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Downside Appears Limited

By Paul Cherney There are multiple technical crosscurrents for Thursday's session.

Upside appears limited, and for Thursday, downside appears limited and might generate a rebound in prices. But the VIX (market volatility index) is probably going to have to stay below its 10-day exponential moving average if that is going to happen (a rebound from short-term oversold). If there happens to be opening weakness in stock prices on Thursday, the VIX will probably move above the 23.00 level. If buyers move into equities and force a reversal of early weakness, expect the VIX to come back down and it looks like it would have to at the least move below 22.94 to act as confirmation of a rebound. Preferably it should move below 22.00.

The movements in the VIX do not always negatively correlate with stock index prices, but if prices are in a rebound and this measure of volatility is dropping, that is usually a good sign.

Near Wednesday's close, the 10-day exponential moving average of the VIX was 22.94. Usually, when VIX moves back above its 10-day exponential moving average, equity prices suffer.

Like Thursday of last week (Nasdaq) when I thought any opening weakness on Friday morning would be viewed by the markets as a buying opportunity (short-term), I now have similar intraday indications of oversold for both the Nasdaq and the S&P 500. Intermediate term indicators based on 60-minute bars are now oversold, except for one, which was the case last Thursday, when I thought that any early weakness on Friday would be seized upon by buyers, but the markets popped higher at the open, and then really did not look back.

There was a headline which forced the buyer's hands at last Friday's open: nVidia's (NVDA) announcement that it expected better sales. This put buyers in command right out of the gate. Another headline might do that for stocks on Thursday, but for now I would expect that there should be some slightly lower prices in the morning.

The Nasdaq has a focus of

resistance at 1547-1568 (daily charts).

The S&P 500 has a focus of resistance at 951-957 (daily charts).

Studies of price action in the S&P 500 greatly limit expectations for any sort of a sustained trend higher due to the percentage of "bearish" advisors (%bears) in Investor's Intelligence weekly poll remaining under 25.0%, and as of Wednesday the % bears is still under 25.0%. There is an aspect of this price study which I feel obliged to address: Of the 14 prior times since 1987 that the %bears have been below 25.0%, nine of those times saw the worst closes during the sub 25.0% readings reach a loss of 2% or more. That means that historically, the odds have been 64% of the time that the S&P 500 has experienced a close which represented a loss of over 2% from the day that the %bears under 25.0 was announced. So far, the current market has seen a closing loss of 1.01%, which occurred on the day after last week's Wednesday announcement. If you averaged all the "worst" closes experienced during the prior 14 occasions, the average worst closing loss was a drop of 2.35%; for the current S&P 500, that would equate to a close of 907.77. History never repeats exactly, but this is a consideration. If the VIX starts a trend back above its 10 day exponential, S&P 500 prints under 910 could become a reality.

The Nasdaq has immediate resistance at 1543-1595, with a focus of resistance at 1547-1568.

The S&P 500 has immediate resistance (established in August, 2002, and the beginning of July, 2002) at 944-965, with a focus of resistance at 951-957.


support for the S&P 500 is now 939-929, with a focus of 934-930.

Immediate support for the Nasdaq is 1532-1510, with a focus of 1525-1515. Cherney is chief market analyst for Standard & Poor's

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