By Paul Cherney Friday is the Triple Witch, when the monthly stock and index option expirations coincide with the quarterly expiration of futures contracts. Quite often, there is huge volume at the open as the big money tries to influence the opening prices of individual equities because it is those opening prices which generqte the special settlement values of the indexes which are connected to futures contracts. After the first 20 to 35 minutes of trading the markets usually calm down and spend most of the day trading sideways.
The sentiment and pricing model which I have been referring to as predicting good chances for gains if the VIX (volatility index) can close below its 20-day exponential moving average became defunct, invalid, as of Thursday's close, because the VIX was unable to move below its 20 day exponential moving average while all three of the other conditions in the model were in place. Thursday's price action caused one of the other 3 conditions in the model to fault. This has rendered the model defunct.
After the selling we have seen over the past few weeks, there would be increased odds for a good short covering rally (maybe one day, sometimes as long as 3 to 5 days) if the VIX can close below its 10 day exponential moving average which finished Thursday's session near 28.22.
Even a short-covering rally might find only limited participation. The study of historical price performance for the second half of June (in years when the S&P 500 lost at least 5% from the end of March to the end of May) puts the historical odds (since 1970) at 4 in 5 (80%) that the S&P 500 will end the June quarter at levels lower than it closed the 10th trade day of the month. The 10th trade day of the month was June 14 when the S&P 500 closed at 1007.27. It is because of this study that I would tend to think that a short-covering rebound might only last one to one and a half trade days.
I include this reminder from Tuesday's column because it remains important: In Monday's session, the NYSE's TRIN (an index combining both advance/decline and up-volume/down-volume indicators) at the end of the session was 0.35. Closes under 0.40 are not that common. The recent record of price performance for the S&P 500 in the wake of excessively low (under 0.40) TRIN readings has not been great. For those who have access to historical charts, here are the dates of the last 5 times the NYSE TRIN has finished the day below 0.40: May 8, 2002; Apr. 16, 2002; Dec. 5, 2001; May 16, 2001; and Mar. 16, 2000 (which led into the March top).
The Nasdaq has immediate resistance at 1474-1491, then 1519-1538.36, then 1554-1595 with a focus of resistance of 1560-1570. The next thick resistance (above 1595) is 1620-1654.
The S&P 500 has immediate resistance at 1010-1019, then 1025.93-1039.09. There is a focus of resistance at 1032-1037.80. There is thick price traffic at 1039-1047. The next resistance is 1065-1088.
Immediate Nasdaq support is 1481-1445 and then all of the price range from Sept 21, 2001. The Nasdaq has additional support at 1400-1200.
Immediate intraday support for the S&P 500 is 1003-981 and then the entire price range from Sept 21, 2001.
September 21, 2001 price ranges are:
S&P 500 intraday high 984.54, intraday low 944.75, close 965.80
Nasdaq intraday high 1454.04, intraday low 1387.06, close 1423.19 Cherney is chief market analyst for Standard & Poor's