By Paul Cherney
Thursday's intraday price action created residual momentum which usually carries into the first three or four hours of the following trading day, then prices can move a little lower. That would be natural ahead of a weekend. Additional gains Friday would increase the odds for the beginning of a January rally only if we could see the indexes hold onto most or all of their intraday gains on an increase in volume which does not represent a buyers' capitulation, meaning, a gentle increase in volume which does not see total trading volume for the session spike above 1.97 billion on the Nasdaq or above 1.67 billion on the NYSE.
Much of Thursday's action was probably unwinding of hedges associated with options. The plunge in the VIX (market volatility index) suggests that there was considerable premium being erased from option contracts and since the equity markets were rising, it is logical to assume that the premium was coming out of put contracts as they were frantically being sold. This phenomenon usually does not last long; it used to last one to four trade days before the Internet empowered virtually everyone with instant market news and instant access to brokerage accounts. Now this phenomenon tends to last one to one and a half trade days, which would mean the buying impact will probably weaken pre-noon on Friday.
The low trading volumes mean that price action is largely in the hands of shorter-term traders who can whip prices up or down. On Thursday, they whipped prices up; the total trading volume for the NYSE was only 1.2 billion, for the Nasdaq, only 1.25 billion.
The move higher in prices, though, is a source of confirmation for me that the S&P 500 884-867 level is strong support which probably will not break and I am viewing Thursday's action as an extinguishment of the potential to see 10-day lows Friday, or Monday-Tuesday (from the weekly signal of Dec. 20, 2002).
Support: The S&P 500 has firm chart support at 884-867. Immediate intraday support is 904-898.
Immediate support for the Nasdaq is now 1375-1362.
Resistance: The S&P 500 has immediate resistance at 915-926.27, and if there are prints inside this zone which are not accompanied by headlines of undeniably bullish importance, then this would look a likely spot for a loss of upside momentum as short-term traders book longside profits ahead of the weekend.
The Nasdaq has immediate Intraday resistance at 1382-1411.62. Prints between 1392-1403 look like a likely spot for some longside short-term profit-taking (unless there is a headline).
Cherney is chief market analyst for Standard & Poor's