THE BOTTOM LINE:
As I wrote Thursday (8/22) in my Trader's Corner article
"Assessing Bottom Possibilities",
I saw good technical reasons for the major indexes having reached a tradable bottom. Among those reasons were rebounds from a key support trendline (SPX), the amount of 'retracement' of the prior advance and major indexes having hit oversold extremes.
Since this analysis was in some detail and was ahead of Friday's rally extension, this article may be of interest if not seen already.
Since there is almost always a Market bellwether, which is one index moving ahead of the others or leading the others to a small or large extent, I tend to focus on that 'leader' index when looking for a bottom; in this case the Nasdaq and to some degree the Russell 2000 were leading. When looking for a top it's sometimes the case to look for the weaker/weakest index; in the case of the recent top, we could look to the Dow 30's (INDU) rounding top formation and the Head and Shoulder's top formation in the S&P 500 (SPX) and 100 (OEX). Both these patterns were seen in especially good detail on hourly charts.
Back to the lead example of the Nasdaq and taking a look at the Nas 100 (NDX) which offers active options of course. And speaking of HOURLY charts, I lead off with the NDX hourly chart.
Firstly, NDX made a distinct double top in the 3145 area', along with a 'failure' of relative strength on the subsequent second top; i.e., highlighted as a bearish price/RSI divergence. Given these NDX chart/indicator aspects, I suppose I stand corrected in saying that we could ONLY see a potential top forming in the S&P and Dow. Better to say that we could 'BEST' see a top forming further ahead of the downside price gap that occurred in NDX. But, I'm focused on how the limited nature of the tech pullback could be assessed.
NDX only fell a short way back into its prior support zone as seen on the chart. A line of support the was traced out in the 3070 area. This was followed by a decisive upside penetration of previous resistance at 3100. Or, at least an INITIAL upside move above that area of congestion. There were other signs of a bottom that came on the daily charts, which you'll see further along on the various daily charts I present.
I think a significant bottom is in place. This is not to say that there won't be either some backing and filling OR a re-test of the prior lows, etc. However, very often in a bull market bottoms are made suddenly and you don't get much of a second chance to adopt bullish strategies (and exit bearish ones). This is unlike the dynamic we often see at tops whereby double tops are not uncommon, top patterns get traced out such as a Head & Shoulder's, rounding formation, etc.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) chart shows a rebound occurring just where it 'should' so to speak in terms of the bounce from support implied by SPX's internal up trendline. I usually feel I need to mention the nature of a so-called internal trendline as one connecting the MOST number of lows or highs (thank you Jack Schwager). Even someone who uses charts a bunch might get confused when they see a trendline cut through one of more lows in the case of an up trendline; or cut through one or more highs in the case of a down trendline. Such a 'best fit' trendline might seem too subjective or in the eyes of the beholder only.
Anyway, SPX rebounded from support implied by what I consider to be the optimal best-fit (internal) up trendline. Moreover, SPX only retraced a bit less than half/50% of its prior advance. In a moderately bullish trend (not a super-strong advance), as stock or stock index will 'normally' not retrace more than about half of its prior move. In a weaker trend (e.g., the Dow), a retracement can extend to a Fibonacci 62% retracement or a little bit more; most often I find around 66% of the prior move.
Chart wise, a bottom formation looks to be in place. The move back about SPX's 50-day moving average is a bullish plus. As far as moving averages next up is what happens at resistance implied by the 21-day average, implying resistance in the 1680 area. Resistance is then seen at the prior high just over 1700.
Support is at 1640, extending to below the bullish up trendline to the 1620 area.
Trader sentiment as plotted above (my daily call-put volume ratio line) is more or less neutral, or at least not an extremely bullish outlook. Extremes in bullishness get me a little nervous as I'd rather see my call/put readings not getting above the 'overbought' line or not consistently. Pullbacks tend to keep traders from getting overboard in bubble like patterns.
The 13-day RSI got to a 'fully' oversold extreme at the recent low and that's quite bullish for a bottom.
The SPX September 1660 calls finished Friday bid at 26.50, offered at 28.70, versus a last trade the week prior at 28.50. No real gain in calls with a recently lower VIX (CBOE Volatility Index). The Sept 1660 puts last traded on the week at 28.10 -3.70 from a week ago Friday. I favor shorting puts as a way to play a likely bottom given the fat premiums that can erode if there has been an upside reversal from a prior sharp bear downswing.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is bullish for the same reasons as described above with the S&P 500. If your game is the OEX, please also read the above commentary on SPX. Only the price levels (support and resistance) are different of course. The Dow is a different story as its technical picture is its own more unique formation and story.
As with SPX, OEX looks to have made a bottom. Enough so that I would at least exit bearish strategies. *CORRECTION* from Saturday: OEX hasn't yet penetrated its 50-day moving average, which does NOT yet fit the pattern of big brother SPX. I'd watch the 50-day average (744) to see if OEX backs off from there or goes through this line easily. Resistance implied by the prior downside price gap as well as the 21-day average is seen in the 753 area; resistance extends to the 760 area. The prior intraday top at 765 should be noted as well.
Last but not least, OEX, which is not always the case, ALSO (along with SPX) got to what I consider to be a 'fully' oversold extreme in terms of the Relative Strength Index (RSI), which bodes well for an oversold bottom having formed.
Trendline support is highlighted in the 736 area; next pivotal support comes in around 720 in OEX.
The OEX September 745 calls were last on Friday at 9.0, +.90 from Thursday. The Sept 745 puts traded at week's end at 12.10, -1.40 on the day. Per my SPX comments, I like the odds in shorting puts at likely bottoms. Of course you have to be accurate in assessing trend reversals. 12 would be a nice chunk of premium to capture if OEX finishes at or above 745 by September 20th.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 (INDU) has made more of a 'faltering', less obvious (so to speak) bottom in that it pierced its well-defined up trendline. However, INDU didn't fall below the important 2/3rds-66% retracement of its prior advance. Its up trendline is still of chart significance as this line tends to 'become' a resistance on the way back up. For this reason, I've noted initial technical resistance at 15150, per the intersection of the previously broken support (trendline). Next key resistance comes in around 15400, which was also prior support.
Near support is seen at 14900. Next support then looks to come in around 14700.
Key Dow stocks that contributed to the sell off in the 30 stokc Dow Average were CSCO, DIS, HD, IBM, JNJ, MCD, UTX, WMT and XOM.
Of these all but JNJ, MCD, WMT and XOM have stabilized. Prior dog of the Dow HPQ has taken another bearish tumble. MSFT has rebounded, hoping for a savior CEO with new vision. A mixed bag but INDU could start to do better.
The Dow Index (DJX) September 151 calls last traded at week's end at 1.20, -.80 from the prior week. The DJX Sept 151 puts traded at 2.50, unchanged from the week but down -.59 on the day. The largest DJX call Open Interest (OI) remains in the Sept 153 calls (last at .44) and the 153 puts (bid at 3.60, offered 3.75). DJX is not index I want to trade as the trend seems most unclear and unclear as to how soon it could have upside follow through.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) Index chart looks to have regained its bullish footing given that COMP found support in the 3600-3585 area and then has had a strong rebound from there. Also bullish is the fact that COMP gave back so little of its prior advance in that the Index only retraced approximately 25% of its prior advance; this is a 'minimal' retracement. Normally, if I can say there's a 'normal' in the market, a limited retracement will be not more than a Fibonacci 38% of a prior move.
The move in COMP to back above its 21-day moving average also bodes well in thinking tech stocks will start to see some more upside ahead. Pivotal resistance is suggested at 3700, then in the 3737-3750 zone. Some view tech stocks as fundamentally overvalued or at least already 'fairly' valued. All I can say is that the recent correction didn't do much to derail the current strong bullish chart. Prices are not far under the upper end of its broad uptrend channel and I wonder how long COMP can continue to keep on this much upside momentum going but the Index isn't back up at its upper channel line again either. If it gets there and falters again, I'll reassess.
Technical support is highlighted in the 3600 area, then at 3550. A couple of closes below the 50-day moving average would suggest that the bloom had worn off the tech rose.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart has regained bullish upside momentum. When NDX found support in the 3070 area, it was holding above its prior line of technical support and well above the important, and widely followed, 50-day moving average. NDX, like the more inclusive COMP, had a minimal retracement of its prior advance. That it quickly regained buying interest suggests that tech is still on a strong bullish track. With money coming back from previously hot foreign markets (think India, Brazil, Turkey, etc.) there's plenty of money looking for above-average gains.
Fairly major support comes in around 3000 and that's still significantly above strong technical support implied by its up trendline, currently intersecting in the 2950 area.
I wrote last time that I'd have interest in buying calls on a pullback to the 3050 area, risking to a Close below 3000. I was being conservative but that's ok with this index. It can rip either way but for now looks like its back into a renewed up leg, with next resistance in the 3150 area, with resistance extending to 3185-3200.
The NDX out of the money September 3065 puts last traded Friday at 26.22, -9.38 (bid at 24.9, offered 26.40). A lot of premium in those things and not for the faint of heart to be short them. Still, long-term weekly charts (not shown) for NDX look bullish, especially if the Index achieves a decisive upside penetration of 3150.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) chart picture is technically the same as NDX and there's not more to say about the Q's regaining bullish momentum. Of course, as usual, the bearish break caused some hectic selling, but it was short-lived. I don't fault traders to exit as QQQ had already had such a strong run up. Many, with good reason, fear overstaying in the next 'bubble'. Amen.
Where to from here? There's potential resistance in the 77 are, then at 78. QQQ could go to 80. It's a nice big fat round number. Longer term charts suggest this stock could reach 83 or higher.
Near support is seen in the 75.3 area, with support extending to 74.5-74. At 73.6, QQQ would fill in its prior upside price gap. Gap areas below current levels tend to 'act as' support.
I don't look for spikes in daily trading volume on rallies like this but I do watch that the On Balance Volume (OBV) line continues to trend higher in order to match bullish price action.
The QQQ September 75 calls last traded on Friday at 1.78, +.30. The September 75 puts traded at .09 at week's end, -.12. These puts went out around 1.40 the prior week as I recall. Nice short for a few days 'work'!
The QQQ 76 strike in puts currently has the largest Open Interest versus the 77 strike in calls.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has made a nice recovery from support in the 1020 area and is now approaching technical resistance just over 1040. Next key resistance is then highlighted in the 1060 area.
Support is expected on any pullback to 1020, with technical/chart support extending to just over 1000, at RUT's up trendline.
It doesn't often happen that the Russell gets to what I consider to be a 'fully' oversold reading around 35 in the Relative Strength Index/RSI, but that was seen at the recent low. This indicator consideration suggests that a significant bottom has been made. You can see the corresponding price development when RSI gets at or near the lower 'oversold' RSI line with the consistent tendency for a renewed advance. Such supposed fail-safe patterns are 'made' to be broken eventually but it hasn't been seen yet in the current trend.
The RUT September 1025 puts were last traded at 13.79 on Friday, -3.20, versus trade at the end of the prior week at 21.40. Nice to be short puts at an apparent bottom which I think occurred this past week in the 1020 area. Of course, it's some ways yet to Sept. 20th expiration. I suppose one wild card is that the Government gets shut down! Yes, that would be wild as in wild and crazy!!
GOOD TRADING SUCCESS!