By Paul Cherney
Weakness in the morning on Wednesday would be a natural set-up for an oversold rebound. Tuesday's price action makes it more than apparent that there are still plenty of dissatisfied investors who have the capacity to sell. If Wednesday morning can see a shakeout of some more of those former bulls, then the stage would be set for an intraday reversal in prices.
At this point, though, I wouldn't be able to call any rebound in prices anything more than a short-covering rally. Short-covering rallies usually only last 1 to 4 trade days. Short-covering rallies are started by bears (bears who have been correct in betting on lower prices) moving into the market to book profits by buying back shorted stock. Their buying usually causes prices to reverse their fall and when prices start to move higher, bargain hunters and short-term momentum traders jump in on the long side. These rallies usually only last 1 to 4 trade days because the short-covering is only about a one day phenomenon and then the interest on the long side by the short-term momentum traders is well, "short-term," as soon as they see prices start to lose upside momentum, they become sellers in order to book profits.
The only way a short-covering rebound rally can turn into something bigger is if the longer-term investors are convinced that prices are as low as they can go, if long-term investors consistently move in to support prices then an upleg of more than just a few days unfolds. (I don't think the current psychological climate will entice many longer-term investors to step to the plate consistently.)
Here are some technical conditions which help to bolster my confidence that we can see some sort of reversal in Wednesday's market:
As of 4:00 pm EDT on Tuesday, the CBOE's Total Put/Call ratio was 0.92, just above the treshold I consider to be excessive (which makes this number a short-term positive).
As of 4:00 pm EDT, the CBOE's Equity Only P/C ratio was 0.90 (well above the 0.75 level which I consider to be a positive). - There was relatively high volume in Tuesday's market. You don't need excessive volume to mark a reversal in the market I like to see two expansions in volume on a reversal day: first, prices drop as volume expands (sellers are running scared, selling into a declining market). If prices can find a bottom and then start to move higher, that's when you want to see the second expansion in volume because that would be signalling that the sidelines are emptying as buyers rush into the market on the buy side.
Recipe for an intraday reversal on Wednesday:
If we are going to get an intraday reversal in Wednesday's market I would like to have heavy volume high on my wish list: Ideally, I would like to see total trading volume on the NASDAQ near 2.2 billion shares on Wednesday. The NYSE should be up to about 1.39 billion.
Intraday I would like to see excessive P/C ratios at the CBOE. A Total P/C ratio greater than 1.00.
The NASDAQ might fill the price gap it established on Apr. 18th, 2001, when the index gapped higher at the open. That gap has been partially filled, the remaining gap runs 1960.15 - 1941.57 This price area is a natural spot for shorts to cover.
Immediate NASDAQ resistance is 2039-2104 with a focus 2088-2101. The next resistance is a brick wall at 2137-2181.05.
Intraday charts show resistance 1974-1986 then 1994-2016.
The NASDAQ has a layer of support 1961.57-1844.
Immediate S&P 500 resistance is 1284-1202 then 1207-1218, there is a brick wall of resistance in the 1227-1240 area. Immediate S&P 500 support is now 1170-1139 and this area should hold if tested.
Cherney is Market Analyst for Standard & Poor's