A favored bottom pattern I have is seen when index prices rebound after hitting my lower envelope
lines, coupled with an oversold RSI extreme and where bullish sentiment
is slow to come back (up). Add to that where the downside retracement is around 50% (OEX + NDX) to 61.8% (INDU).
This was the second dip under the aforementioned lower envelope
lines I'm using currently. It turned out that the brief dip below the 200-day moving average in the S&P 500 and Nasdaq Composite was only a harbinger of ONE more shot down; whereupon the 200-day average became a support sling-shot so to speak.
Panic bottoms (are there any other kind!) are always a bit hard to judge ahead of time, which I try to do, sometimes of course with greater success than others. Panics usually or often overshoot what you think they will rationally do. After many years of trading and analysis, I still never quite appreciate the extent the final panic and 'final' lows in the market. I never thought that the recent correction was the beginning of a bear market, but at the tail end of it, I had my doubts too.
Still and all, bottoms (at least WITHIN overall bull markets) are 'easier' to time than tops, which can be impossible. As I always say, sell offs tend to as few as a 1-time decision to dump stock; in the case of fund managers, they will tend to raise some cash by a small percent of overall portfolio value; alternatively and often they will lighten up on certain stock sectors and increase holdings in others.
In terms of my initial support-targets, it worked out fairly well. The S&P 100 (OEX) and Nasdaq 100 (NDX) gave up the least as could be anticipated with big cap favorites: At the 579 low, OEX hit my initial support target at 580 and did not have a single day Close below its 200-day average. NDX got to 2443 as an intraday low, versus my initial support-target of 2435.
The other indexes were scattered about in terms of meeting some key technical expectations for a bottom. I had an initial support-target of 1260 in SPX; it got to 1266 this past week. My initial support-target for INDU was 12000; it hit 12035. For COMP my initial support-target was 2700 and it reached 2726 at its recent low.
SPX and COMP each retraced 58% of the last big up leg. (OEX and NDX only 54%). As is frequently the case, the Dow 30 (INDU) performed quite 'technically' since it retraced an exact Fibonacci 61.8% of its late-November to early-May advance and hit an exact 30 (the start of an oversold extreme) in its 8-week Relative Strength Index (RSI).
One way that ALL the major indexes, including the Russell 2000 (RUT), suggested that they were back in an uptrend or at least made a significant bottom, was the fact of all closing the week back above their 21-day moving averages. Speaking of RUT, there was a 'minimum' chart objective implied by its prior Head and Shoulder's top down to 722; RUT made a low in the past week at 729. I'd say that RUT has 'fulfilled' a key downside objective. This (technical analysis) is not rocket science, only an 'art' and general expectations for key patterns.
It's also hard to predict how much chopping around the Market will do in terms of either 'testing' its recent bottom or not. I anticipate that a next dip will hold above the lows already in. The 200-day moving average should also be a general area of support. A sideways move would be a good thing for the bulls as it builds a support base.
On an unrelated subject, Jim Brown mentioned to me that Art Cashin has had quite positive things to say about OIN on CNBC recently. I was at PaineWebber (now UBS) for 7 years where Art always had a terrific morning piece for the Analyst/Trader types like me; actually I was the only Analyst trader hybrid 'type', the rest were EITHER traders OR analysts (or brokers). Whatever, we all loved Art's invariable ending; e.g., On this day in 1943 Congress authorized the withholding tax on payrolls (true for June 9th). To celebrate, become self-employed!
By the way, I haven't been around Art in many years and gave up CNBC for lent :-) years back, but I assume he's well into his 70's. The market savvy that Art shows goes to my theory that being older can be a definite plus in the Market, since by a certain age you've seen it all or mostly so.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) appears to have completed its correction as its popped back up above its 21-day moving average. The 2nd down leg peak to trough to date: 2.3 times its first 65 point decline. If the second down leg is greater than a fibonacci 1.62 of down leg one, the next (fibonacci) expectation for the second downswing is to be at least double the first. SPX retraced 58% of its late-November to early-April advance versus my expectation of about 50%; when it went further, my next expectation was a 62% retracement but only the Dow equaled that.
The pull back under the 200-day moving average was temporary only as was the dip to under my lower moving average envelope line. All these factors plus the 13-day RSI and may call to put ratio or sentiment indicator suggested this market was oversold. A bounce back was in the cards. The RSI in fact bottomed at a higher level than ITS prior low, suggesting bullish price/RSI divergence.
The backdrop was also one of belief. If you believed that stocks were going into a bear market, the aforementioned factors would not have necessarily 'signaled' a bottom. My expectation has been that we were seeing a more or less normal downside correction in a bull market. Only if the retracement was GREATER than 62% or a bit more, namely 66%, would it look differently.
I anticipate near support now at 13000, extending to around 1288 or the intersection of the 200-day moving average, with next lower support back at the prior recent 1266 intraday low.
I've pegged near resistance at the prior 1335 high, with next resistance in the 1360 area. There may be a period of 'base' building as SPX establishes support in the 1300 area, extending to around 1280 but over time I anticipate the market working higher. Given the lighter volumes of summer, there may be a period of backing and filling. Bullish to me also is that my CPRATIO 'sentiment' indicator has risen only moderately.
S&P 100 (OEX) INDEX; DAILY CHART
The big cap S&P 100 (OEX) has regained some bullish footing as it rebounded from the area of its 200-day moving average and Closed above its 21-day moving average. My 580 initial support-target for OEX was equaled at its 579 intraday low within 1 point. OEX (as well at big cap Nasdaq 100) at 54% came closest to retracing a fibonacci 50% of its last big up leg. The recovery after that level of retracement is bullish.
OEX's second down leg was also a bit more than double its first. If the index was going to stand its ground it was 'time' for it to do so to maintain a still-bullish expectation in terms of a second corrective down leg versus the first; assuming this wasn't the start of a major bear move. I didn't think this was where we were and have been thinking correction-only. More on relative 'wave' considerations for the two down legs in my next Trader's Corner tomorrow (Sunday).
There's resistance just overhead at the prior 607 high, with next anticipated resistance in the 620 area.
Near support is highlighted at 590, extending to the 200-day moving average at 583, which is also then quite close to support implied by the recent 579 low.
OEX may take some time to get back into a clear cut bullish trend but I think the worst downside is over.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) completed an exact Fibonacci 61.8% (I often round to 62) retracement of its late-November to early-April advance. There is often just ONE of the major stock indexes that will fulfill a Fibonacci retracement objective so exactly and its telling when one does so. Pullback retracements of 38, 50 and 62% (or a bit more, especially 66%) remain within the bounds of a correction-only versus a bearish round-turn 100% retracement or more, which would suggest a new bear market trend.
INDU nearly reached my initial support-target of 12000 at its intraday low of 12035. I was thinking we'd see the Dow retrace somewhere between 62 and 66%.
While the Dow fell well below its 200-day moving average, it was only a minor dip (again) below the lower moving average 'envelope' line which is another way of measuring an oversold condition. Of course being 'oversold' is NO guarantee that an index will come out of free fall but a number of Dow stocks got into support areas where there was fund buying interest; e.g., AA, BAC, CSCO, HD, IBM, KFT, KO, MCD, MMM, MRK, MSFT, PFE, TRV and XOM. HD hardly corrected actually from its prior strong uptrend and DIS, T, VZ and WMT remained strong through this recent correction.
Support is noted at 12400, then at 12300; finally, back near the prior 12035 intraday low. Near resistance and a bit of tough near-term overhang is at 12600, next in the 12700 area and then finally and especially, around 12800.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) has regained some bullish footing after its recent rebound which came after its second down leg covered approximately double the ground of its first decline (from 3134 to 2946). COMP's second down leg 'c', from 3085 to 2726, was 1.95 times greater than its first downswing. The fact that the two down legs had this type 2 to 1 relationship, as well as seeing COMP rebound quickly from its dip below its 200-day average (as well as FROM my lower 'oversold' envelope line) suggested at a minimum to exit short COMP stocks.
COMP, like SPX, at 58 percent, retraced between 50 and 62% of its last major advance. Retracements less than 2/3rds maintain the potential of a downside correction-only; versus something suggesting a slide into a bear marke. There should be a period of recovery ahead, although it also would be normal to see backing and filling. Bullish sentiment is not rebounding strongly among options traders; in a contrarian sense this is bullish.
Support is suggested at 2800, extending to around 2782 at the top of COMP's recent upside price gap. Support at the 200-day moving average should also be noted, extending to the recent 2726 intraday low.
Resistance can be initially anticipated at the line of recent highs at 2873-2882, with resistance extending to 2900 even; next resistance is suggested at 2946-2950.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) Index has probably completed its sizable downside correction that carried to around 2450. Last week I noted an initial support-target of 2435 and the intraday low was 2443. It was telling also that NDX held ABOVE its 200-day moving average and didn't again dip to below my lower 'oversold' moving average envelope line (at 4% under NDX's 21-day moving average).
NDX (like the big-cap OEX) completed just over half/50% of its late-November to late-March advance. The strong rally after this much of a retracement suggests NDX's correction may be over.
A rebound in key Nasdaq bellwether AAPL (Apple Computer) from the $550 area was telling for the recovery rally in NDX. NDX's Close back above its 21-day moving average also suggests that the slide may be behind us. That said there's still resistance around 2570 to be overcome; next resistance is at 2630-2635 to 2650.
Near support is at 2500, extending to 2450. Once we see some 'base-building' type back and forth action I'll be more inclined to buy dips to and under 2500 support. 2500-2450 could be a 'sweet spot' to do some buying of calls but short-covering and bargain hunting buying may carry into next week. I thought NDX might fall to the low end of its broad weekly uptrend channel (not shown) at 2400; this major up trendline may still be tested later, but at a higher level. Stay tuned on that.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has experienced the same rally as the underlying NDX index of course and on its 'typical' low volume. The volume pattern with the stock is that big volume comes out when key support(s) are broken; otherwise, not so much.
I've noted resistance this week at 63.0, then at 64. Near support looks like 61.25, then back in the 60 area. On the longer-term weekly chart (not shown here), I was anticipating major support closer to 59-58.9. I wouldn't be surprised to see some sideways movement but not much further upside. Lastly, we may see the Q's dip under 60 on a further instance for a final low. We're not in a strong seasonal time for big gains.
RUSSELL 2000 (RUT); DAILY CHART:
My 'minimum' downside target on the Russell 2000 (RUT) based on its Head and Shoulder's top pattern was to the 722 area. There's nothing that says this number 'should' have been reached or we can't trust the recent 729 low. I suggest now watching to see if RUT can overcome potentially TOUGH resistance in the 785 area. If it can't for a time, we may still see another downswing that carries below 730.
I have noted near support at 750. What bothers me as I say is the sizable supply overhang suggested by the triple top pattern that makes up the Head and Shoulder's formation.
It may be hard for the small to mid-cap Russell index to attract the kind of buying that will churn through resistance anytime soon. Resistance is at 775-778, then at the aforementioned 785 area.
RUT doesn't often fall to oversold RSI readings (see above) at or below 30 on a 13-day basis but it did on this last downswing and then the RSI made a higher low this past week on a lower price, setting up the same bullish price/RSI divergence seen with the other major indexes. This was likely a good 'signal' to exit RUT puts but whether the index has all that much upside from here is the question that remains.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
1. Technical support or areas of likely buying interest are highlighted with green up arrows.
2. Resistance or areas of likely selling interest are notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I favor buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment. There's a bottom of the chart display of the CBOE daily call to put volume ratio line for equities-only options (CPRATIO) on the S&P 500 (SPX) and the Nasdaq Composite (COMP) daily charts. However, this indicator pertains to the market as a whole, not just SPX or COMP. I divide calls BY puts rather than the reverse (i.e., the more common put/call ratio). In my indicator a LOW reading tends to be bullish and a HIGH reading tends to be bearish, as with overbought/oversold indicators.
Any trading bias I have or suggestions I make are based on Index levels, not a specific option (month and strike price) with a suggested entry price for that option. My outlook most often focuses on the intermediate-term trend (next 2-3 or more weeks) rather than just the next several days relating to the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades, where a defined risk or trade-exit point would equal just 1/3 or LESS of an index price target; e.g., a favorable risk to reward ratio would be 1 to 3, 1:4, 1:5, etc.
I favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would be the case with far out of the money options; this kind of analysis/risk to reward expectation helps in not overtrading an account such as by loading up on inexpensive calls or puts. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.