THE BOTTOM LINE:
While, as I wrote last week, topping out action suggested the market wouldn't see new highs anytime soon, this doesn't warrant becoming growling bears. I assess that we're seeing a correction only WITHIN a longer-term uptrend.
Bullish sentiment fell to levels this past week last seen when the S&P 500 (SPX) hit 1100 last August; or, back in June last year, when SPX fell to around 1250. (Supporting the idea what the market will go lower after May.)
Options traders in the aggregate tend to buy puts after the market is already falling or has fallen sharply, NOT for example when its up at a line of prior highs such as the Dow was week before last. I'm not saying that the 'herd' is always wrong, just most of the time! Especially when they don't buy those same puts when the risk to reward equation is much better.
If you want put 'insurance' against a big fall in stock values, better to do it when you can stop out or exit for a small loss. Declines are MUCH more likely in circumstances where the price pattern shows an index or stock hitting resistances, especially after a prior huge advance. I'm talking about not just instances when there's a possible top formation of one type or another, but also when the major indexes are at or above levels representing a 'typical' overbought extreme.
The market started finding support after INDU got down to support in the 12800 area. If you wonder why, you can peruse the 30 Dow weekly charts. 9 INDU stocks continue on a bullish track; almost 1/3rd of the Average. With the exception of some recent selling pressure in HD and PFE (profit taking or minor topping action?), the 9 are AXP, DIS, HD, KFT, KO, PFE, T, TRV, VZ.
As to how low we can go from here, I would note that the Nasdaq Composite (COMP) has already retraced (at 2900) a Fibonacci 38% of its run up from its December 2011 low up to its March high. COMP of course could have more of a retracement than this, such as 50% (to 2822), but in a strong market, like the tech-heavy COMP, retracements of as much as one-half of a big prior advance isn't all that common. You may recall me making several mentions of the fact that the Nas 100 (NDX) reversed lower (to date) after retracing exactly 50% of the massive 2000-2002 bear market decline.
As to the question of how low can we go, my crystal ball isn't exactly clear on this question. I have support levels noted with each index below and I'm not anticipating a break of the second highlighted (lower) 'support' levels. Prices may well chop around for awhile as the market continue to throw off its longer-term overbought condition; e.g., as seen on weekly index charts using the 8 or 13-week Relative Strength Index (RSI) indicator.
Segueing into the topic of oversold readings, we're seeing that already with the 13-day RSI in the major indexes. The daily chart RSI readings are about as low as seen over several instances in the past year; the recent RSI low is a 5th one.
If I was going to adopt an aggressive bullish stance, I'd be looking to do it soon, especially on further weakness. A more cautious approach suggests not trying to buy index calls (for example) on what may be only an initial rebound, since a stronger rally may follow and it's often safer to buy a secondary low. There's definitely the risk that this first cluster of lows is not a 'final' low for this overall correction. And, to keep buyers away, there's this new mantra of sell in May and go away, which is kind of stupid to take to heart, since as soon as EVERYONE believes it, it won't 'work' any more.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart is bearish on a short to intermediate-term basis. The last intraday top at 1415 was under the prior peak. No (downside) reversal was indicated however until SPX, for the second time, pierced its 21-day moving average. If you were also keeping tabs on SPX's hourly chart (not shown here), a Head & Shoulder's top formed as part of the 1415 high. A next top was lower than 1415, making for 2 lower secondary tops sandwiching the middle peak. It's a good idea to follow the hourly and weekly charts in addition to the dailies.
I've noted near support in the 1340 area, and that includes the prior 1343 intraday low. I've highlighted a next potential lower support at 1320. 1320 represents a Fibonacci 38% retracement of up leg from the early-Dec 2011 low to SPX's early-Apr high. This particular retracement is the initial one I look to as a possible stopping point for a correction. The second down leg has carried as far as the first decline, whereas it's sometimes if not often the case that a second downswing is longer than the first. Could happen, doesn't 'have' to'. Stay tuned.
Even if SPX goes on to make a lower low, there's potential for a rebound before that. The low reading on the RSI and similar low on my call to put (CPRATIO) sentiment indicator suggests being cautious about overstaying in puts. The indicators are one thing. There's also the fact that SPX has resisted getting pushed to support at 1340. I'm also cautious about jumping in on the long side here until I see more but its tempting given an 'obvious' place for a stop/exit just below 1340. If 1320 is seen, that's also interesting for calls, with a stop just below 1300.
Near resistance is seen at 1365, then around 1380. Two days of closes above the 21 and 50-day averages would suggest substantial buying was coming in again.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) index chart is bearish short to intermediate term. The second decline has now carried as far as the first. Some symmetry there but the second sell off often carries farther than the first. A rebound to the 627-630 resistance wouldn't be surprising but I don't rate the chances of a bullish break out above 630 as high, at least not yet.
I wrote last week that "I don't see OEX being pushed under 610-609 near-term, at least not for long." And, that "Longer-term we could see 600 retested..." Taking another look at that, I'd also note that 600 (599 to be precise) represents a fibonacci 38% retracement of the late-Nov to April advance. 600 seems like a 'natural' eventual objective. If so, a question is how many are going to sell OEX at 600, when it seems like such a natural or obvious place to be buying it, if only to cover shorts.
Immediately ahead, another dip to 612-610 looks like a buy and 630 a place to sell. At 600 the buy side looks compelling because of good potential for at least a bounce or more and with 595 as a (hopefully) 'limited risk' exit/stop out point.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) has a bearish chart as the last high in the 13295 area makes for well-defined line of resistance. I'd call the pattern a double versus a 'triple' top or a complex double top since the left hand top is a cluster that occurred in a similar time frame, followed by a significant decline. The second top after the prior low forms a second top.
Some time (space) separating two tops is what's associated with a double top. I make a point out of this as double tops are potent formations that are worth shorting most of the time. The indicated risk point (stop out point) is just a bit over the prior high; e.g., at 1335 (Dow 13350) in Dow index puts. (I messed up this number last week in the e-mail but corrected it in the web version.)
I wrote last week that "Bearish sentiment should start to build again if INDU closes below 13000 for an extended time." This is seen big time in the SPX and COMP charts which display my (CPRATIO) 'sentiment' indicator. I also noted that key lower support below 13000 came in around 12800 and that's held up well so far, with much owed to continued bullish action in AXP, DIS, HD, KFT, KO, PFE, T, TRV and VZ. (The HD and PFE weekly charts are showing some selling coming in recently and they've retreated from their recent highs but no reversals are seen.)
Pivotal resistance is seen at 13000 at what was key support (support, once penetrated, 'becoming' subsequent resistance), extending to 13050. A move above the key 21 and 50-day moving averages would be bullish if more than a 1-2 day affair.
Support is suggested in the 12750-12710 area, with next support coming in around 12600. 12530 could represent fairly major support as implied by this level representing a Fibonacci 38% retracement of the advance from the late-Nov/early-Dec lows up to the early-Apr top.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
We've seen to date two somewhat complex 'top' patterns in the Nasdaq indices involving chart (price) gaps, namely what's called in technical analysis parlance an island top pattern. The top variety (there's an island 'bottom' formation also) occurs after a prolonged rally. There's a final upside price gap, then a cluster of highs at or above the price gap. This is then followed by a downside gap, leaving the isolated 'island' top and is a type of exhaustion pattern; i.e., an advance gets 'overextended' and volatile and a significant correction follows. I didn't highlight the two island type tops but I think you can see them below easily enough.
I wrote last week about looking for "...a retest of 2900 support... and "for the 13-day RSI to finally also get to a 'fully' oversold reading again." With both predictions borne out, where to from here? I don't have a lower projection than 2900 near-term but of course this (2900) support may get retested and even pierced; support extends to 2870. 2900 represented a Fibonacci 38% retracement of the Dec 2011 to April 2012 advance. 2822 would be a 50% retracement of COMP's last up leg and is my lowest downside expectation currently; and more for later on rather than anything I anticipate near-term.
Key resistance comes in at 3000, extending to 3020. I'd be surprised to see a rebound carry to above 3000. I wouldn't overstay in Nasdaq related puts. Bellwether Apple (AAPL) could eventually retreat to around 500 (Friday Close: 566) and if this happened I don't envision COMP holding the 2900 area.
The 'oversold' extremes seen in both the 13-day Relative Strength Index (RSI) AND my (CPRATIO) 'sentiment' indicator seen above suggest that at least a short-term bottom could be at hand or is near. These two indicators plus the fact of the 38% retracement discussed above for COMP suggest at a minimum to take put profits; take the money and run as the further downside is probably less near-term anyway, than the rebound potential that exists; e.g., for a rebound to key resistance in the 3000 area.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) Index has completed a second a-b-c (down-up-down) corrective pattern which could mark the end of the decline. Or NOT, assuming the second down leg is of the extended variety where the second downswing 'extends' to more than the first decline, which isn't uncommon.
As I note above with the Nas Composite, Apple Computer (AAPL) is an even more key bellwether for the big cap NDX. I see potential for AAPL to pull back to the $500 area but maybe not soon; whenever, more downside for NDX below 2600 is suggested by such a move for Apple as an ancillary 'indicator' so to speak.
In terms of the RSI oversold extreme seen below and the equally 'oversold' extreme (of a different type) implied by my sentiment model seen above with the COMP chart suggests that further NDX downside of any magnitude is probably limited.
Near support comes in at 2600, extending to recent intraday lows at 2587; next support is at 2575, a prior key low. Near resistance is at the top of the recent downside chart gap at 2680, which also represents resistance implied by the 21-day moving average; next resistance is at 2700. NDX may bounce back and forth between 2600-2590 to 2680-2700 over the next 1-2 weeks before there's any prolonged move out of this range.
The Facebook IPO may well provide general buying interest in NDX in the coming week. I'm unsure when Facebook becomes part of NDX but it will of course; as surely as Mark Zuckerberg will exercise his option to purchase 60 million shares at 6 cents each. Not a bad deal with the stock expecting to start trading somewhere between 28 and $35! Let's see... well, you can do the math but it's a lot of zeros!!
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bearish in its pattern, but looks to have technical support in the 63.5 area, extending to 62.7. Near resistance is at 65 even, then in the 66 area.
Daily trading volume has tapered way off and may mean that the sellers hit with extreme 'fear and loathing' have left the building and taken away the potential for further major selling pressure.
The near-term price range (next 1-2 weeks) I can envision for QQQ is 63 on the downside and 66 on the upside.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart which is bearish could also have formed a 'complex' Head & Shoulder's Top with a 'neckline' in the 784 area. A decisive downside penetration of 784 on a Closing basis, would suggest potential for a sizable further down leg. Absent that and an ability to hold above 778-785 support on an intraday basis, negates 'activation' of an eventual downside target (implied the H&S neckline penetration) to the 720 area.
If Nasdaq is at or near a bottom, RUT will follow and the 780 area will prove to be at least a near-term bottom. In terms of potential support implied by key retracements, at 778 RUT would complete a 38% retracement of its early-Nov to April run up. A 50% retracement of the prior RUT advance would be to 757.
Key near resistance still looks like 805 at the top of a downside price gap and the current intersection of the 21-day average; next resistance then extends to 815 and the 50-day moving average with further resistance coming in around 820.
GOOD TRADING SUCCESS!