THE BOTTOM LINE:
Key moving average 'envelopes' pointed To the Recent Bottom, especially in conjunction with a 'fully' oversold RSI, coupled with low bullishness as displayed with the SPX and COMP charts seen below. Price and indicator patterns predict prices!
I wrote about some of the whys and wherefores of using moving average envelope lines, using a 'centered' 21-day moving average in my recent Trader's Corner article, which may be worth a second, or first(!) look via the above LINK.
The 21-day moving average (and a Fibonacci number) is ALWAYS what I use with the Indexes, not with stocks, where I stick to the 50 and 200-day moving averages mostly. I note in the aforementioned article and all the time that the moving average envelope lines are percentage values that float above or below the daily 21-day moving average Close.
With the S&P and Dow 30, in low to normal volatility periods, I use moving average envelope values of 2 to 2.5 percent. I look to see what values intersect the highest highs and lowest lows in price swings over the most recent multimonth periods. At times, during more volatile price swings, the values used might increase to 3% or more. In a rising trend/bull market, dips to the LOWER envelope line will tend to have a greater probability to represent a bottom or interim bottom.
With the more volatile Nasdaq I tend to use envelope values of 2.5 to 3 to 3.5 percent above/below the centered moving average. Sometimes, the envelopes 'expand'; e.g., I just adjusted my UPPER moving average envelope value to 3.5 percent, from 3% in the big cap Nasdaq Composite as Google (GOOG) mania took over in the big cap Nas 100. On a big run higher, an envelope that 'contains' most of the rallies that occur could expand to 5 percent.
The use of moving average envelopes is not a 'mechanical' trading system; e.g., automatically buy every SPX dip to the lower line, short rallies to the upper line. Not! Especially don't attempt to play the downside on every rally to the upper envelope line as bull markets play out with repeated new rally attempts. The moving average envelope indicator, used in this way, is a measuring tool that give you an idea or 'yardstick', of not only that an index in question is 'overbought' or 'oversold' but at what price points this might be the case.
Adding to an evaluation of extreme moves that carry to the upper and lower moving average lines, is when a dip in an index to the lower envelope line in a long-term uptrends occurs in TANDEM with a low reading (oversold) in the 13-day Relative Strength Index (RSI) AND low bullish sentiment figures on my CPRATIO indicator; e.g., the CBOE daily equity call to put volume ratio FALLS to the highlighted oversold zone seen on my SPX and COMP daily charts.
The line up of my 'BIG 3' indicators have offered some very profitable prior trading opportunities, most recently this past week. You do have to BELIEVE that there is a floor to every decline and a ceiling to every rally. When we get caught up in a bearish or bullish outlook we can LOSE that perspective. Having seen HOW this works in the Market over the past 3 decades helps. In my ("Essential Technical Analysis") I describe how my trading wizard/mentor used the envelope technique masterfully in tandem with the two other technical indicators mentioned above.
TRADE SUGGESTIONS RECAP:
Previously, I suggested bullish plays in the S&P 500 (SPX) in the 2050 area (currently at 2126), in the Dow on dips to 17500-17400 (now 18086), in the Nas Composite on dips to/below 4900 (last at 5210) and my bullish sweet spot in the big cap Nas 100 in the 4350-4300 zone (last at 4661). I recount this because it was because these prices were at or near my lower 'oversold' envelope lines. Not my 'genius', just past experience of when all 3 indicators mentioned get oversold; i.e., price, RSI and sentiment.
LAST but not least, repeat 50 times that: we are in a bull market and remain in a bull market:-) Moreover, sideways/lateral trends even of months duration, tend to resolve themselves by resumption of the primary or major Market trend.
The S&P 500 Volatility Index (VIX):
The VIX Volatility Index has, as predicted, again topped out at or near 20. VIX followed a trendline higher as is highlighted below. Resistance stands at 20, then around 22 as the start of major resistance.
VIX fell like a stone this past week as soon the major (up) trend resumed. VIX has come back down to what has been fairly major support around 12.
S&P 500 (SPX) DAILY CHART:
The S&P 500 (SPX) had a major rebound after my 'big 3' indicators in tandem got to bullish oversold readings; this, as seen in the dip to my lower envelope line (at the extended green arrow), the 13-day Relative Strength Index (RSI) reaching my 'fully' oversold zone AND (very importantly) a low level of bullishness preceding the other two indicators.
Bullish/bearish sentiment extremes usually PRECEDE significant price reversals by 1 to 5-days. Sentiment indicators are 'leading' indicators. Also, sentiment models do not often turn on a dime. As SPX rallied on Mon-Wed, bullish sentiment actually DECLINED. This in the face of a great-looking rally as momentum shifted to up, seen as early as Monday as SPX achieved a decisive upside penetration of its 21-day moving average. Traders and Investors, once convinced, take significant contrary market action to get 'unconvinced'.
Resistance is seen initially at the area of prior SPX highs at 2130-2135; resistance then extends to 2145, then perhaps to 2170.
Support is seen at 2100 at what was 'resistance', with support extending to 2080.
I wrote last week that: "Buying dips to the 2050 area offered a decent speculative play if risk was held to the low-2040 area, and projecting upside potential on a rebound back to 2090-2100." SPX easily cleared 2100 and next up is for the Index to clear its prior highs (2130-2135) which I think will happen.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart has seen a strong bullish rebound. A bullish OEX breakout was seen first (this past week) in the decisive upside penetration of its 21-day moving average.
OEX found 'final' recent support at the milestone 900 level with the lowest intraday low within a hair's breath of the lower 2 percent envelope line. The extended green up arrow marks the low at the lower envelope line. At the same time the 13-day RSI reached an oversold extreme, which is perhaps too simple of a buy 'signal' by itself, but combined with the dip to the lower envelope AND a bullish sentiment low (the CPRATIO indicator is seen above with SPX) was unbeatable trading 'gold'.
The recent low made two weeks back was followed by 3 more days' of lows that were successively (a bit) higher. Usually, given a similar oversold condition in the S&P, you don't get repeated lows in the same area for longer than 2-3 days. The pattern of important lows is for short-lived 'spike' declines; rallies in bull trends see gradually higher highs over a much longer period.
Support is now indicated at 930, next at 925. Resistance is suggested at 945, then at 950-952, extending to perhaps 975 over time.
OEX is at new highs so projections of further gains such as to 975-1000 over time, is based on longer-term chart analysis not shown here. But it's somewhat predicable to assume OEX reaching the milestone 1000 level once 900 was powerfully retested.
THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:
The Dow 30 (INDU) is bullish in its pattern but doesn't show the strength seen in the broader S&P indices. The move above 17800, then 17900 was bullish but INDU next needs to clear 18150-18200 and then re-test and exceed 18300-18350 to match new highs in OEX and what looks to be coming with SPX also.
Areas of INDU support this week are highlighted at 17900, then at 17800. Technical/chart resistance is seen at 18200, extending to 18300-18350.
Last week I suggested upside this past week as perhaps only being to 17900 as I thought the 21-average would offer initial resistance; Nope, not with all the other indices in strong rebounds. The Dow is the 'dog' of the Market it seems.
The chance for a triple top in the Dow 18300 area is there but eventually INDU could break out and reach 19000. A sizable new up leg would take turnarounds in such Dow stocks as CAT, CVX, DD, IBM, PG, WMT and XOM. Apple (AAPL) looks to have resistance at 130. A decisive upside penetration of this level would help also.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bullish and COMP has cleared prior highs decisively. Go tech!
I wrote last time that the Composite "has declined to 2 and half per cent below its 21-day moving average so I look for support in the 4900 area and on any dips to and below this level." As with the S&P 500 I've circled the 3 oversold levels seen at the recent bottom in price, RSI and in bullish sentiment. However, it was ONLY on the most recent dip that support implied by the lower envelope line was reached.
Both RSI and sentiment indicators had bullish readings on a prior recent low. It was the line up of ALL 3 of my key indicators in tandem on the recent lower low that suggested STRONG potential for an upside trend reversal.
Support is seen around 5100-5125, then at 5050; fairly major support should be found at 5000 going forward. Resistance is suggested at 5215, then at 527, based on certain upside projections for a possible extension of the recent strong advance.
NASDAQ 100 (NDX); DAILY CHART:
The big cap Nasdaq 100 is bullish like the broad Nas Composite with its strong rally to new highs. At recent lows the same bullish line up of indicators was seen that also occurred with COMP.
I wrote previously that the 4350-4300 zone was "my sweet spot to look for a tradable bottom." Sweet indeed if you believed that the world was not coming to an end and trusted the long-term (UP) trend!
Near support is indicated at 4550, extending to 4500-4480. 'Resistance' is projected at 4670, extending to 4750. Resistance in quotes reflects these levels projected as possible extensions of the current bull move; as opposed to a PRIOR high with a history of prior selling pressure in that area.
The NASDAQ 100 ETF STOCK (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQ) is bullish. It found 'final' support in the 106 area, at its up trendline AND at the lower support 'envelope' line.
The strong advance seen in On Balance Volume (OBV) was a good ancillary bullish indicator.
Support is seen at 110, extending to 109.2-109, then 108 even. Resistance is projected at 114, extending to 115.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has seen a strong recovery rally and has a pattern of higher pullback or downswing lows which also maintains an overall bullish chart pattern.
Support is noted at 1260, extending to 1250. Near resistance comes in at 1280, then is assumed at the prior 1296 high with potential to touch 1300.
I anticipate the Russell making it to its prior high. Whether such a retest will form a potential double top or exceed the old high but perhaps just by a bit is hard to predict; e.g., a nominal new high is seen at 1320-1325. Stay tuned!
GOOD TRADING SUCCESS!