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Stocks Ripe for a Pullback

By Paul Cherney From Cherney Market Analysis

The intraday options squeeze on Friday pushed the VXO market volaitilty index to new multi-year lows. The last time the VXO was at 9.80 (today's intraday low for the VXO) was January 31 of 1994. The S&P 500 managed a gain of 0.08% (closing basis) two days later and then headed lower, falling to a closing low on April 5, 1994 that represented a loss of 8.93% for the decline from the high. There is one huge difference between today and January of 1994 and the huge difference is that on February 4, 1994, the Fed initiated a rate tightening cycle by raising the Fed funds target. (That meeting was also the initiation of post meeting announcements).

The bigger picture is, a low VXO is not in and of itself a harbinger of declining stock prices. Stock prices tend to fall (most of the time ) when the VXO is rising, but we have to see that occur before the red flags start waving.

A pattern in the VXO that can unfold right now (after a drop like Friday's) is a small rise in the VXO as stock prices retrace (expected Monday) but then another lift in equity prices and a double bottom in the VXO. If that happens and then the VXO shoots higher, stock prices will struggle. That has not occurred yet.

This might seem simplistic to some, but right now, the Fed is not on the verge of initiating a tightening cycle because they've already been in one for almost 13 months. The tightening in February, 1994, had shock value because the Fed's last prior move had been a loosening in September 4, 1992. I view the tightening on February 4, 1994 as having shock value, that is not possible today.

Some retracement is likely on Monday. I think it is better to have patience and wait through any brief flatness or small retracement as long as immediate supports are not undercut and the VXO does not shoot above 11.93 (not expected Monday).

These are the immediate supports of significance that render my short-term positive outlook wrong if undercut: Nasdaq 2128-2115.57, S&P 500 1222-1212.11.

Over the past few days I have included a window of time in which I expected a positive tone to dominate, the shortest period of that window ended on Friday, now, in the short-term the markets will become more susceptible to a retracement, but the scales I view still suggest one more little lift before the potential for sideways summer drift increases.

Next week, after the July expirations, is when my concerns about a lack of attendance start to rise. Earnings reports should keep interest in place until Friday, July 22, or even a few trade days after that, but summer vacations are coming in August and I am concerned that once the bulk of earnings are out of the way, markets might not be able to push much higher than the levels established tomorrow or sometime next week.

Immediate Intraday Resistance (established Thursday and still valid):

S&P 500 1223.1229.12-1233.16.

Nasdaq 2156-2164.18

Immediate Intraday Supports:

Nasdaq support: 2149-1236.37, stacked at 2137-2124.88.

S&P 500 has immediate intraday support 1224-1219.80, then 1220-1214.69


The Nasdaq has a focus of resistance 2150-2154, this is an overlap of two layers of resistance 2134-2154 and 2150-2165, I had been making the supposition that a gap above 2154 at the open would open the door for a bullish trip to the 2170.99-2192 layer of resistance, that is still possible, but as Thursday's trading unfolded it became obvious that sellers, not buyers were becoming aggressive and that could mean some sort of a stall or retracement might have to unfold before a foray higher.

S&P 500 has immediate intraday resistance 1224-1229.11. The index also followed the short-term bullish scenario I had outlined here (an opening lift that pushed prices past the 1229.11 in the first few minutes of trading), but the index could not finish with a close over 1229.11. A close above 1229.11 would be a short-term bullish move, next resistance is from all the way back in the spring of 2001 at 1232-1286.62 with a focus of resistance 1249.23-1267.

Supports of significance: Nasdaq 2128-2115.57, S&P 500 1222-1212.11

Nasdaq support: at 2137-2124.88 overlaps the support of significance, so 2124.88-2115.57 is a focus of support. Next support is 2106-2085.

S&P 500 has stacked supports 1222-1212.11 then 1210.49-1199.03 usually, prices have a difficult time pushing down through stacked supports.

Disclaimer: Use of the information provided by Cherney Market Analysis, Inc., is subject to the Terms of Use contained on its website, Cherney is president of Cherney Market Analysis

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