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Downside Remains Limited

By Paul Cherney The CBOE volatility index, or VXO, is above its 10-day exponential

moving average. The chances for a good move higher do not increase until the VXO can start moving lower. Near the close of trading on Tuesday, Jan. 13, the 10-day exponential moving average of the VXO was 16.14. Anytime the VXO is above its 10-day and moving higher, the chances for big gains weaken, but Wednesday, Jan. 14, can see a rebound in prices even if the VXO does not manage to undercut 16.14 because this is options expiration week.

Some of the price action on Tuesday had to be related to the option expiration on Friday. There were no headlines to account for the price drop. Wire services reported that sell programs were executed. Tuesday's price action can be a set-up for a different market direction on the following trade day.

Intel (INTC) is supposed to report after Tuesday's close and that will certainly influence the opening on Wednesday but the markets have seen such great appreciation in price that even a good news might only propel the markets higher on an intraday basis. Usually after the price action seen on Tuesday, it is better to see a final flush of sellers and a down opening which then reverses.

A surge at the opening which finds the Nasdaq unable to maintain prices above immediate

resistance at 2,104-2,113.33 would not be a good sign. This 2,104-2,113.33 was established Friday as resistance, and then Monday's late afternoon prices and Tuesday morning's prices have confirmed that the sellers are active at these levels, preventing prices from moving higher so if prices jump but then undercut 2,104 for more than four minutes, more profit-taking might follow.

Immediate intraday resistance for the S&P 500 is 1,127-1,131.60, and the same conditions apply.

Longer-term momentum measures for both the Nasdaq and the S&P 500 remain positive, but daily measures are in positions which can see sloppy, sideways and slightly lower prices. Downside still appears limited.

Immediate intraday

supports for the S&P 500 are a stacked staircase beginning at 1,124-1,119.90. Additional supports are 1,118.48-1,113.69, then 1,106-1,100; the broad support is 1,106-1,068 and 1,083-1,053, which makes a focus of support 1,083-1,068. Price support thickens with prints of 1,096 and lower. A drop to prints under 1,113.69 would not be healthy.

Immediate intraday resistance for the S&P 500 is 1,125-1,128. The longer-term (and older) resistance for the S&P 500 is still 1,116-1,133, then 1,151-1,176.

Immediate support for the Nasdaq is 2,101-2,084, 2,089-2,078, then 2,062-2,047.

Good earnings reports could be viewed as a "sell on the news" event for some companies, capping upside.

There is virtually no competition for an investment dollar. Downside should still be limited, but as the earnings reports for the fourth quarter are delivered, the upside for the markets might be limited, too, as the markets digest some of the gains of the past 15 months.

This quarter is a quarter following a 10%-plus gaining quarter for the S&P 500. Historically, odds are eight in 10 that the S&P 500 will be higher at the end of the March quarter; the average gain (closing basis) by the end of the quarter is 4.05% based on data since 1958. A 4.05% gain based on the close of the S&P 500 at the end of the fourth quarter would be 1,156.96. Cherney is chief market analyst for Standard & Poor's

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