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A Matter of Conviction

By Paul Cherney On Wednesday and Thursday, the markets experienced a short-covering rally. Buying is created by 3 factions: 1)

bears covering short positions to book profits, 2) momentum

players jumping on the backs of their bearish brethren, and

3) some longer-term investors step in to do some bargain


Wednesday and Thursday's price action satisfied

the buying demand of the bears covering shorts and then the

momentum players probably started taking profits on Friday so two of the three legs of the buying stool were

eliminated. If the longer-term investors are not convinced

that there is some sort of relative value in equities at

these prices, then there will be no one to support prices

and declines will exceed the lows seen in Wednesday's


It is natural for the market to retrace some of the

gains generated by a short-covering rally, but if buyers

don't step to the plate to prevent prices from closing

beneath the lows that generated the short-covering, then

price patterns could easily turn sideways to lower and

require time to establish a base of prices before anything

meaningful to the upside can unfold.

A positive

trend could unfold from the short-covering rally if the

retracement finds buyers at price levels higher than

Wednesday's lows and then those buyers force prices above

the immediate resistance levels mentioned below.

The Nasdaq has intraday support at 1923-1901, then 1894-1874. It would be unhealthy for prices to move below the 1894-1874 level. Wednesday's low print was 1851.49.

The index has considerable resistance at 1942-1985.83, with the

first focus of resistance 1942-1966 -- and that is still a

major stumbling block as proven in Friday's session when the

Nasdaq printed a high of 1942.15 and then turned lower.

There is a very thick layer of resistance at 1966-1986 and

then stacked right on top of the 1986 there is resistance

at 1977-2018 which makes the 1977-1986 level a focus of


The S&P 500 index has immediate support at 1123-1116. The

index has resistance at 1126-1139.50. The next layer of

resistance is at 1152-1177 with a focus 1156-1164.

The "500" has well defined intermediate term support in the 1111-1052 area. There is a focus of support inside this region at at 1094-1080. Wednesday's low print was 1081.66. Cherney is market analyst for Standard & Poor's

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