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Downside Appears Limited

By Paul Cherney I can no longer cite the price pattern prior to 1991's Desert Storm military action as a potential guidepost for today's markets because we have gone longer in time than in 1991 and there has been no military action.

The cloud of uncertainty hanging over the market with respect to Iraq has not gone away and the lack of total trading volume speaks loudly to the fact that the market action is in the hands of traders, not longer-term investors.

Right now, the only trend apparent in the intermediate term is sideways for the S&P 500, a huge trading range since July, 2002.

The price pattern established over the past five trading days carries a positive tone. Monday's retracement did not eliminate that positive potential, but the fact that Monday's opening move higher hit resistance levels and then just reversed is a clear and obvious sign that there are sellers who remain ready to use advances in price as a selling opportunity.

When I see this kind of price action I tend to think that there has to be some sort of a short-term shake-out to clear the overhead air of sellers. In the recent market, these "shake-outs" have taken place intraday. (Think of a shake-out as a short-term capitulation of sellers.)

Intermediate term intraday indicators did not reach levels on Monday which would suggest that the intraday downside is over, but downside still looks limited.

The S&P 500 finished Monday's session inside immediate support at 838-831. Additional support is 826-815, with a focus of 826.66-818.70. Next S&P 500 support is 806-768.

The Nasdaq has immediate intraday support at 1309-1295.06, and if prices were to start to print in this zone I would expect to see some intraday base-building. On the chart, support actually runs 1309 all the way to 1279, with a focus at 1296-1287.

The S&P 500 has immediate resistance at 839-853. Monday's price movements created stacked resistance; the next resistance is 852-869 and inside of this layer is an especially thick layer from 857-862. In Monday's session, I was wrong in my expectations that S&P 500 prints above 852.87 could force a short-squeeze, all those prints did was bring sellers to the markets which adds to the importance of this price level of resistance.

The Nasdaq has immediate intraday resistance at 1335-1343, then the 1352-1379 area. Cherney is chief market analyst for Standard & Poor's

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