THE BOTTOM LINE:
I use the word 'correction' here versus seeing recent weakness as the start of a major downside trend reversal. Potential downside objectives in a second down leg that could complete a bearish correction are based on a Fibonacci 'formula' or rule of thumb which I'll get into next.
The decisive downside penetration of the prior lows in the S&P (not yet the Dow) changes the pattern there to bearish in the short to intermediate term. This pattern of sharply piercing the prior low hasn't been repeated yet in the tech-heavy Nasdaq. After a prior major rally, THE most common bearish counter-trend pattern is called in 'wave' terms an 'a-b-c' or down-up-down correction, where the second downswing from peak to low is more than the first, often significantly more. There's a way to 'measure' the possible downside of a second corrective downswing.
An example initially in the S&P 500 (SPX): Given the decisive downside penetration of SPX's prior low, a second down leg END point often has a Fibonacci relationship of 1.38, 1.5 or 1.62 times the first decline of 97 points. From the recent SPX peak at 2104 a second longer down leg equaling 1.38 times the first is 134, suggesting potential to 1970; i.e., 2104 - 134 = 1970.
If the second longer downswing implied by a down-up-down ('A-B-C') correction carried a distance equal to a Fibonacci 1.5 X the first decline of 97 points, a potential objective becomes 1959; i.e., 2104 - 145 = 1959.
A still-deeper correction where a second bigger decline was 1.62 times the distance carried in the first sell off, sets up a possible target to the 1948 area; i.e., 2104 - 156 = 1948.
Wave theory and Fibonacci relationship of a second down leg to the first, suggests possible downside targets in SPX in a range, from 1970 to 1959, extending to the 1948 area.
You will see on my charts analysis on suggested support and resistance areas based on prior support/resistance; OR, potential support highlighted may be the common Fibonacci retracements of 38, 50 and 62 percent of the prior advance.
Potential target/OBJECTIVES based on a second down leg that's 1.38 to 1.5 to 1.62 as long as the first downswing are a related analysis but are not highlighted as 'support'. Such downside targets for a second longer down leg also rely on Fibonacci calculations.
SENTIMENT factors, as well a long-term chart analysis, play into my current Market view of correction-only versus Bear Market ahead. I've not seen the start of a Bear Market when traders had very LOW bullish expectations. I've yet to see over many market cycles a major TOP that wasn't formed with very high and persistent bullishness, which is quite the contrary currently.
[My usual chart highlights for resistance levels are red down arrows; my highlights for support areas are the green up arrows.]
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX) DAILY CHART:
The S&P 500 (SPX) has turned bearish in its short to intermediate pattern given the decisive plunge below its prior low. Such a pattern often suggests that a further decline, a second down 'leg' will carry farther than the first downswing.
I outline how possible further downside targets could be calculated in SPX in my initial bottom line commentary above. My maximum downside projection, assuming this decline gathers steam is to the 1950 area.
Per my chart, anticipated near support/buying interest comes in around 2000-1995. 1995 is support implied by this level being a half/50% retracement of the prior advance. Next lower support is highlighted at 1965 and a 62% retracement. 1950-1960 looks like fairly major support is there.
Initial and key overhead resistance is seen at 2050, the recent 'breakdown' point where selling got fierce and buyers scarce. Fairly strong resistance looks to next come in around 2100.
Bullishness is way down per my 'CPRATIO' indicator and the Relative Strength Index is headed that way too. Best advice is to look for further weakness but don't get way bearish either.
The S&P 100 (OEX) INDEX DAILY CHART
The S&P 100 (OEX) chart turned short to intermediate-term bearish with the sharp break below its prior 902-901 lows and to a weekly Close below the 'milestone' 900 level.
The rounding pattern that was traced out by the declining lows into this past week finally reached a tipping point or 'breakdown point' around 920. Resistance is seen at 915, extending to 925.
OEX might stage a minor rally around 900 but there's also potential for a dip to next potential support at, 886 to probably 880.
886 would represent potential support at 50% retracement of OEX's October rally and is often a give-back amount that is seen in a 'normal' correction, where selling doesn't continue on into a waterfall type decline. Next lower technical support comes in around 870-872, with 872 representing a Fibonacci 62% retracement.
Anything near the 870 area is a good bet for bottoming action into a year-end rally; aka a Santa Claus rally! Stay tuned.
THE DOW 30 INDUSTRIAL AVERAGE (INDU); DAILY CHART:
The Dow 30 (INDU) didn't break as sharply as the S&P in that INDU held above ITS prior low and above key near support at 17200. Of course, the narrow PRICE-weighted Dow doesn't bend under the weight of big oil companies with monster capitalization that's reflected in the capitalization-weighted S&P indices.
The Dow of course lagged the S&P on a potential move to new highs so its more 'modest' recent correction isn't suggesting stocks will stabilize and end stock jitters; aka 'Fed jitters'!
I play the odds of corrections. There's often a 50 percent chance that a stock or index, within a long-term bull trend, will often retraces about half of its prior gains and then rallies. Support implied by a 50% retracement-pullback suggests next key support below 17200 is noted below at 16960. We can generalize key next lower Dow support as coming in around 17000.
Near technical resistance is seen at 17600, at the pivotal 200-day moving average; piercing this level led to a sharp further dip of nearly 400 points. Resistance in the 17600 area extends to 17700.
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) has turned mixed to bearish as initially suggested by the classic 'sell signal' double top made by COMP. I was thinking small slide/pullback, then on to new highs above 5200. WRONG! Instead came a sharp downside penetration of key support at 5000. COMP hasn't pierced ITS prior low (just above 4900), so its chart doesn't have the more bearish aspect implied by SPX's decisive downside penetration of its prior low.
Pivotal overhead COMP resistance is 5000. Areas where prices fell off a cliff (a 'breakdown' point) see a lot of selling coming in on a return rally. Next resistance is highlighted at 5100. A sustained recovery move back above 5000 is needed to suggest renewed upside momentum in the Composite.
Key near support is at 4900. Next lower support, implied by a 50% retracement of the October rally, comes in at 4835. A decline to 4835-4800 area, if seen, could be potential low for the current pullback. Stay tuned!
Trader bullishness keeps dipping. So much so that I'm thinking there will be a solid trade coming up betting against this crowd.
THE NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) traced out a bearish double top at 4737 as seen on the daily chart; this top was still shy of NDX's all-time 4816 peak. When Index support was then pierced at 4600 with selling piling on, this second top now appears as a more potent bearish chart pattern.
The key when a top is hit twice is what happens on the pullback, whether shallow or deep, because, as the old saying goes, "tops are 'made' to be broken". Well, sometimes!
Pivotal support is at 4500. If 4500 isn't pierced, this recent weakness doesn't suggest major bear damage. Below 4500, 4400 is next lower support, extending to 4300. A deep correction could carry to the 4300 area. In that area, if seen, risk to reward potential in bullish plays, favorable.
Near resistance is seen at 4600. Ability for NDX to climb back above 4600 in a sustained move would regain bullish momentum.
The NASDAQ 100 Tracking Stock (QQQ); DAILY CHART:
The Nasdaq 100 tracking stock's (QQQ) upside momentum stalled as seen in the 115 double top. A two-headed monster for the QQQ bulls perhaps if said top turns out to preface a major correction. 112 is important near resistance, with next resistance then beginning at 114.
Key QQQ chart support is in the 110 area, at the prior lows. I'm not thinking major correction here but all eyes are on 110. If this area holds as support, the chart looks just 'mixed'. Not so if 110 support is pierced as a subsequent decline could carry to 108, with a slide perhaps extending to 106 and my current lowest downside target.
On Balance Volume is drifting sideways to lower. No big daily volume spikes have come yet. A major volume jump looks likely if 110 is pierced. Whether this would 'signal' any immediate bottom is unlikely. But a cluster of high volume days are often followed by an end to a decline.
The RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 Index (RUT) has been reliably waxing and waning between its narrow upside trading 'band' at 2.5% above the 21-day moving average and on the down to 5 percent under the 21-day. Obviously, more downside bearish influences going on with the rallies smaller, the declines bigger. This is a mixed picture or chart best defined as a trading-range market. Buy it at support, sell at resistance.
Near resistance is at 1140, with next resistance in the 1170 area. 1200 has been a slam-dunk area to short.
Best near support is seen in the 1100 area, with support assumed to extend to the prior cluster of lows at 1080.
A frequently reliable sign of the end of decline has been seen with the 13-day Relative Strength Index (RSI) into or below the oversold extreme highlighted in the 30-25 zone and below. Stay tuned, with RSI at 33.
GOOD TRADING SUCCESS!