By Paul Cherney
There is probably more selling to come. The reversal in Thursday's session was not healthy. There has not been sufficient signs of a capitulation (I like to see a plunge in prices accompanied by a surge in volume) to suggest that a low of substance has been established. The real problem is the tech stocks. When the "buy" money was flowing in Thursday's session, it was the traditional cyclicals that were garnering the interest.
I think some caution is warranted. Friday could be a zig-zag session ahead of the weekend.
The NASDAQ has immediate resistance 1750-1791 with a focus 1755-1768. The next layers of resistance are 1818-1827, 1841-1878. The NASDAQ has an intermediate term band of support 1760-1677 with a focus 1740-1701. Sub-1700 prints appear likely in Friday's session. After reviewing intraday charts there is a focus of support 1709-1689 then 1657-1628.
The S&P 500 index has well defined intermediate term support in the 1111-1052 area. There is a focus of support inside this region at 1097-1080, below 1080, the next layer of support is 1075-1052. I am not saying that this is going to happen in Friday's market (I doubt that it will) but I want readers to be aware of it. S&P 500 price level 1052 is a "line of death" established during the October 2001 consolidation of the rocketshot up out of the Sept. 21 lows. The first test of 1052 should produce a rebound in prices (see glossary definition below). The S&P 500 index has immediate resistance 1090-1102 then 1101-1109.
A "line of death" is the lowest price point in a sideways consolidation. A prerequisite for a "line of death" is a sharp (asymptotic) rise in prices and then just a sideways consolidation pattern. The truly important "lines of death" occur after a multiple week (or month) uninterrupted trend higher which finally reaches price levels where buyers and sellers meet in equilibrium (that's why prices just move sideways in consolidation). The line of death is the lowest price point established during that sideways consolidation. It represents a "towel toss" level for the people who went long during the consolidation and it also represents a "take profits" point for the people who shorted near the top of the sideways consolidation. The first test of a line of death often produces a hard, fast rebound.
My theory is that the first test of the line of death usually produces a rebound in prices because buyers are the bears who were playing the trading range and when prices reach the bottom of the range, they are happy to take all or some of their short-side profits by buying to cover. Oftentimes, (in a generally bullish market), their buying turns the market up for another trip to the upper edge of the band of consolidation, but if the lift generated by the short-covering at the bottom the consolidaiton (at the line of death) fails to generate followthrough buying and prices rollover and pierce the line of death again, then bulls who had gotten long during the consolidation give up on the long side and sell, adding to the downward pressure.
Cherney is market analyst for Standard & Poor's