THE BOTTOM LINE:
Panic selling ends eventually and it did this past week as a likely bottom was made and probably more than an interim one. The nature of corrections stemming from overbought over-valued stocks is often scary steep speed to a climax bottom.
This situation happens again and again with most Markets as buying on the way up occurs multiple times, in multiple increments, but selling tends to be more emotional and panicky in nature and stocks tend to get dumped in a condensed time period.
I stand by an earlier 'headline' statement from a prior Index Wrap that: "The 'correction' camp has won out for awhile but that's a good thing too as bottoms are easier to 'time' than tops."
How so, bottoms are 'easier' to time (predict) than tops? Well, I should also say that I speak for myself. But in bull markets we do see the kind of pattern shown on the weekly S&P 500 (SPX) chart with REPEATED rallies (4) up toward the upper resistance trendline, the upper end of SPX's broad uptrend price channel with it hard to predict that the 3rd, 4th, or 6th time will lead to a correction that will take the Index back down toward the middle to low end of its channel.
True that there was a 'failure' of relative strength as highlighted above, in that the RSI didn't also go to a higher high and 'confirm' the price trend. But this pattern doesn't mean that the rally can't or won't go on for more weeks, even in a seasonal period that tends to be bearish.
I wrote a Trader's Corner
opinion pieces on Wednesday (10/15/14) laying out why I thought that the major indices had bottomed in terms of falling to deep retracement levels relative to the February to mid-September advance such as the 62% to 66% retracement levels seen in SPX, OEX and NDX. In the Nasdaq Composite (COMP) and the Dow 30 (INDU) the 3/4ths-75% retracement levels were reached.
Moreover, I decided it was time to look at the model offered by using 21-day moving averages with moving average envelope lines that showed the type of EXTREMES associated with major Index bottoms; namely, at levels equal to 5 percent UNDER the 21-day average in the S&P and Dow and 7 percent under in the more volatile Nasdaq Indices. My aforementioned Trader's Corner article (clickable above) is a companion piece to this one and is a quick read. However, the same retracements and moving average envelope studies are also shown again in my charts below.
In terms of Index strategies, I don't necessarily envision an immediate sharp rebound ahead as some basing price action may occur first, but I believe a tradable bottom is in place. November to May should be a mostly bullish trend. I welcome some two-sided trading swings as I anticipate opting for bullish strategies on good-sized price dips.
As the weekly SPX chart above demonstrates with the RSI low of the week just ending, ALL the major indices are now 'fully' oversold on both a 2-month/8-week basis as well as will be seen with the 13-day Relative Strength Index (RSI) indicators shown on the charts below.
In terms of the related bottoming pattern of at least 1-2 days of 'extremes' in bearishness among options participants occurring typically AHEAD of Market bottoms, two such daily extreme-bearishness CPRATIO readings (Friday-Monday) occurred ahead of the Wednesday low of this past week; i.e., as measured by daily call to put equities-options volume ratios per my CPRATIO model seen on the SPX and COMP charts.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX) DAILY CHART:
As described above in my initial 'bottom line' commentary, I believe that the major indexes like SPX have reached at least an interim bottom. However, I also don't think it's up, up and away ahead; just that we likely won't see lower lows ahead. The drop to the area of lower envelope line in SPX, at 5 percent under the 21-day moving average, is often an EXTREME low for a sell off and can represent an upside reversal area as suggested with SPX this past week.
The S&P 500 would have an intermediate trend reversal if it closed and stayed below its February lows. If SPX fell instead to its February lows in the 1740 area, but not lower, that would be a 100% retracement of the Feb-Sept advance and a possible double bottom. Given the extent of the correction to date of about 2/3rds of its prior advance, I assess the Index as probably not making a lower low than last week. This remains a bull market based on the long-term trend.
SPX is oversold on both a 2-week and 2-month basis. Bearish sentiment got extreme for a couple of days running prior to the recent bottom. Price action, extent of the correction, the oversold condition AND the dip, although brief, into extreme bearishness by options traders suggests good potential for an upside reversal. Moreover, the VIX volatility Index rose all the way to 26 before falling back. There's a tendency for VIX levels above 22 to end up marking a bottom.
Support is highlighted at 1814 to 1830, extending to 1800. Resistance is seen at 1900-1906, with next resistance in the 1940 area. A Close above 1906, the 200-day moving average with SPX holding above this key average would be a bullish plus.
S&P 100 (OEX) INDEX; DAILY CHART
As with the S&P 500, I think the S&P 100 (OEX) has put in a bottom; with OEX, this is suggested in the 820-815 area. If instead, OEX saw a new down leg develop, coupled with a dip below 800 this might signal the Index going on to retest its February lows in the 770 area. The drop to the area of lower envelope line in the OEX, at 5 percent under the 21-day moving average, is often an EXTREME low for a sell off and can result in an upside reversal setting up in this area.
Given the retracement of 66% of the prior multimonth advance, an oversold condition and the rise in bearish sentiment we've seen, this portends the prospects of a substantial bottom being already in place.
Key support is highlighted at 820, extending to 814 with next support in the low-800 area. Near resistance is seen at 847-850, extending to 860. A Close above the 200-day moving average at 845 that then mostly held above this average would suggest prospects for further gains.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow finally got 'fully' oversold on both a 13-day and now 2-month basis and that was missing prior to this past week. The retracement of 75% of the February-September advance to 15840 holds out the prospect that INDU will not have a full round-turn decline of 100% by retracing to its February low at 15340.
I've highlighted potential support ahead at 16000, then in the 15840 area; the levels of 16600 and 15840 represent the 62 and 66% retracement levels respectively. The 15840 area is also at the lower (5%) envelope line and represents an oversold EXTREME where upside reversals are common.
Near resistance is at 16600, at the 200-day moving average. It would a key bullish development for INDU to get back above this key average watched widely on the Street. Next resistance then comes in at 16800 and also at another key average, the 21-day. Rallies from the low envelope line, at 5 percent UNDER this average that gets back up TO but not above the 21-day average, usually leads to another dip.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
With the Nasdaq and greater than 'normal' downside volatility reaching the LOWER 'oversold' 21-day moving average envelope value at 7 percent under the average which often represents an EXTREME low. Sometimes the lower envelope value will go more than this but not usually for long. The fact that COMP stabilized, so far at least, in this area suggests potential for a bottom to be in place. Further dips to near or TO the prior COMP low are not ruled out however.
I assess the bearish correction as mostly having run its course. There may well be some backing and filling but there's some likelihood that the 4100 area will hold up as support. As representing a 75% retracement of the Feb-Sept advance, this is much of a give back as is generally seen without a move back to the PRIOR low. So if 4100 is pierced we can assume there's then potential for COMP to retrace its prior gains from its Feb low and retest the 3983-3946 area.
4300 is key near resistance at the 200-day moving average. Next resistance then looks like 4400 at the 21-day moving average. A move from the lower 7 percent envelope line back to the 'centered' moving average (relative to the envelope values) would then be a key test of further upside potential. It's common for rallies to fail in the area of the 21-day and pull back once again.
Near support is at 4200; next support is highlighted at 4112-4100. If COMP retraces MORE than 75% of its prior upswing, there's potential for a round-turn 100% retracement back to the starting low (February).
Bearishness still abounds which is a bullish plus in a contrarian sense. The call to put ratio went up with more call activity but I don't think this is going strongly higher anytime soon. More trading shocks would not be surprising. The Composite got quite oversold and that bodes well for some further upside.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq big cap 100 (NDX) halted it's slide this past week at a level just shy of a Fibonacci 62% retracement for two days running and touched the lower 7 percent envelope line that often represents an EXTREME low on the downside.
Potential upside reversal price action coupled with an oversold RSI extreme (finally) and the VXN S&P 100 volatility Index so high (over 26 briefly) all lend support to the potential for a bottom to have formed.
Support is seen in the 3765 area; with next support at 3700, extending to 3884-3880. Major support begins in the low-3400 area.
Initial resistance could come in at 3850-3854, then is highlighted at 3900 on the chart (red down arrow), with resistance extending to 3950 at the 21-day moving average. A move all the way from the lower extreme envelope line back up to the 'centered' 21-day average is a key test of renewed upside momentum; rallies frequently fail in this area.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The QQQ tracking stock for NDX (an ETF) has the same potential bottom pattern as NDX, given the extent of the retracement of the February-September advance which was not quite to a 62% retracement which would have been reached at 90.
The 200-day moving average, at 92 should be considered initial support now that the Q's have rebounded back above this key average that's well followed on the Street.
While 92 may hold as support a more conservative estimate is 90.2-90 as technical/chart support; next lower support is then suggested at 89. Resistance is highlighted at 94, then at 96.
On Balance Volume (OBV) is still pointed lower and adds a bearish note to the chart as a 'secondary' indicator versus price action. And, price action is potentially bullish; more so if 92 finds support/buying interest.
RUSSELL 2000 (RUT); DAILY CHART:
As I've been noting in some of the other of my index commentaries, the first key test of RUT resistance after its rebound from the lower (5 percent) envelope line that has marked many prior lows is what happens on a move TO the 'centered' (within the upper and lower envelope lines) 21-day moving average. RUT turned down on that test on Friday as the Index touched the average but this the approximate high of the day.
I don't see the Russell rallying further, especially in a sustained move above the 21-day average, without some backing and filling and a possible retest of prior lows.
I've highlighted chart support at 1060, then at 1040. Near resistance is at 1100 as noted, then at 1120 and next in the 1140 area.
RUT is at an oversold extreme and this has in the PAST meant it would reliably rebound but this may be a definite thing that buried in the past! RUT is the only index that is now represented as being in a DOWNTREND channel.
On the longer-term weekly chart (not shown here), major support at RUT's longer term uptrend line comes in currently in the 1000 area.
GOOD TRADING SUCCESS!