THE BOTTOM LINE:
No sooner than the Market had a 3-4 percent correction, after gaining 46% in the S&P 500 (SPX) from a mid-November 2012 Closing low, then there were some predictions of a Bear Market. Part of the problem is our media talking heads look at the Dow now being near unchanged for 2014 but a bit dumb as a predictor of much.
Now there has been a tremendous gain over the past two years and the aforementioned SPX is as 'overbought' by some measures as the Index was at the double tops of Sept. 2000 and October 2007. The bear markets that followed those tops took SPX down approximately 725 and 780 points respectively.
By the way, the predictions I saw of the U.S. heading into a bear market were made by 'technicians' based on such factors as certain bearish divergences at the last top, significant 'divergent' trends between major indices (S&P and Dow versus Nasdaq versus the Russell), and extreme bullish sentiment among investment advisors. I will respond more on such technical aspects in an upcoming Trader's Corner article.
A 'technical' point to be made here is that the last bear markets occurred after SPX formed the 'mother' of all technical indicators so to speak, a double top; not only a double top but one separated by a number of years which is the most potent of tops in the same area.
A 'fundamental' point to also be made is that bear markets occur in recessionary periods. They may START of course before an actual recession begins. But, if we look at what's out there on the horizon, it's hard to see how we would have conditions ahead like the economic downturn that 9/11 contributed to in 2001 for the 2000-2002 bear market or the 'great' recession after the mother of all bubbles in the 2007-2009 bear market.
I'm not going beyond sort of 'think about it' given cheap money, more or less steady job growth, a big upswing in M&A (Mergers and Acquisitions) in 2014, etc. as to WHAT is out there that would throw the U.S. into recession. Events not imagined ahead could do it of course. P/E multiples may be too high for small to moderate economic growth, but that's a matter of a Market correction and not something fueling a bear market.
Last, but not least, as a trader, I look at price swings that I can TRADE, end of story. And, so far the biggest retracement of its last upswing is seen in the small cap Russell 2000 (RUT) and, with a bear flag formation seen in the RUT daily chart, the Index looks likely to retrace ALL of its last run up; e.g., back to the 1080 area.
There's probably a lower low ahead on the S&P and Dow and also in the Nasdaq which has so far only retraced a 'minimal' 25% of its last advance, at least in the big cap Nas 100 (NDX). Another dip doesn't make for a bear market. A bear market IS in the cards no doubt sometime ahead sure as night follows day, but trading wise what we see now doesn't have to push traders into any paralysis. We need price movement and trends we can trade is all.
More on the trend picture, support and resistance and price objectives are noted in my index commentaries below.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX) DAILY CHART:
The S&P 500 (SPX) Index is bearish on a short term basis; the intermediate trend would turn down on a break of the last big low just under 1820. What I tend to focus in corrections is how much is the retracement of the last advance; e.g., is it a 'minimal' 25-38%, a fairly 'normal' 50% correction or a deeper 62-66% give back. Any of the foregoing retracements, coupled with an oversold condition, an increase of bearishness and reversal type price action, could suggest a bullish play.
So far SPX has retraced just shy of 50% of its April-July advance and reached an oversold extreme basis its daily chart. Worst case in my mind is another leg down equal to the first with SPX dipping to 1840 or a bit lower. At this point I see further downside potential to the 1900-1880 zone only. Moreover, bearish sentiment got extreme a week ago Friday. Traders are still mostly bullish but are more nervous, especially in our summer period of lower volumes. We could see another bearish scare and that's helpful if looking for this as part of a marker for a low.
Near support is suggested in the 1920 area, then at 1900, extending to the 1880 area. Near resistance at 1940; next resistance comes in around 1960.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) is bearish on a short-term basis after the break of the steep mid-April to late-July up trendline as highlighted still on my chart. OEX's retracement of the advance during this period to date has been just shy of half of that run up. In fact I've suggested as a first technical support, a retreat to the 50% retracement line, in the 845 area. Next support is projected at OEX's longer-term up trendline, currently intersecting in the 833 area.
I can't point to specific indicator or pattern but my hunch is that after a further rally attempt, OEX will go to a lower low for the move. It depends also on what happens at resistance, first at 860 an then 10 points higher, at 870. A sustained move back above the 50-day moving average, currently at 866, would be a bullish plus.
OEX got oversold 'enough' and retraced enough to set up a next rally, but I'm taking a wait and see on any trade action.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow 30 Average (INDU) rebounded strongly on Friday and right from its 200-day moving average, which is a bullish development in looking for a possible quick end to the current correction. INDU was alone in falling as far as to this longer-term average, which is well watched in the investment community. Moreover, the Dow rebounded back above its longer-term up trendline in another bullish plus for the chart; well, assuming the Average can now stay above this prior technical support.
You may recall that as the narrow trading range went on between 17000 and 17130 in INDU, up to and during this period I noted that there were fewer and fewer of the 30 Dow stocks in strong uptrends; and a type of technical 'divergence'. It's relatively easy to set up weekly charts of the 30 Dow stocks and quickly peruse them on a weekly basis. Doing so can offer some key insights as to the potential for a counter-trend move.
Key near resistance is at 16600. Next resistance comes in at 16800 and a bit above; resistance implied by the 50-day average comes in at 16860 currently.
Near INDU support is highlighted at 16350 and extends to around 16240; 16242 represents what would be a 50% retracement of the February to July advance. As the Dow was not holding up as well as the other major indices, I looked at the retracement picture for a longer time horizon; I used retracements in the S&P dating from their April lows. The bullish or bearish outlook-tally of the individual 30 stocks of the Dow is too mixed to give a meaningful evaluation of how many look to be bottoming or could fall further. Stay tuned!
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite Index (COMP) turned bearish after forming a (relatively) minor double top. COMP's steeper up trendline was pierced an the recent sideways consolidation could be a bear flag formation, with another downswing ahead that would take the Index down further, even back to ITS 200-day moving average. This is one scenario. Another is a decisive upside penetration of 4400. Next resistance then is seen at 4450.
On the bearish side, a break of 4300 could lead to at least a retest of potential support at 4250, extending to the low-4200 area; 4215 represents a 50% retracement of COMP's prior advance.
COMP did not fall to a 'fully' oversold reading in the 13-day Relative Strength Index or RSI, which it might yet, assuming there's another down leg to come. Trader 'sentiment' might see another fall in bullishness, pulling my CPRATIO line down to what I consider to be a different type of 'oversold' extreme.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart continues to have a short-term bearish pattern. Key near support is at 3850 and represents a very 'minimal' 25% retracement of NDX's April-July advance. I can envision another dip that would test trendline support in the 3770 area.
Conversely, a sustained move back above 3900 resistance would put the big cap Nas 100 back in position to retest its 3950 'breakdown' point.
I'm unconvinced that the 50-day moving average will continue to 'act as' as a key support as it has done just recently. NDX presents a still-mixed picture. There may be some further selling pressure in tech, which would then likely cause more put activity by traders and 'set up' a next rally. One leg down in NDX, not a second shoe to fall? Maybe, but not predictable just yet.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) has a slightly different pattern in that a key support/up trendline that has been traced out in the QQQ tracking stock is such that recent action has pierced that line. 94 is showing up as a key support but I'm not convinced that the Q's are out of the bearish woods. There's significant complacency by traders/investors regarding the further upside potential for big cap Nasdaq stocks.
Very near resistance is at 95.1, at the previously broken up trendline and not far under the 21-day moving average (at 95.7). Consider next upside resistance as 95.7-96.0
Bearishness and daily trading VOLUME will likely spike if there's a decisive downside penetration of 94, which is now established in traders' minds as support. I have rarely seen key upside turnarounds in this EFT if there was NOT a volume 'climax' or a noticeable jump in volume relative to prior average volume numbers.
The key volume indicator for me, represented by the On Balance Volume (OBV) line, keeps falling as prices trend sideways offering a possible further example of diverging chart (price) action versus other technical aspects.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) chart continues bearish and RUT has recently traced out a 'picture perfect' (straight out of my technical analysis book for sure!) 'bear' flag. I'll be surprised if RUT doesn't take another dive based on that pattern, with a move down to 1100 support. If the Index falls to this area it would almost be surprising if RUT didn't also re-test its prior low in the 1083 area.
I'm wrong about the bearish 'flag' pattern if RUT instead climbs back above 1140 and finds support in this area subsequently. RUT initially fell well below its 200-day average and if this pattern continues it reinforces the ideal that the small cap investment 'theme' is not in favor this year. Next resistance is highlighted at 1160, which was a bearish 'breakdown' point on the initial attempt for the Russell to regain its 50-day moving average.
GOOD TRADING SUCCESS!