THE BOTTOM LINE:
The Dow Industrials (INDU) and the Dow Transports (TRAN) each 'confirmed' each other at new weekly closing lows in September but rebounded. Another INDU weekly Close below 10700 AND 4189 in TRAN would suggest bear market possibilities. Tending to 'confirm' a major Bear Market in terms of Dow Theory would involve the slide continuing to a weekly Close below 9686 in the Industrials and 3932 in the Transportation Average. The foregoing levels give some milestones as to where we are in the US Market. Lots of worries about a slowing global economy but which is not yet upon us in the United States.
I've only recently finally realized how much damage can be done by doing away (in 2007) with the uptick rule which didn't allow shorting without a prior plus trade. Now its cowboy rules as big players can just keep shorting stock on the way down, like the commodities markets. They can do so with impunity as in a fearful situation they know buyers are mostly going to stand aside. I think of this development as the "commoditization" of the stock market. Bad deal, bad outcome.
As options traders of course we can benefit from this by getting more oriented toward adopting bearish strategies when upside price momentum falters. There is a bias toward jumping in when prices are going up, less in positioning yourself for a decline. I'm an example as I've made more money in bull markets, helped along by the good feeling of bull market trends reflecting good times and high hopes. I'm working on my bias to be more comfortable in index calls than in puts. As long as the short-sellers are going to be able to push prices down fast and furiously without limitations I'm making friends with my bear instincts.
I thought that the retracement of the October advance would be AT LEAST 50%, which we're passed now. The Dow has retraced 56% but the broader S&P has given back a bit more than a Fibonacci 62% of the October advance. The Nasdaq Composite has retraced just over 2/3rds of its prior advance. COMP could retrace 3/4ths of its October upswing; or ALL of it, for a 100% retracement. If the October lows are pierced than the technical picture suggests potential for a bear market.
Bullish sentiment has NOT yet gotten so low among options traders to suggest that there's an extreme bearish outlook or an 'oversold' market in that sense. There seems to be a complacency that the market will stabilize and soon find a bottom that keeps me from looking just yet for a place to exit puts.
The market is getting to an oversold extreme in terms of indicators like the RSI and MACD and that suggests being alert to rebound potential. I'm looking for a limited rebound if that. Investor types are not enticed by the current market and most likely have the opinion that stock market odds are casino like, tilted in the 'house's' favor. They are probably right given how little thought there's been to what's good for the market as opposed to how much can we deregulate.
As to Europe being able to keep the Euro going and having lived and worked there in the 90's, I don't underestimate the ability for the different Eurozone countries to hang together in a crisis. Still, the system of a common currency without a strong central bank seems inherently problematic.
OTHER (INDUSTRY) GROUP INDEXES:
The CBOE Oil Index (OIX) especially took a nose dive. Oil prices hitting a $100 a barrel seemed totally crazy with Libya coming back on line and with sluggish current demand. China and India aren't going to put millions more in cars if we head again into global recession.
I take some perverse pleasure from the continued slide in the Philly Gold & Silver Index (XAU) just because the gold bulls tend to be convinced that gold can ONLY keep going up. The companies that mine it and refine it aren't quite reflecting that outlook.
The CBOE S&P Bank sector Index (BIX) looks like it could retest its 2009 lows if the Index sinks much lower than its latest weekly close at 112.8. If Bank of America keeps falling (latest weekly Close was 5.17) maybe it'll get cut from the Dow Average. I can't fathom what financial company or bank stock would replace BAC (maybe if they clone TRV!), at least that's holding up.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) continues bearish in its pattern although SPX has retraced 'enough' to suggest that a short-covering rally could take hold. Maybe one more shot down to get the index completely oversold. I estimate support in the index in the 1147-1158 zone, but if prices keep plunging, SPX can fall to 1120 next then still lower, even a retest of the 1075 early-October intraday low. Back to back closes below 1100 will look especially bearish.
Resistance comes in at 1200 and extends to 1220. My guess is that SPX will see 1120 before it sees 1220.
The RSI indicator suggests that the S&P is nearing an oversold extreme but it can go lower still without suggesting that a rebound is just around the corner. Bullish sentiment is not low enough to suggest that this decline is nearly over. When equity puts are being bought in greater numbers is when I'd like to surrender mine.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart, like the S&P 500, continues bearish in its pattern and like the overall market appears to be in free fall. Stay tuned for this coming week and a fuller contingent of players to see if buyers come back in. 520 in OEX looks like it can bring in buyers but maybe 500, or dips under 500 is the 'magic' number to bring in short-covering and speculative buying.
Resistance is in the 540-550 price zone. One thing to watch for is an key reversal; i.e., prices make a decisive new (intraday) low, followed by a very strong rebound within the same day.
The index is already just about as far under its 21-day moving average as occurred at last month's bottom. There's no magic in that except that the major indexes do have a tendency to rebound from these kinds of extremes.
OEX, reflecting a smaller number of stocks than SPX, has reached what is a 'typical' oversold extreme area in terms of the 13-day Relative Strength Index (RSI); where you want to be thinking of exiting bearish strategies. Of course the market will go where it will. Still, the odds of a good-sized rebound get greater the longer that prices get pushed under extremes such as represented by my lower (moving average) envelope line.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) Average has gone from somewhat 'mixed' (its trend not being clear cut) to bearish in the past week. As Charles Dow wrote back in his day, a falling tide lowers ALL boats; sooner or later. There became too many of the 30 stocks that started breaking down, even those that had previously seemed to be bucking the overall downtrend; e.g., BA, CAT, CSCO, CVX, HD, DIS, IBM, KFT, INTC, MCD, MRK, WMT, and TRV.
Key near support in INDU is in the 11028-11119 zone, representing the 62 to 66% retracement levels. Psychologically, the key media-crowed level will be a break below 11000. 10800 is a more key technical level that ought to hold up as support.
Normally, I'd expect INDU to find support in the low-11000 area, but this market has been in free fall this past week, although on relatively low volume. Low volume doesn't make your losses less if you are holding these stocks but the fuller test of potential support should be found in the coming week with all players on deck. If the market is waiting for dramatic new steps coming out of Europe for a bullish turnaround it looks like furgettabotit!
On the upside, key resistance is at 11600, extending to 11700. If the Dow Closes above 11600 and then above 11700, the next pivotal resistance is 11800. 10800 looks more likely before 11800 is seen. The Dow is at the beginnings of an oversold RSI. Don't get more bearish due to the absence of an immediate rally, assuming prices stabilize. The Dow Index may be a best rebound play.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) remains bearish and prices accelerated on the downside this past week. The coming week should tell the story in how far this down leg will carry. I'd normally anticipate no lower than 2400 or so, then some kind of rally. In this very fearful market however, 2350 to 2300 may get tested as support. I don't anticipate more than 2-3 days where COMP trades BELOW the 7% lower trading band; i.e., prices that are 7% or more below the ('center') 21-day moving average. After that I'll be closing watching for a rebound.
Near resistance is at 2500, but more key resistance is a bit higher, at 2550 to 2600. A Close over 2600 would be a surprise to me if it lasted more than a day or two.
COMP could get more oversold than it is and bullish sentiment could certainly fall further. It doesn't look to me that there's enough bearishness to suggest the seeds of the opposite taking hold. In this market I'd anticipate seeing my call to put ratio dip to and maybe under 1.0; i.e., CBOE daily equities put volume equals (or slightly exceeds) call volume for a day or more.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) is bearish and prices could get to the 2100 area. I didn't highlight 2100 as anticipated 'support'. It's more that this area would put the Index at 'enough' of an extreme to bring on a short-covering rally. I also assume that if NDX starts falling below the 75% (3/4ths) retracement level at 2135, there's some potential for a retest of the prior extreme (intraday) low in the 2040 area, making for a round-turn 100% retracement of its prior advance.
Resistance is apparent at 2200, extending to the low end of the recent downside price gap at 2227. 2300 is the next key resistance area and one that I'd anticipate would be a tough area to churn through for the Nas 100, offering a promising area to re-short the index; due to a favorable risk to reward on the trade. If NDX held above 2300, the chart starts to look like there's some further upside potential from there.
As a bellwether for NDX, I'm looking at $360 as a key support for Apple Corp (AAPL). If AAPL starts falling below this level, I don't look for NDX to mount a rally in the face of that and without a like rebound in this key stock.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish like the underlying index. I've pegged next potential support in the tracking stock for the 52.3 area. Support should be found in the 53 to 52 area unless QQQ is headed for a retest of support that surfaced during the lows made last month between 51 and 50. 50 should be a major support if reached.
I'm anticipating considerable short-covering buying in the 50-51 price zone if reached. Dips to and under 51.0 would prompt me to cover short positions in the stock. Why be greedy if you shorted or bought puts when the stock failed last on rally attempts to above 58. Take the money and run!
Would I buy the stock in the 50 area? Yes, risking to 49 even on an exiting sell stop. I always liked buying the index on an unleveraged basis since you won't (usually) get too hurt if using stops on your holdings; a conservative play for a relatively high-Beta group of stocks. I love tech stocks anyway and have since IBM was a major bellwether stock for the S&P.
Normally, volume trends tell us little about a next move but the fact that volume has dried up (relatively) on this last shot down, suggests that strong hands are not letting go of the stock in any wholesale way as we get into the low-50 area.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has succumbed to the weakness in the Nasdaq this past week, whereas the Russell stocks were holding up a bit better before. 660 looks like a next target and RUT could sink lower still, such as to 640. 600 should be fairly major support. The index got there before on the tail end of panic selling. The pattern now looks similar; a panic selling plunge that doesn't look over.
Key resistance is in the 700 area, extending to around 720 where there should be an ample supply overhang with plenty of RUT stocks for sale if you want to bid in this area.
GOOD TRADING SUCCESS!