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A Jittery Ride for the Markets

By Paul Cherney Jagged, indecisive trading is still likely. These markets are going to have to prove themselves by demonstrating the ability to rise and exceed

resistance levels. Until then, patience is a virtue.

On Thursday, Mar. 11, certain end-of-day measures of put volume and the total Put/Call ratio at the CBOE reached levels which heavily weight the odds to favor that there will have to be a close below Thursday's close for the S&P 500. That was 1,106.78. (See "Put/Call Filter", below).

The broad picture of Nasdaq

support is a band 2,001-1,783, established over the months of October, November, and December, 2003. The index has well-defined support at 1,994-1,925, then 1,907-1,878.

The S&P 500 has support at 1,110-1,091, with a focus at 1,097-1,091, then 1,082-1,053, with well organized support at 1,077-1,031.

Immediate resistance for the S&P 500 runs from 1,120.90-1,129, and this is the area of resistance which would have to be exceeded on a closing basis to suggest that buyers are back in command.

The immediate resistance for the Nasdaq is 1,962-1,982.58. Next resistance is 1,996-2,022.

Put/Call Filter: As of Thursday's close, the CBOE Total Put/Call ratio was 1.20 (that's high). As of Thursday's close the CBOE single day Put Volume divided by the previous day's 10-day moving average of put volume was 1.99 (very high). Either of these measures is an extreme, both happening on the same day is rare. Historically, since 1986, this combination of extremes has been followed by an S&P 500 close which undercuts the close on the day of the signal. Sometimes such extremes generate a good mechanical bounce for a few days directly after the signal, but ultimately, a close lower than the close on the day of the signal has unfolded every time similar levels have been reached in the past (since 1986 for the S&P 500).

For the filter, I asked to see trade days when the CBOE's Total P/C ratio was above 1.15 (on Thursday it was 1.20) and on the same day, the CBOE Put Volume divided by the previous day's 10-day moving average of Put Volume had to be greater than 1.95. My conclusion is that this market has some work to do to restore confidence.

One thing that became obvious when looking at the price performance after signals in the past: the markets appear very susceptible to bad headlines. Here is a list of the trade days when the CBOE's Total P/C ratio was above 1.15 and the CBOE Put Volume divided by the previous day's 10-day moving average of Put Volume was greater than 1.95. All of the dates were followed (at some point in time) by an S&P 500 which undercut the closing price on the day of the signal.

Sept. 18, 2002;

Aug. 21, 1998;

July 16, 1996;

Oct. 5, 1994;

Mar. 30 & 31, 1994;

Feb. 4, 1994;

Mar. 12, 1993;

Feb. 16, 1993; and

Dec. 2, 1987.

On Thursday, the S&P 500 closed below the "line of death" (as explained in the previous column) at 1,120.90 and this has technically opened downside risk for a test of the next layer of organized support on the daily charts which is 1,077-1,031. There is no calendar or timetable for this potential downside target. Prices never move in straight lines. Cherney is chief market analyst for Standard & Poor's

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