THE BOTTOM LINE:
After repeated highs in the same areas the major Market Indices finally succumbed to a swoon. This is what happens in overbought markets as corrections come eventually.
This current short-term bearish dip could next morph into an intermediate trend pointed down by the Indices dropping below indicated support levels suggested on my charts below.
An indication of the sea shift this past week was seen in the S&P Volatility Index, VIX, which shot up to 21.1 from 11.8 the week before. The Nasdaq 100 Volatility Index (VXN) went from 14.4 to 22.5 from Friday to Friday, which classifies as a spike higher.
The charts were showing, in the all the major indexes, repeated highs in the same area and what (Charles) Dow called a line formation. Such leveling off of prices after a prior very strong run up that created high Relative Strength Index (RSI) readings is a correction 'waiting' to happen so to speak. Sometimes the wait can be long! Sometimes relatively short as in this most recent tradable dip.
Technical Analysis 'works' on the principle that the overall actions of the Market 'forecasts' many NEXT moves such as trend corrections or an acceleration of an existing trend. In our current Market the aforementioned 'line' formations, coupled with overbought RSI readings was in turn coupled with periodic and relatively HIGH bullish sentiment readings; all together these were pointing to this most recent dip in stocks, brought on as it turns out by the sharp drop in oil prices.
If it wasn't the accelerating oil price decline to create Market pressures, it (the 'bearish factor') would have been something else since price and indicator patterns were suggesting that stocks had hit peak levels for now. Chart and indicator patterns suggested SOMETHING was coming that would drag stocks down. We didn't have to know that that 'something' was an oil price shock, but we had help in Jim Brown's oil analysis.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX) DAILY CHART:
The S&P 500
(SPX) saw a bearish break below it's 21-day moving average this past week which suggested a further move lower which was acutely illustrated on Friday. The short-term trend turned lower with the break below 2050-2055. The intermediate trend is mixed. Long-term trend no change: up.
SPX could easily dip to 1980 or to around 1950 at a potential conclusion of this down price swing.
Upside resistance, at what was previously technical/chart 'support', is highlighted in the 2055 area, with resistance/selling interest extending to 2075.
This past week's fall was enough to bring the RSI from an overbought extreme to the beginnings of an 'oversold' condition. Bearish sentiment readings have increased per my CPRATIO indicator at bottom, but have not yet seen a 1-day or more extreme. The last major bottom (mid-Oct) was accompanied by an 'extreme' in bearishness. We haven't seen the same yet on the current decline.
S&P 100 (OEX) INDEX; DAILY CHART
The big cap S&P 100 (OEX) broke under key technical support at 910, at the 21-day moving average and from then we have an accelerating decline coming into Friday. This was all fairly predictable once OEX kept hitting highs in the SAME area, suggesting the Index was probably 'fairly' valued or at the top of its value range in the eyes of big money managers.
After a period of stalled upside momentum, following a very strong 6-week rise, it wasn't surprising to see this recent fall on profit taking and speculative shorting as the market was overvalued. The Market tends to swing from under to over-valued.
880 is a next anticipated OEX support; we then have highlighted a possible next target to 870-868 or taken as a lower 'support'. Key near resistance, at the recent 'breakdown' point, is at 900, with likely resistance extending to 910.
THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:
The Dow 30 Industrial Average (INDU) finally stopped its mini 'solitary walk of the Dow' as its 30 monster-cap stocks continuing moving to new highs for a time contrary to the stalled S&P.
A key turn technically was when INDU decisively pierced 17800, which had been support on the apparent continued march higher in the Industrials. The drop below the 21-day moving average was the next telling development technically. Trade ABOVE this key trading average tends to 'define' the short-term trend as UP; trade BELOW this key trading average marks the short-term trend as bearish.
I've calculated potential support/buying interest coming in at 17200-17175 and next at 17000, which should mark the beginning of fairly major support.
I've been expecting a fall and I expect more but in the way of measuring these things not necessarily a reversal of the intermediate-term trend. I see the end of this fall as setting up another buying opportunity, which is appropriate in a long-term bull move.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) is mixed in its pattern since short-term upside momentum has reversed from up to declining.
The chart and indicator pattern suggests that COMP may fall further. My downside objectives and potential support points are noted at 4600 with next support projected at 4510-4500. I anticipate tech stocks holding values better than the S&P currently and don't see for example 4400, at my lower trading 'band' or envelope line, as a target.
Key near-term resistance is at 4700, extending to the 4750 area.
COMP now appears headed toward a lower 'oversold' reading in terms of my preferred momentum indicator, the Relative Strength Index. From extreme to extreme, the Market we know and love from a trading opportunity perspective!
NASDAQ 100 (NDX); DAILY CHART:
The NDX chart has seen a reversal in its short-term up trend, which isn't too surprising after the 6-week gains that preceded the recent sideways trend; which in turn 'set up' declining momentum, tipping then into a sharper sell off.
Anticipated support points are highlighted (with the green up arrows) at 4150, then at 4100. I can envision NDX winding up getting to or near 4100 as a low but not much below that. 4000 is the beginning of expected major support. Key overhanging resistance is seen at 4300-4320.
I noted in my initial 'bottom line' comments above how the Nasdaq 100 Volatility Index (VXN) shot up over the course of last week from the prior week's reading at 14.4 all the way to 22.5 at the most recent Friday Close. A sharp spike of 9.3 points! VXN may go still higher if NDX 4200 is decisively penetrated and panic selling comes after. At some point a very high level in VXN suggests potential for an upside trend reversal.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The QQQ chart has the same developing bearish trend as the underlying NDX. Key prior support was at 104, now highlighted as initial expected resistance; next key resistance comes in at 105-105.5
102 is anticipated next support, with the low-100 area to 100 even as the low end of any downswing I currently envision. I'd love to cover short positions in the stock in that area.
Per my suggested QQQ short in the 105-106 area; last week I suggested a lower (buy) stop to 107. This week I suggest a lowering this stop further to 105. My current objective is for a decline into the 102-101 zone.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has been trending sideways between 1160 and 1190. The weekly Close below 1160 suggests further downside ahead as momentum looks to be down in the near-term, next 1-2 weeks.
Resistance is highlighted at 1180, extending to 1190. Potential technical/chart support is seen at 1140, then at 1120. I'd be a buyer in the 1109-1120 area.
I anticipate RUT continuing to have broad two-sided price swings, and tend to evaluate bullish strategies and positions when the Index is at an 'oversold' RSI extreme and bearish strategies and positions when the Relative Strength Index is up at a typical 'overbought' extreme.
GOOD TRADING SUCCESS!