By Paul Cherney
The technical conditions of the markets are slowly deteriorating, but it seems unlikely that prices will be able to move dramatically in either direction until after market participants have a chance to see the July Employment report and the ISM index on Friday. At this point, with the deterioration in the end-of-day measures, the chances appear real that even if the numbers impress on Friday, the upside might be short-lived, fueled by a short squeeze; those rallies tend to last as few as one as many as four trade days.
On Tuesday, the VIX (market volatility index) started to wobble and Wednesday's price action was no improvement. Very near the close of trading on Wednesday, the VIX's 10-day exponential moving average was 20.71. Generally, a move above the 10-day is coincident with declining equity prices and a move below it is coincidental with rising equity prices, but so far, the VIX has not really put any distance between itself and the the moving average.
The VIX will probably have to move below 20.07 to suggest that bulls are taking control on Thursday.
This week's key economic reports include GDP and Chicago PMI on Thursday, then the July Employment Report and the ISM Index on Friday.
Second-quarter advance GDP is due for release at 8:30 a.m. ET on Thursday. The Street expects growth of 1.7%.
The underlying story of large short-interest at the Nasdaq 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 in the short-term, the potential for a little break lower in the Nasdaq would be in place if the Nasdaq undercuts 1710, that would open downside risk for Nasdaq prints 1699-1685. The bigger concerns for a leg lower would not come unless the Nasdaq undercut the 1675 level. Due to the nature of the advance and the price action in June, there is considerable Nasdaq support 1686-1597, so it is difficult to make a case for a plunge.
Resistance: Overhead resistance appears formidable. The action of buyers on Friday was impressive, but the deterioration in end of day technical measures of volume and price suggest that it is going to take impressive headlines to put the fear of a short-squeeze into the bears.
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.
The S&P 500 is testing its big resistance at 988-1015.41. It's 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 is 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, the overlap of these shelves of support is 1686-1682, which should carry some importance. If prices spent time under this level, I think the odds would increase for a break below 1675 as described above. Due to the nature of the rise since the March lows, Nasdaq supports are stacked, the next support is 1648-1597.
Point of clarification: In the end of day comment on Friday, 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 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