THE BOTTOM LINE:
There was a 3-4 week period where prices either kept going up (Nasdaq) or sideways (S&P) ahead of the sharp pullback. In the case of the big cap S&P 100, a 'double top' formed and in Nasdaq, prices were advancing but on LESS 'relative strength'. To illustrate these points, I direct your attention to the OEX (S&P 100) and Nasdaq Composite (COMP) charts and commentaries below.
Implied volatility took a substantial jump from 12 to 18 in terms of the VIX. This reminds me of my speculation in my recent Trader's Corner article
that declines to 12 in the VIX tended to have 'predicted' or pointed to significant potential for an upcoming downside reversal and sell off.
The timing 'problem' with a bearish price/relative strength (RSI) divergence especially after a prolonged and very strong advance, is that it can take 3-4 weeks or more for an actual (downside) correction to materialize. You have to be patient in these situations to wait for a top to actually develop, not always a strong suit with us trader types!
Another less than bullish situation with the sideways trend to slightly higher trend of the 3 weeks coming into this past one, was the level of continued high bullish sentiment. My equities call to put daily volume ratio was suggesting consistently HIGH bullishness. It was 'too much' bullishness in the sense of complacency in that it was safe to just stay bullish; this after a slow to moderate 4th quarter earnings season and after the S&P had advanced a whooping 30% in the prior year.
I'm not suggesting that there won't be a short-term rebound in the near term (we can more or less expect that), or that it's going be down a 100-150 points from here in SPX (S&P 500), in the relative weak to minor gains typically seen in Feb-March period. Trading success in a bull market doesn't necessarily just consist of adopting bullish strategies and buying any and all dips.
Fairly good-sized pullbacks should have potential but doing so at the 'right' time may be more challenging this year. There could also be more opportunities on the put/bearish side of the major indexes at optimum periods involving close study of market action and indicators. A major bull market like 2013 is the friend of 'laziness' so to speak as a MAJOR uptrend will tend to reward you even if you were not overly astute in your entry points or market timing.
I don't have any major target pronouncements on where prices might be headed (e.g., the Dow falling another 1000 points and heading again to the 14,800 area), but I've highlighted near and intermediate support points on each of the major stock indices (as well as resistances and I find it best to stick to potential intermediate price targets from week to week.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) finally went from slowing momentum and a sideways trend, to a break of key support in the 1830-1820 area. As I noted last week SPX had made "a minor double top in the 1850 area making the near-term trend is neutral to bearish...". I made more of a point of highlighting the double top in the big cap S&P 100 (OEX) as the smaller index ALSO initially hit resistance implied by the top end of its uptrend price channel. The same bearish price/RSI divergence was seen in SPX (as in OEX) as prices had been rising but were 'unconfirmed' by new highs in the Relative Strength Index.
The decisive downside penetration of the 50-day moving average that's occurred will now get noticed by a wider circle of investors than would be the case with the shorter 21-day moving average. Bullish sentiment has been consistently on the high side for weeks but some bearish 'fears' have now hit traders and investors, which is more realistic given that stock prices that go up enough will eventually correct.
SPX could now be headed toward the LOW end of its uptrend channel suggesting potential to the 1760 area currently. I've noted a next support around 1775, extending to 1760.
Near chart/technical resistance is suggested at 1840, extending to 1850. On a near-term basis I'll also be watching to see if the Index rebounds to Close back above its 50-day moving average, currently at 1811.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) has turned bearish on a short to intermediate-term basis. This after OEX first hit resistance in late-December at the top end of its broad uptrend channel and later formed a minor double top; calling this double top 'minor' is not to negate it as a top formation, but more widely spaced double tops tend to make for a more 'potent' bearish signal so to speak. Given that the fist top was at technical resistance of the upper channel line did suggest paying MORE attention to the second top.
I suggested a stand-aside 'neutral' trading stance last week but shorting rallies back to resistance now seems warranted. Resistance is seen in the 810 area, extending to 820. The
Bearish 'breakdown' point as I'd call it was at 817.
Support is suggested in the 790 area, extending to around 780, at the current intersection of OEX's up trendline. 790 is fairly key support technically as this is where the last downswing low developed. A couple of Closes below 790 would tend to 'confirm' a an intermediate bearish trend. OEX is now almost 'fully' oversold according to the RSI pattern of at least recent months.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) accelerated its prior "near-term downtrend" I wrote of last week and to update the 30 stocks many of those strong uptrends have stopped, mostly with at least minor trend reversals. What looks like interim tops have formed in more than half of the INDU stocks, including AXP, BA, CVX, DD, DIS, GE, GS, JNJ, JPM, MMM, NKE, PFE, PG, TRV, UTX, WMT and XOM.
Near resistance is at 16200, with next resistance pegged at 16400, down from 16600.
Near support is seen in the 15800-15740 area, extending to INDU's up trendline, currently intersecting at 15600.
The Dow is now near the low end of its 13-day RSI scale that starts to suggest an 'oversold' condition. INDU in 2013 reliably rallied from such oversold conditions this past year. 2014 of course is starting with less bullish influences than 2013, at least of late.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart was of course bullish until it wasn't! Once 4200 support gave way, selling picked up. Of course many of the Nasdaq stocks were way 'overbought'. It's been a minor tech bubble. Not a precise term technically but there was a lot of speculative 'froth'.
I've highlighted on the daily COMP chart the multiweek bearish divergence seen in continued new highs after the minor top of late-December, into the recent peak of the middle of this past week. This divergence went out for some time but the eventual result isn't surprising. Tops in very strong bull moves take some time to finally succumb to profit and panic type selling.
Support seen in the 4100 area could find buying interest and technical support again; next support is suggested between 4050 and support implied at the intersection of the up trendline at 4010.
It's hard to get out a bullish mindset but I did look at Nasdaq in terms of risk to reward as if adopting NEW bullish positions: "If holding bullish positions in tech you may want to be thinking what is your possible further upside potential relative to downside risk for when a pullback finally arrives." It seems to be upon us. Bullish sentiment is still quite high relative to when I would tend to 'trust' a next significant bottom and area to take on bullish position in tech.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart has turned bearish on a near-term basis as the 21-day average got decisively pierced on the last week sell off. The pattern looks like the possible start of a more prolonged correction. I'd like to see NDX get down to a fully oversold RSI reading which is typically seen in the 35-30 zone on a 13-day basis; i.e., RSI 'length' setting at 13 and applied to the daily chart.
On a weekly chart basis (not shown) NDX is just beginning to come off from an extreme overbought condition. As I've noted previously, NDX was the most overbought by key technical measures of it, as seen since the multiyear monster big cap tech rally began in late-2008. Stay tuned on what a change in prior strong upside momentum might portend for the next few weeks!
Next support looks like 3500 and the prior downside intraday low. Still lower anticipated support comes in at the up trendline intersecting at 3470, extending to 3450-3425.
Near resistance is at the recent (downside) 'breakdown' point in the low-3600 area. Resistance then extends to 3635.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 (QQQ) has turned bearish on a short-term basis tracking the underlying NDX Index of course. QQQ had hit the top end of its uptrend channel several times and each time the pullback was relatively minor. This recent decline wasn't from such implied resistance but the sell off penetrated key support around 88; at what had been prior resistance.
We've seen Closes below support implied by the 21-day average before but not so deep and at the low end of an extended daily price range to boot.
86 is key near support, with next chart support extending to 84.4, at the Q's up trendline. I see support extending to 84 even, at the last intraday downswing low; which was also a line of prior resistance.
As usual a major jump in daily trading activity (volume) occurred on this recent break. The On Balance Volume (OBV) line turned down also which would be expected. The spike in volume has sometimes been at a major low but the pattern this time looks more like this volume spike could be at the beginning of more weakness to come.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart is bearish now given the sharp decline of Friday on an overnight downside price gap. I've noted key near resistance at the 1166 'breakdown' point, with next resistance in the 1180 area.
1140 looks like potential near support, with next technical support at 1120-1117, at the intersection of RUT's up trendline.
1120 is a reasonable downside target for the Russell 2000 and 1100 could also be hit. A Close below 1100 to 1080 that wasn't reversed (back to the upside) the next day would be more bearish price action than I'm anticipating currently given potential for RUT to stay within its uptrend channel. A break of the up trendline might lead to quick dip to 1100 but with strong buying interest resurfacing there. Trendlines reflect the average rate of gain that's been maintained previously but increased volatility may reign ahead.
GOOD TRADING SUCCESS!