THE BOTTOM LINE:
The bearish rising wedge chart pattern in the major indexes that was traced out from October/early-November into the beginning of last week, most often forms ahead of a sharp trend
reversal. I'd say that last week's decline definitely qualifies as 'sharp' (and scary)!
I think I was clear last Saturday: that I was bearish and expected a substantial sell off starting soon, probably after an early week rally. I forgot that Monday (MLK Day) was an Exchange Holiday, so wrote that I anticipated a short-term rebound possibly INTO Tuesday. A good-sized rally did occur on the FIRST trading day of the week but that happened to be ON Tuesday. There were triple tops (a double top in the case of the Dow) made on the hourly charts of the major indexes by the end of Tuesday, another bearish type 'signal'.
The dominant daily chart pattern that suggested buying was seriously running out of steam was that of the bearish rising wedge patterns that formed from the early-November lows until recently with all the major indexes. You know it's the 'end' point of this pattern by when the two slanting trendlines get close to converging (or actually do converge).
In my Thursday Trader's Corner article, I laid out in detail the fundamental and technical meaning of the wedge pattern of the bullish RISING variety. There is a bullish FALLING wedge also.
I hope you saw that e-mail. I do recommend checking it out if you haven't. A key point of pattern recognition is that we understand what a chart pattern relates to in terms of the underlying fundamentals (e.g., stock distribution, less and less buying coming in, etc.), in terms of potential price targets implied by the chart formation and so on. This, so that when we see this pattern again, we are forearmed about any trend reversal implications.
You can click to this Trader's Corner article HERE
I'll just repeat from this column what the general characteristics of a Wedge pattern are in terms of it formation, duration and outcome.
ESSENTIAL CHARACTERISTICS: RISING WEDGE PATTERNS
1. The Wedge can develop either as a type of 'topping out' pattern to a previously existing uptrend, or start to form at the bottom of previous downtrend.
2. The Wedge normally takes more than 3 weeks to complete.
3. Prices almost always fluctuate within the Wedge's confines (between the two rising up trendlines) for at least two-thirds of the distance from the base (beginning of convergence) to the 'apex'. In some cases, prices go a short distance beyond the apex, pushing out a top in last gasp rally attempt before collapsing.
4. Once prices break out below the lower trendline, they waste little time typically before a sharp decline.
5. The ensuing drop often or 'ordinarily' covers all of the ground gained within the Wedge itself, and sometimes more.
The aforementioned ultimate price objective is one that's seen more commonly in individual stocks than in the broad indices like the S&P 500 and the Nasdaq Composite, but this target does constitute a sort of 'maximum' objective that I wouldn't rule out; but not necessarily in s straight shot. Keep in mind that the usual pattern of a full-blown correction is a downswing, a recovering rally, followed by another decline that often carries farther than the first decline. There are usually 3 legs or segments to a significant bull market correction.
The rising wedge pattern only rarely suggests more than an intermediate correction, within a still major or primary uptrend.
CHART OF THE WEEK:
A key support in the S&P 500 (SPX) is suggested by an SPX pull back to the major down trendline that the S&P previously broke out above; that level (1070) is noted on the SPX weekly chart below. It's also not unusual to see a set back after prices of a stock or index have retraced around half of a prior decline which is the case with SPX. In a very strong stock or index recovery rally, the key retracement levels that suggest (when achieved) at least a pause, is in the 62 to 66 percent zone. The Nasdaq Composite got to the 66% retracement area for 3 weeks running, counting the high of this past week.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The S&P 500 (SPX) has confirmed the bearishness of the Rising Wedge pattern discussed last week and the sharp pullback has now even pierced its broad uptrend channel on the downside. I noted last week that a 'maximum' downside target could be to as low as to the 1030 area but as noted in my initial 'bottom line' comments, I wouldn't expect a free fall here. More likely is that prices stabilize at or not far under recent lows and a rally follows.
To think that there won't be another significant decline after a rally attempt ahead is probably wishful thinking for the bulls. The market may finally undergo a significant correction, which would be quite 'normal' after a multimonth advance with only shallow and short-lived pullbacks.
I've noted near support area as 1080, then 1070, which would retrace around 2/3rds of the rally that began in early-November; with major support probably beginning in the 1040 area.
Near resistance is noted at 1115, with pivotal resistance at the broken lower trendline of the wedge pattern, as noted on the chart; the current intersection of this trendline is around 1140-1141.
As so often happens, the SPX top formed after BOTH the (13-day) RSI AND my sentiment indicator (see above graphs) got to overbought extremes. It will be interesting to see if and when my sentiment model falls to an oversold extreme. I think it may, but seems more likely in a second down leg. Bullishness dies slowly when so many prior corrections were short-lived.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) has turned decidedly bearish in its pattern. The outlook last week was potentially bearish; a strong potential no doubt but up trendlines were intact, etc.
Near-term resistance is noted at 504, then around 507-508, at the previously broken lower trendline of what had been OEX's uptrend price channel. For a more pivotal resistance, I'm keeping tabs on what happens on any rebound back to the area of the widely followed 50-day moving average, currently intersecting at 516. Major resistance is probable beginning around 525, at the previously pierced trendline.
The next lower technical support should be found around 500, extending to 496. Major support is anticipated in the 480 area.
DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) Average fell like a stone, which isn't surprising since this group of just 30 big cap stocks was lagging on the last rally. INDU had been going more sideways to just slightly higher, in terms of the highs being made, for some weeks coming into this recent break. Nevertheless, the various reaction lows had been marching steadily higher; the fact that each succeeding rally was short-lived and didn't carry far is characteristic of the wedge pattern and others, which suggest that buyers were thinning out.
Key near resistance on a bounce back is at 10300, then at 10400. Major resistance is up around 10615 currently. The Dow, haven't fallen the furthest and fastest, is the first to register oversold on the RSI.
Based on where the 62 to 66% retracements come in, I've noted a 10080-10035 support zone on the daily INDU chart. Major support is implied if there is a return all the way back to the low end of the rising wedge pattern in the 9700 area.
I wrote last week that "I anticipate lower prices ahead, perhaps after a short-term rally attempt, into say Tuesday." This predicted short-term rally (only) was ON Tuesday, the first trading day of week, which I forgot was Tuesday, not the usual Monday.
NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:
You'll see again with the Nasdaq Composite (COMP) chart, the same Rising Wedge formation. There are some divergences yes, between the indexes, but they all tend to form the similar major chart patterns.
Near support is suggested or estimated for the 2175 area, then 50 points lower, at 2125. Major support is projected at 2050, extending to around 2025.
I've noted resistance at 2237, then up around 2300, which I see as the start of major resistance for awhile.
Bullish sentiment is falling as put volume has jumped. At some point I anticipate that there would a daily reading or two that would put my indicator at or near the 'oversold' high bearishness zone. In the topsy turvy world of contrary opinion, extreme bearishness suggests that the market could turn back up
NASDAQ 100 (NDX) DAILY CHART:
MEA CULPA: I noted price levels last time for the Nasdaq 100 (NDX) index that were appropriate for the Nasdaq Composite only so forget about watching "2274-2279" as an important chart support for NDX. Well, like I've said, all the charts look the 'same' sometimes; only price levels are different!
I've noted next potential technical support for NDX at 1760, extending to the 1730 area. Based on a short-term oversold condition, we could see the index rally early in the coming week.
Initial technical resistance will come in around 1840 in my estimation, then at the previously broken up trendline, which intersects currently around 1873.
I'm going to take any rallies in the near-term skeptically in terms of the big Nasdaq stocks immediately resuming prior strong uptrends. While what is feared the most, probably China throwing up higher interest rates, may not occur, there are other concerns that finally add up such that it occurs to the bulls that stocks are priced mostly 'fairly' for now.
NASDAQ 100 TRACKING STOCK (QQQQ); DAILY CHART:
The Nasdaq 100 tracking stock (QQQQ) mirrors the bearish price pattern of the underlying Nas 100 index per usual (having traced out the same bearish rising wedge pattern and having had the same sharp sell off) but with the Q's we can also better assess daily volume patterns. I didn't bother to draw a sharply rising trendline touching the tops of the daily volume bars of early-January through this past week; you can easily eyeball such a line.
My take on this rising volume trend (as noted last week), while prices went sideways (until Wednesday), was as rising long liquidation and (especially) increased shorting. Also, volume should expand in the direction of the (price) trend and the big volume jump was on the downside, suggesting a new intermediate-term (down) trend.
Near support is noted at 43.3, then 42.6. Major support is in the 41 to 40.6 area.
Near resistance now is down to 45.5, with pivotal resistance at the previously broken up trendline, currently intersecting at 46.2.
RUSSELL 2000 (RUT) DAILY CHART:
The Russell 2000 (RUT) Index is bearish in its chart, now 'confirmed' by the decisive downside penetration of the long-standing up trendline, rather than simply implied (last week) by its bearish rising wedge pattern. While small cap stocks may have a good seasonal tendency to rally early in Q1, no group of stocks will continue to rise if the economy is going nowhere.
Key resistance is suggested in the 625-630 price zone. A close above 630, at the previously broken up trendline and that wasn't reversed the next day, would suggest that RUT had recovered upside momentum. This doesn't look likely but that's a 'reversal' point for the current bearish chart.
Key support is in the 600 area, extending to 590. Major support is expected in the 553-557 area.
GOOD TRADING SUCCESS!
NOTES ON MY TRADING GUIDELINES AND SUGGESTIONS
1. Technical support or areas of likely buying interest and highlighted with green up arrows.
2. Resistance or areas of likely selling interest and notated by the use of red down arrows.
I WRITE ABOUT:
3. Index price areas where I have a bullish bias or interest in buying index calls, selling puts or other bullish strategies.
4. Price levels where I suggest buying index puts or adopting other bearish option strategies.
5. Bullish or Bearish trader sentiment and display the graph of a CBOE daily call to put volume ratio for equities only (CPRATIO) with the S&P 100 (OEX) chart. However, this indicator pertains to the market as a whole, not just OEX. I divide calls BY puts rather than the reverse (i.e., the put/call ratio). In my indicator a LOW reading is bullish and a HIGH reading bearish, consistent with other overbought/oversold indicators.
Trading suggestions are based on Index levels, not a specific option (month and strike price) and entry price for that option. My outlook often focuses on the intermediate-term trend (next few weeks) rather than the next several days of the short-term trend.
Having at least 3-4 weeks to expiration tends to be my guideline for trade entry choice. I attempt to pick only what I consider to be 'high-potential' trades; e.g., a defined risk point would equal in points only 1/3 or less of the index price target.
I tend to favor At The Money (ATM), In The Money (ITM) or only slightly Out of The Money (OTM) strike prices so that premium levels are not as cheap as would otherwise be the case, which helps in not overtrading an account. Exit or stop points, as well as projected profitable index price targets, are based on my technical analysis of the underlying indexes.