A Hard Road Higher

The indexes are going to have to demonstrate the ability to overcome resistance levels to force some buying by the bears

By Paul Cherney

The price action of the past four days has the potential to be a short-term bottom, but the indexes are going to have to demonstrate the ability to overcome resistance levels to force some buying by the bears.

There were high Put/Call ratios on Thursday. Just because we have high P/C ratios does not mean that the markets have to move higher -- it only means that we are reaching extremes of sentiment which have supplied a potential fuel for some upside. Back in September there were excessive P/C ratios four out of the five trade days in the week ending Sept. 21; those truly excessive readings did not in and of themselves stem the selling. We will need to see prices demonstrate the ability to move above resistance levels as a sign that buyers are interested and that bears will be forced to cover.

If the Nasdaq moves above the immediate resistance at 1655-1672, then some short-coveing is taking place, but the real short-covering will not come unless prices can exceed the 1685-1697.03 level (even though there is still an older focus of resistance 1696-1718), bears who have established shorts in the past few trade days will feel the heat and cover.

If the S&P 500 prints 1092 or higher, then there is short-covering taking place and I would expect higher prices. The immediate resistance for the S&P 500 is 1087-1096.77.

If the Nasdaq spends more than three or four minutes below the 1626 level without attracting buyers then the downside risk opens for a test of the next layer of support which is 1607-1558. This would also be a set-up for an intraday reversal from lower to higher, or, if the index can't turn itself around intraday, it would be a set-up for a capitulation on Monday morning.

If the S&P 500 undercuts 1053 for more than 4 minutes without attracting buyers then downside risk opens for a test of the next thin shelf of support which is 1020-998.

Cherney is chief market analyst for Standard & Poor's

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