks. Especially since the upper and lower envelope lines on indexes tend to be consistently around 3% above or below a Fibonacci 21-day moving average.
The upper and lower envelope lines plot values that are set at some percentage ABOVE and BELOW a particular moving average that is in the middle. Some chart applications don't display the centered moving average, but you can add it as a separate indicator since it's important to see it. It's important to see the centered moving average because the 21-day average often acts as support or resistance.
I went into a comprehensive explanation of the use of 'simple' moving average envelopes (as opposed to Bollinger Bands) in a Trader's Corner article which can be viewed
The S&P 500 (SPX) is shown below with a 21-day moving average and envelope lines relative to this average as a representative example. The upper envelope is set to 'float' 2.5 percent above the 21-day moving average. Why 2.5%, whereas the lower envelope line is set to float 3 percent below the center (21-day) moving average? Simply that 2.5% is the value that's been working to contain rally highs. You can experiment with these values. With the Nasdaq, the particular moving average envelope values that 'contain' most intraday highs and lows, will tend to (either on the upper, lower, or on both lines) be a value of 4% or more.
You'll see an instance in early-May where SPX briefly found support at the average, but after prices fell below the moving average, the average later 'became' resistance on 2 subsequent rallies, as highlighted by the red down arrows. I'll be using moving average envelopes on the daily charts I display today for the major indexes, although I don't use them much on the Russell 2000 index as this indicator 'works' less well with RUT.
The lower envelope line will tend to 'act as' a key support area, although prices may continue to decline ALONG this line so moves to the lower envelope doesn't necessarily mean that a rebound will happen from this area. It does give some parameters to trading. If there is a rally from the lower envelope line, as happened recently, the moving average may be where the rally stops. If a rally breaks through the moving average, I look for further rally potential to or near the upper envelope line.
The foregoing is a sort of 'mechanical' explanation of a key technical model, indicator or study (moving average envelopes) that may be useful in analyzing what will probably continue to be a trading range market in coming weeks. What do I think of the trend ahead is another question?
The most potentially 'telling' chart pattern, aside from the sharp increase in volatility, I see currently is on the hourly index charts. The pattern could be one that's tracing out a rounding bottom, with the key second half (the rising second half of the circular pattern) not yet defined by future market action.
My next charts, of the hourly S&P 500 (SPX) and the Nasdaq Composite (COMP), outline what could be one way price action unfolds; assuming hourly lows stop approximately at or above the price levels I've projected out into the future. Conversely, if prices break below the representative values I've forecast then the projected rounding bottom is a bust as far as a forecasting model. These hourly charts offer a view of a possible bottoming process and the pattern that most stands out to me.
I don't have a perfect chart tool (above) to show a potential rounding bottom (or rounding top) but these charts give an idea of how such a bottom would 'look' as it unfolds.
Given the oversold intermediate-term condition of this market, I doubt that we're going to see another big leg down, without at least some rally attempts as we've seen recently. I usually say trade LESS, but this current market will likely require trading MORE and for shorter-term objectives if you want to participate. The moving average envelopes will provide some useful ideas of the where support and resistance may develop. I'll have more specific discussions on each index next.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is still bearish on a near to intermediate-term basis but the decisive bearish event hasn't happened yet, which would be the index piercing its prior closing low at 1256.8 and I see bottoming potential still ahead. If there's a decisive downside penetration of 1250, another down leg could be underway however. It depends on whether this is new closing low or a final spike down. My lower envelope line suggests potential 'support' at 1245; next support is 1234-1235.
Longer-term chart considerations also suggest key support at 1249-1250 as the long-term weekly up trendline (not shown) now intersects in this area. Major support is assumed to lie at 1173-1175, where SPX bottomed in November 2010.
The index is not quite as oversold as last week as measured by the 13-day RSI. It only took a rebound back up to the 21-day moving average to get traders somewhat bullish again, but of course selling predominated around 1298 and SPX didn't close above the average, which is a bearish element. High bearish sentiment isn't quite the contrarian bullish influence I was seeing last week.
Resistance comes in at 1291, extending to 1298, with next higher resistance noted around 1312. Volatility is certainly up, with the VIX shooting up to 21 by Friday; midmonth the S&P 500 volatility model hit 22.7 as a closing high.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is still bearish, with a key event the inability to get back above its 21-day moving average. In terms of the chart pattern as to future rally potential, the key is what happens if the index again sinks to the area of prior lows in the 564-559 zone. I continue to have the view that further weakness won't be all that pronounced, at least not in the next 1-2 weeks. I'm more realistic this week as to how much sustained rally potential there is in the immediate future, especially ahead of the 4th.
There was a decent-sized on Monday-Tuesday but the telling technical event was the failure for OEX to climb back above its 21-day average. This was the case in a strong, but short-lived rally in late-May.
So, OEX seems to keep getting pulled lately to the bearish envelope line. In a strict trading range market versus markets in STRONG trends (e.g., the first 6 weeks of this year), I would anticipate a rebound. The wrinkle is that markets can and do get overbought OR oversold for prolonged periods. I lean to the view that this market is basing, not setting up for another substantial decline.
I've noted support at 560-559, then at 554, assuming the index again rebounds from intraday lows in this area. 550 is key support. A daily and more especially a weekly close below 550 would suggest an initially break in the long-term up trendline.
By one measure, key near resistance is at 576-577; on my chart I've indicated initial 'resistance' at the current 21-day average at 574. 580 is the next key resistance above that. If there's even a one-day close (better is 2-days) above the 21-day moving average, there's potential for more gains. Any next rally is unlikely to be dramatic in my view.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) of course had a bullish surge this past week in the early going but got beaten back at the 21-day average. I don't think that traders are watching this average all that much (oh yeah, "we're at the 21-day average, let's sell!") but rather that this time period just simply works as a key first test of resistance; or, the first test of pivotal support (on pullbacks).
Nevertheless the hourly chart considerations I wrote above in my initial 'bottom line' commentary above suggest there's potential for a rounding bottom to set up. It's speculative at this point but I'm struck by the bottoming action being at the low point of the circle, where it 'should' be. The rounding bottom or rounding top isn't seen all that much, especially on daily INDEX charts; the patterns are more common on daily equity charts.
INDU remains the least bearish looking chart in that sense that the Average has been holding above ITS prior low, unlike the other indexes that are down and dirty testing prior (mid-March) lows. Actually, none of the major indexes have yet pierced their prior lows, a key thing that hasn't yet tipped the charts fully bearish. A weekly close in the coming week below 11900 would be an initial dip below INDU's longer-term up trendline.
AA, AXP, BAC, CAT, DD, DIS< GE, IBM, INTC, JNJ, JPM, KFT, KO, MCD (if it can pierce a minor double top), MRK, MSFT, PFE, PG, VZ, UTX, WMT, TRV, and T all have potential to rally at current or slightly lower levels. I don't see a lot more near-term downside in many to most of the aforementioned stocks so my view of the Average is not that bearish. Many of the stocks are oversold enough to get a lift on some bullish news. There was some good news (e.g., on Greece & energy costs) this past week, but when in bearish worries, investors don't switch views quickly.
I calculate Dow resistance in the 12100-12126 area, extending to the prior upswing high at 12217, with key resistance at the 12400 level. Technical support is at 11900-11870, then around 11715-11705. Fairly major support should come in at 11600. I'd love to buy DJX at 1160 for at least a short-term bounce but I'd also be surprised to see the Dow that low in the near-term.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
The Nasdaq chart as resumed its bearish look with the recent rally failure. However, if this simply leads to more basing action around 2600 that's a good thing for the bulls as it could establish the low of a trading range. Also, the 'broader' the base, the higher is the rally future rally potential.
As to the high end of that potential price range I generally look for at least a 50% retracement in this kind of pattern; e.g., potential high end of a summer trading range equals half of the 287 point decline to around 2740. I've noted resistance at 2760, which begins in the 2750 area. Rally attempts to the 2740 could succeed easily on a next rebound. So far, we've only seen oversold rebounds fueled much by short-covering, hi-frequency trading chasing short-term momentum, and speculative buying in general but there's still a hunger and allure for tech, as seen in LinkedIn's IPO. Tech stocks, especially internet related, have potential to hit total home runs by doubling or tripling (or more) earnings. I'm anticipating that COMP holds the 2600 area, which is where long-term support trendlines intersect currently.
I've noted COMP support levels at 2600, then 2574 at the lower envelope line, and finally at 2550. 2500 is major support. COMP resistance is noted in the 2700 area which encompasses the 2693 recent rally high. Next resistance begins around 2750 but I've noted 2762 as a pivotal resistance. I could see an eventual price/summer trading range in the Composite between 2800 & 2600.
As with SPX, COMP got oversold in RSI terms (above) just ahead of the first lows made in the 2600 area. It was a type of 'oversold' situation also in that traders kicked up daily equities put activity relative to call volume to well above normal levels. This is visually seen in the sinking CPRATIO up to the week before last; this was followed by a strong surge in bullishness this past week. Traders still are predisposed to be bullish. If the bulls get another fright, my sentiment indicator should fall sharply and be ahead of a next rally.
NASDAQ 100 (NDX) DAILY CHART:
Bearish disappointments ruled this past week and the Nasdaq 100 (NDX) index fell off as sharply as it ran up on Monday-Tuesday. This kind of pattern can be part of a 'base' building process, as lows are established repeatedly in the same area. We'll see on that.
Currently I don't see enough downside momentum here to punch through key technical support at 2200-2180. This doesn't mean it's off to the races again as far as upside potential. The bulls would be doing well right now to pull NDX above its 21-day moving average; even modestly above, but to also hold those gains.
Look for initial, and intermediate-term, support in the 2200-2180 area. In the event this area is pierced, if the LOWER envelope line was again reached, NDX would hit 2159. Fairly major support begins at 2130, extending to 2100.
I've noted resistance at 2261, at my centered moving average, but to encompass the recent 2256 rally high. A key to a bullish stampede would be trading above 2300.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) chart reads of course like the underlying NDX. Each week I try to look at the chart freshly and irrespective of my view of the week before. I still get the same 'message' from this pattern, which is some likelihood that the index is at the low end of a trading range. Lows ahead that sink below 53.5 turns the chart to more bearish pattern. Next support in that case becomes 53. Major support begins at 52.
Initial resistance is at the recent 55.4 intraday high, extending to 55.5, the current 21-day average. 56.0 becomes the next pivotal resistance.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) has this clear cut Head & Shoulder's Top (H&S) pattern and an objective implied by the break of the so-called 'neckline' is 751. This is rule of thumb on the downside 'neckline' break; this is, AFTER the 3 pronged top that's the H&S pattern where a second rally (the head) is higher than the first peak (left shoulder), but with anther dip and a final rally that more or less only equals the first (right shoulder); this is definition of what the Head & Shoulder's is. I don't get overly focused on price targets. The major thing we know of trading benefit is to sell the heck out of a Right Shoulder (RS), not waiting for a deeper fall to 'confirm' direction. That's it.
An equally powerful chart reality is that a potential double bottom is forming and could become the low end of a trading range, which is where I think we are in the Nasdaq. More price action is needed to prove or disprove this picture.
Key near support in RUT is 776-772. If RUT falls decisively falls under 772, there's the aforementioned 751 target based on the outlined H&S top pattern. 740 is highlighted as my lowermost technical 'support' but more broadly it's 740-737 and a key multiyear support (up) trendline intersects there, so I see this area as a pivotal support. A break of this trendline would suggest a more bearish long-term period for the Russell ahead. Recent highs above 860 cap a rally that started in the 350 area in early-2009, a gain of 145%. Our recent top could also be a long-term top.
GOOD TRADING SUCCESS!