By Paul Cherney
Wednesday's price action was the product of short-covering and bargain hunting -- which is often how markets start a turn.
The VIX (market volatility index) was so close to its 10-day exponential moving average that I will have to wait for the overnight systems run to see whether it was officially crossed to the downside. Either it has been crossed or the market is within a day of that event, the first two trade days after the event carry only 5.6 in 10 odds of seeing gains in the trade day (based on S&P 500 prices). The average of all the percent price performances in the first day after a cross is +0.76%, the worst loss 3.53% (doubtful for this market), the best performance a gain of 5.41%.
By the 10th trade day after a cross down through the 10-day exponential moving average of the VIX, (when that moving average is above 38.00), the S&P 500 has been higher 12 out of 16 times. The average of all the gains and losses as of the close of trading on the 10th trade day after a VIX crossing is a gain of 2.26% (a table of historical price action is on Page 51).
The VIX has spent so many trade days above the 30 and 40 levels that it is reminiscent of 1987 and the aftermath of the October crash of that year, prices spent a considerable amount of time moving sideways, consolidating, forming a base. That might be what happens in this market.
The retest of the price range from the July 24 lows is a natural spot to see buyers come back to the market because these levels on the charts have attracted buyers before (on July 24). The current retest is only generating about half the number of new lows as occurred on July 24. These markets might not take off like a rocket, but a base with limited downside risk should be forming unless some other technical condition emerges (or a headline which neither I nor you can predict).
Support: Immediate support for the S&P 500 is 830-818, support is stacked 818-796.73 (this is inside the 844-775 price range created on July 24).
Immediate support for the Nasdaq is 1204-1184.
Resistance: Immediate intraday resistance for the S&P 500 is 839-849 then 878-893
Immediate resistances for the Nasdaq are 1216-1243, 1232-1251 which makes the 1232-1243 area a focus of resistance.
Cherney is chief market analyst for Standard & Poor's