A Test for the Market

Stocks will have to move above already solid resistance levels on Monday to prove that buyers are interested

By Paul Cherney

There were high Put/Call ratios again on Friday, but the markets will have to demonstrate the ability to move above resistance levels as a sign that buyers are interested and that bears will be forced to cover. (The resistance levels, which should force some short-covering, move lower as the markets move lower.)

If the Nasdaq moves above the immediate resistance at 1630-1636, then some short-covering is taking place, but the real short-covering will not come unless prices can exceed the 1655-1672 resistance.

If the S&P 500 prints above resistance 1079-1086, then there is short-covering taking place and I would expect higher prices.

In Friday's session, the Nasdaq confirmed that there is support in the 1607-1558 because the index could only manage to print inside the upper edge of this band of support. The Nasdaq's intraday low on Friday was a print of 1605.97. In Monday's session, a retest of the upper edge of this band of support appears likely.

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

Here are other reports from today to keep in mind:

Thursday's end-of-day Nasdaq TRIN (an index combining both advance/decline and up-volume/down-volume indicators) was 5.823. That is enormous. I filtered data back to 1990 and there have only been two other occasions when the Nasdaq's TRIN has ended the day above 4.99, Those days were: July 6, 2001, when the Nasdaq's closing TRIN was 5.657. On that day, the index had lost 3.65%. On the trade day following that day (comparable to today), the index gained 1.81% as of the close of trading. The other day was March 28, 2001, when the Nasdaq's closing TRIN was 5.529. On that day, the index had lost 5.99%. On the trade day following that day, the index lost 1.81% as of the close of trading.

Obviously, with only two prior occasions as a data sample, there is no real wealth of historical performance, but such an extreme reading at the end of the day must say something about the anxiety of being long the large cap techs.

The last two times the Nasdaq's end-of-day TRIN was over 4.99, the following trade day saw a gain once and a loss once, but I looked at the days following the excessive end of day reading and saw that after the July 2001 signal, the Nasdaq might have gained on the very next trade day, but it then resumed a downward move, bottoming (low close) on the second day after the excessive TRIN reading. At that close, the index was 2.06% below the closing level on the day of the excessive TRIN reading. (Currently, a 2.06% closing loss would equate to a NASDAQ close of 1610.94.) After the low was set in July of 2001, the market just moved sideways for a month before falling into another downleg.

In the days following the March, 2001 excessive TRIN reading, the Nasdaq continued lower, establishing its worst close on the 5th trade day after the signal and posting a closing loss (from the close of the day of the excessive TRIN reading) of -11.6%. (That would equate to a Nasdaq close of 1454.)

ALSO: In April, the S&P 500 lost 6.14%. I have completed a special study which looks at the price performance of the S&P 500 during the months of May when there was a loss of 3% or higher in April. Every single time this has happened since 1957, the S&P 500 has had a losing May, too.

Here is the list of Aprils which lost more than 3.0% and the performance of the May which followed.


April Dates April Losses May Performance
04/30/62 -6.20% -8.60%
04/30/70 -9.05% -6.10%
04/30/73 -4.08% -1.89%
04/30/74 -3.91% -3.36%
04/28/00 -3.08% -2.19%
04/30/02 -6.14% ???

Cherney is chief market analyst for Standard & Poor's

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