By Paul Cherney
Upside appears limited. Downside also appears limited. Any short-term price weakness will probably not find significant downside follow-through. The price trend remains positive until it demonstrates the ability to break below supports.
Near Tuesday's close, the 10-day exponential moving average of the VIX (market volatility index) was 23.08.
The inability of the VIX to rise and exceed its 10-day exponential moving average has been a positive background factor for stocks, but the VIX is now establishing an intraday base. The VIX is probably going to be the best indicator for prices on Wednesday. The daily chart of the VIX does not really offer much insight, but my interpretation of the intraday chart of the VIX is that it could easily be moving higher tomorrow. If that were to happen, another intraday shakeout in equity prices is possible, but I wold still expect the immediate supports to hold.
If the VIX were to undercut the 21.57 level, there could be a crush of buyers searching for longside positions, but even then, I think the upside is probably limited to the focuses of resistance mentioned below:
The Nasdaq has a focus of resistance at 1547-1568 (daily charts).
The S&P 500 has a focus of resistance at 951-957 (daily charts).
I looked at the price performances of the best and worst closes for the S&P 500 while the Investor's Intelligence percentage of bearish investment advisers surveyed (%bears) remained at 25% or lower (the move from the day the sub-25.0% %bears was announced until the best closing high while %bears remained at 25.0% or lower). If you excluded the biggest advance (it was a 6.12% advance in 1991), and just looked at the other "best" closes, the next three highest closing gains achieved by the S&P 500 were +3.03%, +2.70%, +1.97%. If you took those gains and calculated equivalent price levels for today's S&P 500, the equivalent closes would be 957.79, 954.72, and 947.93.
Well before I even did this study, I have been posting that the immediate resistance for the S&P 500 above the 935.05 level was 944-965 with a focus 951-957 and two of the calculations are clustered right in there. This looks like thick short-term resistance.
Investor's Intelligence will release a new number on Wednesday, and the %bears might have jumped above 25.0%, if that is the case, then that would make these calculations and potential conclusions simply "not applicable to the current market."
The Nasdaq has immediate resistance 1543-1595 with a focus of resistance 1547-1568.
The S&P 500 has immediate resistance (established in August, 2002, and the beginning of July, 2002) at 944-965 with a focus of resistance 951-957.
Immediate support for the S&P 500 is now 939-929 with a focus 934-930.
Immediate support for the Nasdaq is 1532-1510 with a focus 1525-1515.
Cherney is chief market analyst for Standard & Poor's