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Positive Bias in Place

By Paul Cherney Wednesday, Feb. 16, is the day Federal Reserve Chairman Alan Greenspan gives testimony on the state of the economy to the Senate Banking committee. The markets will be looking for a headline to sway prices in the short-run (1 or 2 trading days).

Overall, there is a positive bias in place for both the Nasdaq composite index and the S&P 500 index. But short-term momentum measures based on 60-minute price bars have flattened, which raises the importance of simple chart observations.

In Tuesday's session prices pressed higher but did attract some sellers and the S&P 500 and the Nasdaq were unable to close at or near their best levels of the session. The highs achieved in Tuesday's session represent the most important potential launching points for higher prices. That means prints above Nasdaq 2,103.45 and S&P 500 1,212.44 should attract some follow-through buying. But follow-through to the upside is going to have to trigger some bullish thresholds in order to bolster bullish confidence, because right now, both the Nasdaq and the S&P 500 are at levels of

resistance that are not just intraday.

If there is a move above Nasdaq 2,103.45 or S&P 500 1,212.44, I am going to look to the CBOE volatility index, or VXO, and I think it would have to be at the least below 11.25, more preferably below 11.06.

Also, It would be preferable to see True Bull Rally Day conditions in place, namely TRIN (an index combining both advance/decline and up-volume/down-volume indicators) below 0.80 and up volume divided by down volume at least 2.0 or higher.

And prices have to move well above the Nasdaq 2,103.45, S&P 500 1,212.44, as a sign of aggressive buying, the prices will probably have to move quickly above Nasdaq 2,111-2,116.75, S&P 500 above 1,213-1,217 in order to expect anything more than a one day event or simply an intraday advance that fails to followthrough.

A move lower would probably gain downside momentum if the following support levels were undercut: Nasdaq 2,085-2,074.81, S&P 500 1,206.93-1,203.59.

In my view of the market, it is a favorable condition when the VXO is below its 10-day exponential

moving average and at the same time the VXO is moving further down, away from its 10-day exponential moving average (widening the spread between itself and its 10-day). This relationship is wobbly right now. A move higher in the VXO usually coincides with weaker equity prices, so it would probably not be a positive for stock prices if the VXO started trending higher. Price action is more important than the VXO, so if the S&P 500 and the Nasdaq are moving above shelves of resistance, that converts those resistance levels to supports until proven otherwise (regardless of where the VXO is). But it is usually not a good omen for stock prices when the VXO is rising.

Very near the close of trading on Tuesday, Feb. 15, the 10-day exponential moving average for the VXO was 11.67, the 30-day was 12.37. I expect price weakness in stocks if the VXO moves above 11.67. I would guess that aggressive selling is in place if the VXO moves above 12.37. I think it would probably be a positive for stock prices if the VXO moved below 11.25, more preferably a move below 11.06 (chart read).

For the S&P 500, immediate

support is 1,205-1,191.54 with a focus of support at 1,205-1,199. There is a critical layer of support at 1,190-1,185.63, if this little shelf is undercut, then I would expect to see a stairstep decline unfold. On the daily charts there is support at 1,184-1,160, inside this support are shelves. The biggest support looks like 1,178-1,163. Next support is 1,142-1,090.

The Nasdaq has a band of support at 2,073-2,048, with a focus at 2,059-2,048. The next support is 2,039-2,008. The Nasdaq 2,039-2,008 area of support has a focus of support at 2,036-2,024.

I have confidence in referencing historical studies only when my shorter term technical measures are supportive of the historical study. I include the following historical fact because it is true, but thatdoes not mean that it is predictive of the current market.

Historical Fact: In the past 47 years, strength in the first half of February is very common after a down January. Based on S&P 500 data since 1958, 76% of the time, the highest intra-month close for February has occurred on or before the 11th trading day of the month (the 11th trading day this year was Tuesday, February 15). Februaries that follow down Januaries have finished the month lower 65% of the time, so monitoring the VXO is important, because usually, when the VXO is rising, stock prices are falling. Cherney is chief market analyst for Standard & Poor's

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