By Paul Cherney
Intraday indicators based on 60-minute bars are in configurations which usually see a little weakness the following trading day (meaning for Wednesday). A sharp break lower does not appear likely, as Tuesday's markets illustrated the willingness apparent to buy the dips (whether the buying is done by bulls or bears covering shorts really doesn't matter).
On Tuesday, the VIX (market volatility index) started to wobble. Very near the close of trading on Tuesday, the VIX's 10-day exponential moving average was 20.75.
Generally, a move above the 10-day is coincident with declining equity prices and a move below it is coincidental with rising equity prices.
The VIX will probably have to move below 19.86 on Tuesday just to keeps odds tilted against a significant bout of selling.
This week's reports include the Fed's Beige Book on Wednesday, GDP and Chicago PMI on Thursday, then the July Employment Report and the ISM Index on Friday.
I think the underlying story is the short-interest. This should keep a floor under prices and anytime there is a dip, bears closing out of short positions could easily prevent prices from dropping very far. But, the potential for a break lower would come if the S&P 500 undercuts 976.04-974.00, or if the Nasdaq undercuts 1710, then the chances for prints 1699-1685 opens (This scenario is not expected for Wednesday.
I would be concerned about another full day of profit-taking if the CBOE Equity-Only Put/Call ratio hits 0.42 or lower as of the close of trade. This might occur if there is a bullish headline which forces prices higher in a session. If the end of day Equity-Only P/C ratio is 0.42 or lower, I would expect the next trade day to see profit-taking.
Resistance: Overhead resistance appears formidable, but the action of buyers on Friday was impressive and there should be some follow-through.
The Nasdaq is testing the lower edge of its big resistance: 1722-1758. Inside this layer of resistance is a focus of resistance at 1737-1753. This is strong resistance. In Tuesday's session, the Nasdaq printed an intraday high of 1744.60.
The S&P 500 is testing its big resistance at 988-1015.41. Its focuses of resistance are 993-1000, 1005-1008, and 1010-1015.
Supports: Immediate intraday support for the S&P 500 is 991-984.85. The S&P 500 has an important layer of support at 988-974. If 974 undercut without attracting buyers within just a few minutes, that would be a sign that the buyers are not interested at current levels and they are probably going to stand back, waiting for lower prices. This means that if prices spend time (more than 10 minutes) below 974, then I would expect the thin shelf of support at 970-964 to fail and that prices will probably have to test 949-912 support. This scenario would not have to unfold one trade day after another, short-term oversold rebounds in price are a natural phenomenon.
The Nasdaq has immediate support at 1720-1707 with a focus of support at 1715.781-1710. Additional supports are 1703.62-1695.20, then 1687.94-1675.18. The bigger picture for Nasdaq support is 1699 to 1653; there are layers of support inside this broad band including 1686-1653, with a focus of support at 1682-1664, which makes the 1686-1682 area appear critical. Due to the nature of the rise since the March lows, Nasdaq supports are stacked; the next support is 1648-1598.
Point of clarification: In Friday's column, I wrote that the markets might break out (above recently established highs, meaning, the Nasdaq could break above 1776.10 and the S&P 500 could breakout above 1015.41). I think that is very possible, likely even if/when there is a squeeze of the shorts. But I would be concerned that the lift above recently established highs could be an exhaustion of short-term buying demand and if there were a breakout higher, I would increase my focus on possible flaws in the composition of the gains. I would also be paying close attention to the VIX, because a low VIX in and of itself is not a danger, but there is a potential for danger when the VIX starts rising.
Cherney is chief market analyst for Standard & Poor's