By Paul Cherney
As long as there are no overtly bearish headlines, a drop at the open on Friday is probably going to attract buyers. Buyers started to make their presence known near the end of trading on Thursday, and while another down day like Thursday is possible, a rebound in prices would be natural.
One of the potential problems with Friday is that some of this expected buying is just going to be bears booking short-side profits and the lift might not attract terrific follow-through. This is also a Friday in the summer when afternoon trading volumes can be thinned by early escapes for the weekend, which adds another little wildcard.
I will be looking at the VIX (market volatility index) and put-call ratios for some insight into whether the buyers can prevent another day like Thursday from unfolding. If there is a drop at the open (which would be the preferred scenario),it would be better to see the CBOE total P/C ratio jump above 0.90, preferably over 1.00. The equity only P/C ratio should move above 0.85, preferably above 1.00. If there is a price advance, I will be looking to the VIX and that number should be heading lower, at least under 21.00, preferably under 20.88.
There should be a positive underlying trend in place over the next couple of weeks. Right now the markets are trying to work through a short-term minor overbought condition. So far, the retracement has not broken through any envelopes of normalcy in terms of a consolidation after a run-up. I would become concerned that a bigger decline might be in the making if the Nasdaq dropped to print under 1660 without attracting buyers immediately.
Resistance: The S&P 500's immediate intraday resistance starts at 998 and becomes very thick at 1010-1015.33. The bigger picture of resistance, which was established by price action in June, 2002, is that the S&P 500 has a band of resistance at 1008-1041, with a focus of 1020-1031.
The Nasdaq has immediate resistance at 1722-1748; it actually runs all the way to 1758.18. The next layer of resistance is 1778-1829.58. There is a gap in the price chart which runs from 1778.80 to 1796.46, which was created by a downward gap at the opening on Apr. 22, 2002. Sometimes the first print inside a gap like this will draw sellers.
Support: The Nasdaq has immediate intraday support at 1735-1713, then 1715-1693, which makes the 1715-1713 area important support. Additional support is 1684-1648. I think it would be unhealthy if the index printed below 1660 without attracting buyers immediately.
Immediate intraday support for the S&P 500 is 990-983.63, then 980-962.10. I think it would be unhealthy if the index printed below 960 without attracting buyers immediately. There is a big band of support for the S&P 500 at 948-912.
Cherney is chief market analyst for Standard & Poor's