THE BOTTOM LINE:
Believe it or not, based on the how much the major market indexes gave back of the late-August 2010 to early May 2011 advance, the retracements into this past week were fairly 'normal'. The way the lows were made wasn't so normal as we witnessed one of those panic type sell offs and an over the cliff waterfall type decline.
I wrote a Trader's Corner article published yesterday (8/12/11) that is somewhat of a companion piece to this one in that I showed how the lead S&P and Nasdaq indices (SPX and COMP) didn't do much more than fulfill downside objectives implied by weekly chart Head & Shoulder's Top formations.
The retracements of the August 2010 to May 2011 advances have to date been mostly within the bounds of what is a normal percentage 'retracement' and NOT a major trend reversal. The intermediate-term trend did reverse lower of course. I'm sure you feel better knowing that the charts don't look like the end of the world exactly, while you probably felt the market looked like a gut wrenching train wreck.
Regarding the aforementioned (Trader's Corner) article of yesterday: if you didn't peruse it and want to, click on this LINK.
I mentioned last week that the decline in the S&P 500 (SPX) from late-April to early-July of last year, from intraday peak (1220) to intraday low (1010) ran 210 points. The SPX correction this year ran to 254 points. The difference in point terms wasn't that much more on this last sell off go round, but it came faster and the speed of these things are scary. If you can keep a level head and some perspective, don't neglect bearish strategies; those that are successfully executed result in fast and vast profits.
Following the sharp upward spikes in the CBOE S&P Volatility Index (VIX) COUPLED with price action, offered a decent guide to where lows have been made in 3 prior sell offs as highlighted in my first chart.
To recap what I said in my companion article: The first instance of a tradable bottom occurred in SPX in March per example #1. The index bottomed around 1260. There was no particular 'confirming' bottoming action except that that SPX pierced its minor down trendline. With the upward spike in VIX and prices piercing the down trendline, there was good reason to bet on a bottom.
Example #2 provided more to go on in terms of seeing a bottom form since the 1260 low formed a potential double bottom. The subsequent upside move above the minor down trendline was confirming. The peak in VIX was confirming a possible bottom as was price action; VIX peaks are not based on some absolute scale (e.g., as with RSI which has 'defined' extremes) but relative to the VIX pattern prior to the most recent upward spike.
Our most recent VIX spike (example #3) was VERY extreme of course. On and after the spike up to 48 on 8/8, there were lows made in the 1120 area that suggested bottoming type action.
Where do we go from here after the week from purgatory?
Sometimes there's a fast recovery, but other times there's a period of base building and choppy back and fort action for a period of a week or two (or three), but not usually NEW lows.
I don't suggest loading up on index calls but on a risk to reward basis, I suggest cautious buying on further bouts of weakness. You may feel that 'risk' is (OMG!) another 500 point Dow decline but I've never seen such a new down leg with stocks this oversold. The market may not spring back to life but in my opinion the further downside risk looks to be limited.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The chart is bearish but there's a possible or likely 'V' type bottom that has formed. There's a tendency for stocks to come back to their mean as they say. Just so with the major stock indexes as they don't tend to continue to trade at or under prior (moving average) envelope values UNLESS the market is in or going into a bear market and I don't see that in our current situation.
A note on my highlighted support levels: The 1128 to 1146 levels represent 62 and 66% retracements of the July 2010 to early May (2011) advance. 1120-1125 is based on support/buying interest evident on the hourly charts (not shown). 1100 represented a 75% retracement of the prior major advance. In some very volatile markets, there's more than a 2/3rds retracement and there's a retracement equal to 3/4ths of the prior advance that doesn't turn into a full blown retest of the prior low(s).
I anticipate resistance coming in at 1200, then up at the 21-day moving average, currently intersecting at 1261.
OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'
Needless to say, the market got extremely oversold based on the 13-day Relative Strength Index (RSI) seen above. The daily chart RSI in SPX got down to a low of 14. The 8-week RSI (not shown here) closed the week at 26. It's fairly rare for the weekly model to dip under 30 and so has also gotten to what I would characterize as 'fully' oversold.
My market sentiment model finally got to an 'oversold' level of extreme bearishness this past week. Prior to this, my CPRATIO reflected what I believe was considerable complacency stemming from the many months of a rising trend. I found myself believing, prior to last week that the market was just in a 'normal' correction and support would develop again in the SPX 1250 area. NOT!
S&P 100 (OEX) INDEX; DAILY CHART
I will be repeating myself to say that the S&P 100 (OEX) chart turned bearish after the index formed a double top at 603. I pointed this out at the time but didn't expect the rout that followed. If OEX had a weekly close below 463 the long-term trend would turn bearish as well.
OEX retraced nearly 3/4ths of its last major advance but on a weekly closing basis has given back closer to one-half or 50% of the prior (July 2010 to May 2011) advance. A 50% retracement is closer to a 'normal' correction within a still-bullish trend.
I anticipate that major support is at 500 and won't get pierced again, especially not on a closing basis. Support is also noted at 505-510 which is where buying was coming in over recent days.
I've noted resistance (at the red down arrow) at 550, then in the 563-567 area. The 'centered' 21-day moving average tends to act alternatively as support or as resistance depending on the how goes the short to intermediate-term trend.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow has a bearish chart, after it too (along with OEX) formed a double top. Double tops are extremely simple, but also extremely potent as an indicator of an impending reversal. 'Confirmation' of such a top comes when the prior downswing low is penetrated. This doesn't of course predict the severity of a further correction or drop. The Head & Shoulder's Top that got traced out on the weekly OEX chart (shown in my companion Trader's Corner article), did forecast a significant decline.
The few Dow stocks still even trading above their 200-day averages are only 5 in number: IBM, JNJ, KFT, KO, and MCD. The other 25 Dow stocks are generally quite oversold, as is apparent with the INDU average reflected by its 13-day RSI dipping well below 30 early in the past week.
Near support is at 11000. I've noted lower support in the 10716 to 10873 area, where buying interest was showing up along with these levels representing the fibonacci 62 percent and 66% retracements of the major advance dating from July of last year into the May top.
I've calculated resistance as in the 11550 area, then at 11875, extending to 12000. 12000 may prove to be tough resistance for a while, assuming this level is challenged in the weeks ahead as I think it will be.
As far as any trading suggestion, such as buying Dow index calls on a dip and probing for a bottom, I'd rather buy more or less at the money (ATM) calls on the 5 Dow stocks noted above as still trading above their 200-day averages.
NASDAQ COMPOSITE (COMP) INDEX; WEEKLY AND DAILY CHARTS:
The Nasdaq Composite (COMP) weekly chart broke down after making an approximate double top in July. The index has recovered some but it may be a while before it can muster a prolonged rally again. FEAR, rather than complacency or greed has finally come into the hearts and minds of traders and investors.
Support was found in the key 62-66% retracement zone based on weekly chart considerations as highlighted on the daily chart below. Support is noted at 2374, then in the 2434 area.
Resistance is seen around 2570, then at the 21-day moving average, currently at 2680.
OVERBOUGHT/OVERSOLD AND BULLISH/BEARISH 'SENTIMENT'
COMP got extremely oversold based on the 13-day Relative Strength Index (RSI) seen above. The daily chart RSI in for COMP got to a low of 18. The 8-week RSI (not shown here) closed the week at 31 in COMP. The weekly COMP was a bit less oversold at week's end than it was at the bottom of the mid-June correction when weekly RSI hit 30. RSI is based on the Close, although the indicator is usually set to update every 'tick' AS IF the 'last' tick was the closing level. At or near 30 is 'fully' oversold on a weekly chart basis with 'length' set to 8.
My market sentiment model finally got to an 'oversold' level of extreme bearishness this past week. Prior to this, my CPRATIO reflected what I believe was considerable complacency stemming from the many months of a rising trend. I found myself believing, prior to last week that the market was just in a 'normal' correction and support would develop again in COMP around 2600.
NASDAQ 100 (NDX); DAILY CHART:
After the Nasdaq 100 (NDX) index weekly chart broke trendline support at 2380, an extension of that trendline then acted as resistance on a subsequent rebound to it. Prices accelerated to the downside from there. The other noteworthy technical feature was the bearish price/RSI divergence as RSI didn't also go to a new high and 'confirm' the higher relative high in the index. These things pointed to a decline but it was easy to think that a decline would stop at a higher low than the double bottom that formed over several months; first at 2189, then at 2181.
I highlighted what may continue to offer support in the 2070 to 2090 area. I don't anticipate the 2035 intraday low will get pierced.
NDX has rebounded to what was prior support in the 2180-2200 which may now 'act as' resistance for a time anyway. It seems unlikely that NDX is going to come roaring back, but if there's a decisive upside penetration of 2200, 2300 looks to be a target, the level of the current 21-day moving average.
While it's been a pattern for this index to have solid rallies after getting oversold and reaching the area represented by the lower 5% envelope line (i.e., 5% under the centered moving average), it may not be the case this time. Technically, there's no reason why another substantial rally wouldn't occur but fundamentally the market got pretty rattled and real people spending real money have to be willing to bid stocks up again.
NDX is in the best position to rally judging by it having the shallowest retracement to date of the major indexes. NDX, from intraday top to intraday low, retraced around 50%, while on a weekly closing basis, it only has given back (retraced) a scant 1/3 of its last major advance.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has of course the same bearish chart pattern as the underlying Nas 100 index. QQQ found support in the 50 area, so it gave back 10 points from the top around 60 for a 16% decline from its peak.
Huge volume came out on the decline; enough so to probably represent a so-called 'selling climax'.
I've pegged near support at 52.0, then around 50.7, with major support in the 50.0 area.
Very near resistance looks to be in the prior support zone around 53.6-54 as support, once penetrated, 'becomes' subsequent resistance. The next overhead resistance area is at 56.0, extending to 56.4.
RUSSELL 2000 (RUT); WEEKLY AND DAILY CHARTS:
The Russell 2000 (RUT) index broke down badly like the rest of the market but the lows may be in and for some time to come. At 645, RUT had retraced 3/4ths of its last major advance. However, it should also be noted that if the index pierces 645-640 again, it could retest the intraday lows of last summer in the 588 area.
Near support is at 672, extending to 660. The prior 640 low should offer some good support should this area be retested.
Immediate overhead resistance comes in at 710, then at 727, and finally, most decisively for an upside turnaround, at the 21-day moving average, currently at 772.
I'd rather buy dips then sell rallies in an oversold market but I mostly want to see things settle down into a more normal market acting on stock underpinnings like earnings prospects rather than speculate on what terrible things are happening in Europe or what terrible things the Standard & Poor's Corp is suggesting about the 'full faith and credit' of the United States. Seems their downgrade of Japan back when didn't exactly hurt that country!
GOOD TRADING SUCCESS!