By Paul Cherney
The technical reality for is that on an intermediate term basis (2 to 4 weeks) I have already seen measures of price and volume reach levels which (in the past) have coincided with price stability and the beginning of a lift in prices, however, in the overnight systems run conducted after the close of the market this past Friday, an important alert emerged.
The NYSE's TRIN (an index combining both advance/decline and up-volume/down-volume indicators) finished Friday below 0.40, at 0.26. Since (and including) 1990, this has occurred 16 times, 12 of those signals have been followed by price deterioration. Since 1990, 75% of the time, once the NYSE end of day TRIN has closed a session below 0.40, the S&P 500 has (at the least) printed below its prior day's close. This is within a 22 trade day period (roughly one calendar month) of the excessively low TRIN reading. For this market it would mean that the odds are 7.5 in 10 that the S&P 500 will print below 953.99 before Wednesday, August 7.
I took the time to look at price action all the way back to 1986, because there were periods when excessively low TRIN readings were not followed by retracements which virtually wiped out the entire day's gains (the day of the excessively low TRIN reading), but they were mostly in the 1989, 1988, and 1987 markets. For the entire length of the study (From June 1986-June 2002) odds are about 6.1 in 10 (61%) that S&P 500 will at least print below the close of the day previous to the excessively low TRIN (within a 22 trade day period).
The price pattern that might offer the most visible sign that the path for prices could be higher (without undercutting) would be an ABC Pattern in the end of day bars.
Once again, last week the VIX (volatility index) managed to close below its 10 day exponential moving average of the close but Monday's session reversed that move. I don't know how this will work out. I cannot change the past, I have great confidence in the weekly indicator I have referred to (which recently hit oversold levels similar to September, 2001, March, 2001, October, 1998, October, 1990 and December, 1987), but I have not seen the typical rebound in prices that I have seen in the past.
I cannot predict which former blue chip is going to drop the newest accounting bomb but I can tell you that when this weekly indicator has hit similar levels in the past, the newspapers and the TV were rife with similar ominous headlines, which makes me think that downside is probably limited. But, no trend higher has unfolded and until there is a close above the highs established in Monday's session, the best this market might be able to do is base, with S&P 500 downside risk for prints under 953.99 a 3 in 4 shot.
Intraday moves in the VIX below its 10-day exponential should coincide with stronger prices (like we saw on Friday), but after two failures in this indicator, I am unable to predict whether or not the next move under the 10-day exponential moving average of the close will be the beginning of a trend higher for S&P 500 prices.
The Nasdaq has immediate resistance at 1419-1430.40, then 1449 to 1491, with a focus at 1480-1486. The 1480-1486 level has represented formidable resistance in the last weeks of June. The 1496-1540 area is the next layer of resistance. There is a focus of resistance prices at 1519-1538.36. The S&P 500 has immediate resistance at 980- 983.90, then 987-1005.58; the focus of resistance in the 1000-1005.58 area has been especially thick. Once resistance layers are broken, they convert to support.
Immediate support for the Nasdaq is 1424-1401, then 1393-1370.
Immediate support for the S&P 500 is 977-963, then 967-944, which gives a focus of support at 967-963.
Cherney is chief market analyst for Standard & Poor's