By Paul Cherney
The underlying trend for Nasdaq prices has flattened.
My intermediate-term momentum measures for the Nasdaq have flattened. These measures are combinations of price with volume. Their flattening does not always coincide with a drop in prices, but it alerts me to the fact that I should be looking specifically for chinks in the armor of the current bull-leg.
Even though Wednesday's intraday price action looked positive, the fundamental news about layoffs and earnings short-falls weighed on sentiment in Thursday's markets and forced equity prices lower. The Nasdaq has intermediate term (a weekly view) brick wall resistance 1934-2106 and the index has struggled every time it tries to move above the 2040 area. Resistance becomes thick with prints 2061-2106. More immediate resistance levels: Intraday charts show multiple resistance layers, here they are: 1966-1985.79, 1995-2023, and overlapping 2007-2037 which makes the 2007-2023 are a focus of resistance. The Nasdaq has well defined chart support 1965-1888 with a focus 1942-1913. This focus of support looks like a likely spot for bearish traders who were short this market to book profits (buy to cover open short positions ahead of the weekend).
The S&P 500 has intermediate-term "brick wall" resistance 1153-1206. The S&P 500 has immediate (intraday) resistance 1124-142 with a focus 1126-1136. The next concentration of resistance is 1162-1173.62. The S&P 500 has substantial support 1111-1052 and it is doubtful that this level can be broken in a first test. I would become very concerned that the current drop in prices was something more than a natural correction if the number of NYSE new 52 week lows was 150 or higher for three out of five trade days. There were high Put/Call ratios in Thursday's session. There are two kinds of short-covering price advances which could come into play over the next few trade days, one is fed by greed and the other by fear. The "Greed" short-covering lift occurs when prices take a dive and bearish traders start buying to book profits in their short-side trades. I think that could happen if we saw Nasdaq prints at 1920-1888. (S&P 500 equivalent would be 1111-1093). The "Fear"-driven short-covering is more commonly called a "short squeeze" because prices work higher until most bearish traders might not have any profits left in their short positions and they scramble to buy to cover open short positions. In order to have a fear driven short-covering, the markets are going to have demonstrate the ability to overcome resistance levels. You are probably going to have to see the S&P 500 print above 1136 in Friday's session and the Nasdaq print above 1986 in order to really scare (squeeze) the shorts into covering.
Cherney is market analyst for Standard & Poor's