THE BOTTOM LINE:
The S&P, Dow and Nasdaq indices held at or above their prior lows and then worked higher, setting up minor double bottoms. The indexes could now have a period of back and forth choppy action before they're in a position to mount a sustained rally.
It was apparent from the charts that the low-1100 area in SPX and the low-2300 area in the Nasdaq Composite (COMP) were 'must hold' areas for the bulls. It was unlikely that a market as oversold as this one got that there would be a sizable further down leg, but with the climate of fear coming into this past week, it was easy to imagine a further meltdown.
Psychologically, fear and panic tend to be signature events that get quite extreme at a bottom. I am assuming that a bottom is in place but 1125-1100 in SPX and 2330-2300 in COMP continue to be the must hold areas for the bulls, especially on a daily and weekly chart Closing basis.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The chart turned from bearish to one with possible bottoming action. The intermediate-term trend is down, the long-term trend up. Sooner or later a trend will resolve (or reverse) in the direction of the major or primary trend.
A 'V' type bottom went by the wayside, but bullish action is seen in SPX's possible double bottom. It would have been a signature event if SPX had had a decisive downside penetration of 1100, given the oversold extreme seen on both a daily and weekly chart (not shown) perspective. I put some stock in the fact that the retracement of the July (2010) to May advance of between 2/3rds and 3/4ths of it, followed by a rebound, as suggesting that it was not going to be a 100% retracement to retest SPX 1010.
SPX is again trading within my 4% moving average envelope lines and common enough, to find initial recent resistance at the 21-day centered moving average. The upper and lower envelope values, give some idea of a possible trading range ahead, assuming of course that volatility continues to damp down.
I have no trading recommendations given how the market is still unsettled. Longer-term I see the major indexes rebounding further, but after such a shock as we've had, this could be a relatively slow back and forth process. Tough action if you buy calls, perhaps better if you trade based on an expectation of a range-bound trade in the coming 2-3 weeks; e.g., an expected maximum price range of 1100 to 1250-1260. This later area was the major 'break down' point and there could be a sizable overhang of stock in this area.
I've noted resistance at 1200, with fairly major resistance around 1260. Pivotal technical support is seen in the 1120 to 1100 area.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has turned from a straight bearish pattern to one suggesting potential bottoming action given the minor double bottom in the 508 area. If you're looking to trade this market, it's tricky except that those with bearish positions would have been wise to exit given the 3-days of lows in the same area. You often don't get 3-days of similar highs that 'prove' a tradable top so to speak, or strongly imply a bottom.
As with the S&P 500 there may be a sizable supply overhang in OEX in the 560-565 area that may keep a lid on a further sustained advance. Stay tuned on that but investors are starting to realize, like Warren Buffet, that there are some stocks worth buying at current levels.
508 is near support, with further support in the 500 area, extending to 480.
I've noted next resistance (with my usual red down arrows) at 543-545, with more major resistance coming in at 562-567.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) chart shows the same potential bottoming action as the other indexes. With the Dow we're seeing a little bit of a 'stair-step' action as each downswing low after the initial bottom around 10600 has been a stair step higher. As with the others, initial resistance came in at the 21-day moving average. This average so often acts as a 'litmus test', after a trend reversal, as to the ability for the index to resume its prior trend.
I anticipate a struggle for the Dow in the near-term to sustain rallies above 11400-11450, although INDU could get back to the 11500 resistance area, for how long is the question. If INDU not only pierces 11400 but subsequently finds support on pullbacks to this same 1400 area, such action suggests basing action that could 'support' a next up leg. One that might reach what I think will be the toughest supply overhang (lots for sale there!) in the 11800-12000 price zone.
On the bearish side, if initial support at 10800 gives way, 10600 may get retested. If the Dow can't hold above 11000, I start thinking that the 10000 area might be seen again. Recall that the current advance began last summer (early-July) when INDU traded down to near 9600 so testing 10000 again can't be ruled out. Most of the KNOWN bearish possibilities for the economy, Europe, etc. are now discounted or priced into the market. It's those (currently) unknown jolts that are a killer!
Here's my take on 12 stocks in the Dow that most look like they could continue to have some gains: AXP, BA, CSCO, HD, IBM, JNJ, KFT, KO, MCD, MSFT, T, and WMT.
There are other Dow stocks that could rally some more but mostly just seem capable of following the direction of the stronger stocks; e.g., AA, CAT, GE, DD, DIS, INTC, MMM, and UTX.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart has been bearish, but with possible 'W' bottom that's formed. A resulting double bottom formation is based on two (down) swing lows at the same level. It's a minor double bottom. Potential 'major' double bottoms, or tops, are thought to form when there's many weeks or months separating the prior extremes, rather than days separating two lows as is the case here. Still, there were two distinct downswings and two distinct lows at the same level. This should have been enough evidence to get traders out of, or to partly exit, bearish positions.
COMP is back trading between 5% envelope bands; i.e., lower and upper lines that adjust each day to a value that is 5 percent below and 5 percent above COMP's 21-day moving average. I use this simple study as a way to define so to speak the index's most common price range. In extremes like panic selling, values temporarily fall outside these envelopes but prices and the average and the resulting 'envelopes' will converge again.
I'm anticipating a 2350 to 2600 price range ahead for COMP. I doubt COMP's near-term potential to trade above 2600. On the downside, there's the possibility of another bearish stampede, maybe a test of 2300. I mostly think that we've seen the lows already for the current decline. The first low has been RE-tested and held which suggests bottoming action.
Support is noted at the double bottom low at 2337, then at 2250. Near resistance, looks like 2500, with a next higher resistance zone at 2550 to 2600.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) index, which had been in bearish free fall, rebounded after a second low was reached in the 2035 area. I assume the second low is a 'final' low for the steep August decline. If the downside risk is perhaps not lower than 2035, what's the upside?
I tend to use the 21-day moving average as a barometer of a next move. A further rally to above this key average (currently at 2174), assuming support is also found on subsequent pullbacks to the average, suggests upside potential to the 2250 area, perhaps to 2300 again, where the upper (5%) envelope line is headed.
Below 2035, I've highlighted 2000 as support and would further note it's what I think would be a major support. Am I expecting that kind of further downside, no. Do I prepare for that possibility, yes.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish but with potential for a bottom in the second downswing low being equal to the first. We saw good QQQ buying interest back in the $50 area, as anticipated. Only if the 50 level gave way was I looking for further downside potential to the 48.6 area. Currently, I've noted 'support' (below 50) at 48.6.
Resistance begins in the 54 area and I've highlighted 54.3 as the 'initial' resistance but should also make mention again of the relative importance of the Q's trading above the 21-day moving average, currently intersecting at 53.4. I've also highlighted the 56 even level as a possible target or uppermost projected resistance.
It was interesting to see daily trading volume moderate on the second recent sell off relative to the tail end of first decline to the 50 area. This suggests that many who were spooked by the recent market turmoil have already exited, leaving as they say this stock in 'stronger' hands; e.g., more long-term investor types.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) is bearish in its pattern except that the index has the same 'W' bottom formation as the other major indexes, especially the Nasdaq indices. RUT sold off the most relative to how much it retraced (81%) of its major advance from RUT's (double bottom) low at 588 from July 2010, up to its early-May intraday high at 868.
On the bullish side, RUT has had now 3 weekly lows in the same area; i.e., at 640, 650 and 647. Moreover, weekly oversold indicators like the 8-week RSI (not shown) got as low as it did when RUT made a major bottom in the 343 area at the end of the 2007-2009 bear market. This type of indicator-related event is not conclusive for a bottom compared to price action, but we have both a potential double bottom and an extremely oversold group of stocks.
I'm betting on some more upside. In this environment, there should be further bouts of weakness if you were looking to buy dips. A close below the 650-640 zone would be bearish if not just a single day thing. Upside potential looks governed by the ability for RUT to climb above 700-715. If RUT can manage this, there's ultimate upside potential back to the 770 area, which was a significant 'breakdown' point where there's probably substantial selling potential.
GOOD TRADING SUCCESS!