By Paul Cherney From Cherney Market Analysis
Oil prices played second fiddle on Friday to remarks from Federal Reserve Chairman Alan Greenspan and a weaker than expected University of Michigan consumer sentiment number. The Michigan index fell to 89.1, vs. expectations for 92.7; increased concerns about the cost of gas at the pumps weighed on sentiment.
The S&P 500 is testing the upper edge of the 1206-1183 price level of support. This is a likely spot for prices to stabilize and enjoy some sort of a short-term bounce, I think a bounce would be just a short-term phenomenon, but I have reviewed the charts and I think that sub-1200 prints for the S&P 500, especially in the 1198-1194 area, look like a prime spot for short-covering. I do not think that the first lift can be the beginning of a sustained move higher, this is vacation thinned trading and some basing action seems likely as the markets retain some caution ahead of the earnings warning season which will come in September.
Since the price at the gas pumps has now garnered increased focus, weaker crude oil prices should help to put a floor under equity prices (except for oil-related shares, which would be expected to see some short-term profit-taking).
There is some risk that the weekend press will focus on Greenspan's comments (see below) and create some sense of urgency that might lead some price weakness on Monday.
The potential for Nasdaq prints in the 2106-1076 zone remains in place (regardless of whether there is a short-term rebound fueled by short-covering). I would begin to think I was wrong if the Nasdaq closed over 2158.
These markets are not giving points up in a panicked way, it has been a drift lower. I don't expect prices to just tag the support levels and then rebound in a rocket-shot higher. I would still like to see some sort of a definitive sign of absolute capitulation. Some sort of an extreme reading that suggests that some portion of the investing public has thrown in the towel. Readings like that might be hard to come by during this summer vacation period, and if oil just continues to edge higher I think it will weigh on stock market sentiment and create bigger potential for a selling capitulation.
Intraday resistance established on Friday for the Nasdaq is 2124.98-2128.05, then Thursday's shelf at 2130-2138.46.
Intraday resistance established on Friday for the S&P 500 is 1209.07-1211.09 then Thursday's trading range at 1210.03-1213.73.
Due to the slow-motion drift during the month of August, resistance levels are stacked. Nasdaq shelf of resistance 2139-2145.71, stacked at 2146.49-2157.98, the focus of resistance is 2151-2158. Next resistance 2165-2185.91, resistance gets thick 2177.85 and higher. Anytime immediate resistances are exceeded, they convert to supports until proven otherwise.
S&P 500 resistance is a shelf 1215-1219 then 1222.50-1225.08, and 1222.64-1227.61. A focus of resistance is created by the overlapping ranges at 1222.50-1225.08. Resistance is stacked and formidable at 1229-1239.76. A combination of several intraday plateaus creates a focus of resistance at 1238-1242.62, but resistance runs all the way to 1245.81. The next focus of resistance above 1245 is 1249.23-1267.
Next meaningful support for the Nasdaq is 2106-2039 with a focus of support 2106-2076 (very strong and should hold on first test).
The S&P 500 has support 1206-1165 with a focus of support 1206-1183 (very strong and should hold on this first test, there is a specific price area of excessive traffic 1198-1194).
What Greenspan Said: The Fed chief's comments were that newly abundant liquidity (the markets interpreted as higher prices for stocks, bonds and houses) can readily disappear if investors become cautious. Tulips, houses, or stocks are easy to "flip" as long as someone else is able and willing to pay more for them than you did, but once the credit reigns tighten and lenders become cautious and the next prospective buyer can't get that "interest only" loan to pay an inflated price for your tulip, house, or stock, then the bubble can deflate in a hurry. Liquidity that fuels the price increases can vanish once lenders or buyers become cautious.