What a week! Rather than waste time on last week's winners, because only bonds, gold and gold miners gained ground on the week, we'll focus on who got especially hammered.
From and index perspective, the PowerShares QQQ Trust (QQQ) was the week's biggest loser, declining more than 7% on the week. The iShares Russell 2000 (IWM), SPDR S&P 500 Trust (SPY) and SPDR Dow Jones Industrial Average (DIA) all lost between 4.5% and 6%. Suffice it to say mom and pop retail investors will not be pleased if they check their investment accounts on a weekly basis.
As far as individual sectors are concerned, the largest declines were seen in shares of oil and gas, semiconductors, tech, biotech and bank stocks. However, while the intensity of the selling was truly spectacular, the question now becomes, should we be getting long?
As always, whether one is looking long or short is a question of timeframe.
In my view, shorter timeframe participants should be looking for stocks approaching, or already in the vicinity of prior price support. From there, note where the Relative Strength Index (RSI) closed on Friday (is it dramatically oversold?), and consider whether the stock is in a full-blown downtrend or still holding above higher timeframe moving averages.
If a stock is trading beneath all short, intermediate and higher timeframe moving averages, the RSI is dramatically oversold, but in the vicinity of prior price support, the stock can probably be bought with a logical stop. But probably only for a two-five day bounce.
A great example of stock trapped in a horrific bear trend, but likely ready to bounce big is ConocoPhillips (COP). The stock has massive price support and past congestion between roughly $41.50 and $45.
Not only did the stock bounce sharply from near $45 in early-October 2011, but the congestion within that 3.5 handle zone from mid- to late-2010 should help to slow current bearish price momentum. Giving COP dip buyers even more confidence is the bullish divergence that can be found in the daily RSI.
In the example above, it's important to remember that the higher timeframe trend is still bearish. Horrifically bearish, to be precise. Stocks like these can bounce 10%, 20% or even more in an astonishingly short period of time. However, don't fall in love with them. They should be sold, or even sold short into declining, higher timeframe moving averages.
Those operating on a higher timeframe should probably spend more of their time noting specific sectors and stocks that have transitioned into bear trends. From there, note prior price resistance and swing highs. And consider fading strength into an eight-day exponential moving average if trading particularly aggressively. Or higher timeframe 50-day, 150-day or 200 day simple moving averages if taking a more conservative approach.
Moving on to Monday's E-Mini S&P 500 futures (Es) auction, I want to begin the session with a focus on 1962.50/1965 and 1983.
Assuming an opening wave of sell orders forces the Es beneath Friday's 1968 intraday low, the first area I'll be looking for buyers re-enter the auction is toward the low-to mid-1960s. If that area fails to generate any interest, I see little price support preventing bearish continuation toward 1946.75.
If, by some miracle, demand materializes at Monday's open and drives price toward 1983, we'll have to determine how strong our responsive seller truly is. A strong seller would be expected to prevent price acceptance within Friday's value area, and 1983 represents the bottom of that 2015.50-1983 area (where 70% of the session's business occurred).
Value migration above 1983 would have day timeframe buyers looking for further buying toward 1995 and 2003.50.
Any trading or volume profile related questions can be posted in the comments section below, emailed to me at firstname.lastname@example.org or posted to my twitter feed @ByrneRWS.