THE BOTTOM LINE:
It can be hard to switch gears and jump back in with bullish positions after a steep decline, but bull market bottoms like seen early this month require quick 'conversion'. Declines in strong bull moves eventually bring out fear over greed, to offer that simplistic formula of bull markets being overly dominated by expectations of gain, versus bear markets being dominated by fear.
Waterfall type declines within what had been a 'buying-every-dip' mentality are scary. It can be hard to figure IF and WHEN to get back into bullish positions. Technical tools are ideal for finding a bottom in bull market corrections as such bottoms tend to be 'technical' so to speak. For example, the strongest index, the Nasdaq 100 (NDX), makes a 'minimal' (Fibonacci) retracement of 38% then rebounds strongly; the S&P 500 (SPX) makes a 'common' 1/2 50% correction and rallies and the lagging Dow 30 (INDU) corrects 2/3 66% of its prior advance then rebounds more slowly. INDU 'bellwether' type technical indicator of recovery at the 200-day moving average which will find buyers who often don't involve themselves in chart/technical analysis.
Fundamental analysis drives bull markets more than technical considerations in many cases. An economic analysis is made for higher and higher earnings ahead and the multiples expand. The guess work is not knowing for a long time WHAT those P/E multiples should be.
Going back to the very important psychological aspect brings me to a bullish point in that there was a less than robust or immediate strong rebound in bullish sentiment by options traders this past week. Instead, my call to put daily volume indicator for equities options show a somewhat cautionary outlook or aspect this past week which suggests some staying power for the current recovery move.
And, of course, the leading sector of technology, internet, social media and other related stocks found in the big cap Nasdaq 100 (NDX) Index, which is a current bellwether for this Market, went to a new high for the current move already. Expect the S&P and especially the Dow to lag for a while as has been the case mostly in the current market cycle, but they should work higher also. I'm stating the 'obvious' no doubt as Nasdaq doesn't soar without more mainstream economic stocks also following. They are followers here however, which is the point currently.
Last week I wrote the following related to the bottom made week BEFORE last, which is worth repeating for the summary of what happened technically:
"The S&P 500 (SPX) retraced approximately 50% of the October to January advance, which tends to be a 'normal' one-half correction in a stock or major market index after getting 'fully' oversold. A weaker index might retrace a Fibonacci 62-66 percent of its prior advance whereas a strong mover might only retrace about 38% of its prior move. The foregoing was the case with the Dow 30 (INDU) and the later was true for the big cap Nasdaq 100 (NDX) as it retraced a 'minimal' Fibonacci 38% before rebounding.
Typical for the last 3 important lows in the NDX tracking stock QQQ, were the multiple spikes in daily trading volume as high volume typically precedes a bottom in previously strong bull movers."
Going back to the origin point of recent lows in the major indexes helps assimilate the type influences seen consistently in past bull market cycles; influences or aspects worth remembering. Namely, what are common technical patterns as to WHERE and HOW bull market corrective lows will tend to occur. This is worth repeating because primary or major bull markets have an average DURATION that is significantly longer than primary bear markets. If you get in EARLY in bull market trends, you have less to worry about, but there are times you will want to exit bullish positions to guard profits, maybe participate in a bear move with puts and the like, but then be ready to turn on a dime and get back in on the bull side but at a very favorable price relative to the next bull move.
What is 'most' favorable about the foregoing timing aspect is that with good timing of entry you can then set an exiting stop that will result in a (relatively) small loss if a floor doesn't hold but will not get yourself triggered by an early dip in an upside turnaround. If you control trading RISK by entry mostly or only in 'low risk' oversold conditions, profits will typically take care of themselves. Read the Market Wizards series (by Jack Schwager) to see how much the most profitable/greatest traders talk more about controlling risk than predominate focus on reward. This isn't to say that we shouldn't be bold when the time is right to do so. My trading mentor had real guts to go against consensus and lazy thinking but based on astute study of how market trends unfold.
MAJOR STOCK INDEX TECHNICAL COMMENTARIES
S&P 500 (SPX); DAILY CHART:
The recent S&P 500 (SPX) index has reversed its bearish short-term decline decisively by its renewed upside momentum as the Index sailed above its 21 and 50-day moving averages. Good upside potential was seen from when SPX crossed above 1800.
What was resistance at 1800 now 'should' become near support. Assuming this rally is the real deal, which is how the chart pattern reads, I anticipate 1800 holds up as support on any dip. If 1850 is pierced first time SPX may build support above 1850 for a run to 1900 next and potential resistance at the top end of SPX's uptrend channel. Downside support is seen around 1767, extending to the 1740 area.
Bulls shouldn't want to see the Index become immediately overbought so the fact that it's not favors further upside progress. My sentiment indicator doesn't suggest an immediate overheating in bullishness. Waterfall type corrections scare the heck of too-overly optimistic bulls. The recent sharp decline and sudden bearish atmosphere brought needed caution for now. The moderate mid-range reading of bullishness/bearishness is in contrary opinion terms, bullish.
1850 is a key level to overcome for the bulls. Whether SPX slices through this in the near-term, or not, the Index projects higher. Possible hiccups along the way would be a dip back to 1800. SPX may be over-stretched in the near-term, but near term only, is the way the chart looks.
S&P 100 (OEX) INDEX; DAILY CHART
The S&P 100 (OEX) chart is bullish like big brother SPX. The big cap S&P 100 index, unlike big cap Nasdaq 100 (NDX), is not so close to a new high. It's lagging here. Still, the index chart remains bullish above 800. Dips to this area could be bought with tight exit stop-loss points.
OEX had a 'stronger' top pattern, relative to SPX in that OEX formed an earlier and distinct double top at 824. 824-825 is a pivotal line of resistance for the big cap S&P. The OEX chart pattern is bullish and there's potential for a move to the upper end of OEX's uptrend channel. In that regard a measured move upside objective is to 840.
800 is pivotal near support if the rally has steam and it looks like it does. Strongest suggested technical support comes in around 775, at OEX's up trendline.
THE DOW 30 (INDU) AVERAGE; DAILY CHART:
The Dow (INDU) is showing renewed bullish momentum with its strong close of the past week well above prior key resistance at 16000 and putting INDU back into mid-range in its broad uptrend channel. The Dow had the deepest pullback peak to trough, at a 66% retracement and one of my perennial favored 'retracement' buy points in a bull market. Support came in on the recent bottom at INDU's 200-day moving average and the low end of the Dow's uptrend channel, suggesting intermediate support was reached and buyers rushed in to prove it.
Below 16000 support, support in the Dow is 15900, with major support coming in at 15500-15430. Any pullbacks to 16000 in the Dow, now that it passed above that milestone, look to be well supported.
INDU looks headed up the 16300 area to test resistance 150 points higher than its Friday Close. Pivotal break-out kind of resistance begins at 16500, extending to near 16600. Longer range projections for the Dow point to 17000.
Strongly bullish Weekly Dow stocks are seen with DIS, MRK, and V. Moderate gains are underway or could develop in AXP, CAT, CSCO, GE, HD, JPM, MMM, NKE, PFE, UTX, and XOM. This is barely half of the Dow and there are just the 3 strongly bullish charts, so the Dow doesn't project strongly high, but moderate gains can be projected from looking at the 30 individual Dow charts. One of my pastimes! Try it, it's interesting!
NASDAQ COMPOSITE (COMP) INDEX; DAILY CHART:
The Nasdaq Composite (COMP) chart is bullish and has by ONE point made a new Closing high, but immediate resistance should still be considered at 4243-4244 until COMP can decisively climb above these highs. Next resistance looks to come in at the top end of COMP's well-defined uptrend channel, intersecting in the 4316 area currently. On a short-term hourly chart basis (not shown), COMP is at an 'overbought' extreme and I would not be surprised, especially in the holiday shortened week ahead, to see a minor pullback to the 4180-4200 area.
Next technical support is suggested in the 4150 area with further chart support around 4060. 4000 begins what should be fairly major support.
Bullish sentiment, as I discuss in my initial 'bottom line' commentary above, has moderated. Traders have not jumped back so heavily into calls although the last dip to and just below 4000 and into the 38-50% retracement zone, should have been strongly bought if you went by the chart and the oversold condition seen with the 13-day Relative Strength Index (RSI). Hey, not easy to do if you think you're just buying into a falling knife!
Just a point on the RSI is that COMP hadn't gotten 'fully' oversold since before what is shown on the daily chart below; we have to go back to the late-June low to see the 13-day RSI getting near 35 and back to mid-November 2012 to see this indicator dipping to, and under, 30 which is the area that tends to definitively 'define' an oversold extreme at least for 13-day Relative Strength Index. Of course, it can be hard to 'believe' that a bottom can be trusted based on such seemingly simple chart/technical aspects. Of course RSI pattern ALONE might not be a basis of market action, but putting together price AND indicator patterns, plus sentiment, this is a basis for probing the bottom, with an excellent 'stop out' point below the up trendline.
NASDAQ 100 (NDX); DAILY CHART:
The Nasdaq 100 (NDX) chart remained bullish on the pullback as the Index only fell back to prior support at 3435. The Index then not only rebounded strongly but has gone on to make new highs of course. NDX had a pullback that only retraced a 'minimal' Fibonacci 38% of the October to January rally. Such relatively shallow pullbacks are common in strong stocks and stock indexes.
There may be some resistance that shows up at the upper end of NDX's uptrend channel line, currently intersecting around 3720. Next anticipated resistance, assuming NDX breaks out above its multimonth uptrend channel, comes in around 3800.
Near support is seen in the area of the 21-day moving average, at 3580. Next anticipated support is highlighted at 3500.
I'm anticipating at least a test of the 3700-3720 area ahead as resistance but the longer-range weekly chart (not shown) would suggest 3800 is a possible next objective but perhaps not in the near-term. Near-term NDX looks due for a pause and possible dip to the 3620 area, maybe to 3580 which should be an area to be bullish.
NASDAQ 100 TRACKING STOCK (QQQ); DAILY CHART:
The QQQ chart reflects the strong bull recovery of the underlying Nas 100 Index. The tip off technically for a turnaround was when heavy volume came out so to speak. My market mentor used to say that "volume 'precedes' price, in that volume pickups either tend to mark lows or HEAVY volume spikes will tend to mark selling-'climax' lows. This is quite true in the case of QQQ as I've highlighted on the daily chart below.
The other strong suggestion that this ETF was making a bottom and traders should have been BUYING, not selling (which was where the volume was coming from mostly), is seen in the touch to and rebound FROM the stock's up trendline in the 84 area. Buying there was sweet for a quick nearly 6 point gain.
I'm anticipating near resistance coming in around 91, although on a weekly chart basis and not shown here, QQQ has achieved what looks like a decisive upside penetration of its long-term uptrend price channel, at least dating back to QQQ's March 2009 bottom. However, this uptrend channel may be EXPANDING or widening. These uptrend channel lines don't always 'work' as a containing factor in very bullish major moves.
Near support is highlighted at 87.8, then lower at 86 even. The On Balance Volume (OBV) line has turned up strongly, which is a supportive bullish technical indicator. Price trends are always the primary aspect technically, but volume can be a secondary bullish indicator as it would look to be here.
RUSSELL 2000 (RUT); DAILY CHART:
The Russell 2000 (RUT) has had a good recovery move off its oversold lows (per the RSI indicator) and such RSI lows only occur occasionally, but are quite 'reliable' in signaling bottoms, when occurring within overall bull market trends. The simplest way to know that the intermediate to long-term trend hasn't reversed down is to observe that the LAST prior downswing low hasn't been penetrated, especially on Closing basis both on daily and weekly chart.
My re-drawn up trendline was based on the upside reversal after the fact. The prior uptrend channel intersected in the 1100 area. An excellent indicator of near to intermediate-term price momentum is seen in the move back above the 21-day moving average.
Anticipated upside resistance is highlighted at 1166, then at the prior intraday highs in the 1180-1182 area and above that at the upper trend channel line in the low-1200 area. Downside support in RUT is seen at 1120, then back at the up trendline intersecting currently just below 1100 in the 1090 area.
I anticipate RUT working higher but it doesn't look to be leader on this current recovery move; instead, will follow Nasdaq higher but not quickly to NEW highs in my estimation.
GOOD TRADING SUCCESS!